The Formation of a Contract
We enter into contracts in our everyday interactions; from us hailing a taxi or simply purchasing an item from a store, is the operation of contract law. While we might overlook these things at times, it is important that when it comes to business we pay much more attention to the contracts we enter as they have significant legal implications. A contract is a legal document which is legally binding on the parties involved. Over the next couple of week, the various aspect of contract law will be explored from the importance of having a contract, the clauses which ought to be included, their meaning, the legal consequences of breach of contract and the remedies available to the affected party. But most importantly having a contract drafted, ideally by a lawyer or someone with experience in drafting contracts is one of the most vital components of any business transaction especially when a lot is at stake. The money it will cost to draft a contract is small when compared to the costs that will be incurred if the defaulting party does not honour his/her part of the deal. It is betting to be penny smart than pound foolish! Let’s explore the basic requirements of any contract, in other words, for us to know a contract exists these key components must be present:
Who are the parties to the contract?
This might seem obvious but sometimes the parties to a contract may not be correctly stated. So it is important to request the proper or legal name of the individual or entity that is entering the contract. For example you might know someone to be called “John Smith” but you ought not to assume that is his full name because you might be surprised to know that his actual name is “Johnathan Smith”. Best practice will be for the person to produce some form of identification so you can correctly obtain their name and of course the spelling of it likewise. Similarly, if it is a legal entity like a company, be sure to request a copy of their incorporation document to see whether the name they use is in fact the registered name and not just a shortened version which is sometimes done. Again, “Happy Foods” might actually be registered as “Happy Foods Limited” or “Happy Foods Group”. In the case of a stole trader it should be stated as “James Thomas trading as James Plumbing”. It’s worth being thorough and ensuring that all t’s are crossed and i’s dotted!
Meeting of the Minds
Sounds deep and philosophical but this right here is the reason why disputes arise and parties to a contract might find themselves in breach. The terms of a contract must actually be reflective of the intentions of the parties. But simply put, what each party is obligated to do must be stated clearly. If party A is agreeing to do one thing but party B believes that party A is doing something else, then really there was no true agreement as to what each party was expected to perform. It all boils down to communication and there ought to be no miscommunication when it comes to each party understanding what is expected as it relates to the subject matter of the contract. So out of an abundance of caution, both parties should verbally reiterate what it is they believe they are contractually binding themselves to do.
It’s all well and good to have a well drafted contract and the parties are in agreement with the terms however, a very important component of a valid contract is having valuable consideration. So in other words…..where’s the money at? While money is not necessarily a requirement, consideration means that something must be given in exchange or what is being received. Seems fair enough and this too must be stated in the contract; what is the consideration or payment for the task that is being undertaken.
What are we agreeing to?
The actual subject matter or task being undertaken must to properly described. It is important that upon reading the contract what is expected is clearly stated so that no ambiguity exists. Simple none legal language ought to be used to ensure that both parties understand the ambits of their obligations. If the contract is not clearly drafted then this can lead to as mentioned before one party being uncertain as to the task they are contracted to perform.
Tammy Cato LLB, LPC, Bsc. Econ
Attorney -at- Law & Global Chamber Brand Ambassador
For more information about the above subject matter email us at POS@GlobalChamber.org