I Am Starting a Business… Do I Need a Contract?
An entrepreneur’s guide to understanding contracts
Starting a business can be an exhilarating and marvellous milestone in life. Typically, entrepreneurs are usually occupied with ensuring their idea, service, or product is ripe and ready for picking (metaphorically of course – unless you’re starting a fruit and veg business) by their customers or clients.
Up-and-coming business owners often ignore the need to draft contracts carefully to address potential future situations. A lack thereof has often led to: conflict and dispute, unnecessary time spent attempting to resolve the problem and even worse – litigation.
What Exactly is a Contract?
Is a contract simply the act of signing on the dotted line no matter the terms contained? Are terms written on a napkin in a restaurant effective and enforceable?
A contract is essentially an agreement that is enforceable by law. It details the rights and duties that each party owes to the other. The formation of a contract transpires when:
1. An offer has been made
2. The offer has been accepted
3. The offer is accepted for a consideration
4. Both parties have an intention to create legal relations
5. The terms of the contract are certain
Each of these aspects to the formation of a contract are worth exploring to gain a better understanding of the legally binding nature of contracts and their impact on your business.
The Offer
To form an agreement, one party must make a promise based on specific terms. This promise, however, doesn’t legally bind the individual making it.
A valid offer must be:
(i) Specific;
(ii) Complete;
(iii) capable of acceptance; and
(iv) Made with the intention of being accepted.
It’s important to remember that an offer ends if too much time passes, the offeror withdraws it, the offeree rejects it, a key condition no longer exists, or the offeror dies.
Acceptance of the Offer
Agreeing to the terms of an offer is straightforward—it becomes effective once communicated to the customer or client. This can be done verbally, in writing, via email or on the phone.
Consideration
Consideration is anything that is to be given in exchange for a promise to do something i.e. ‘I will provide a box of exotic fruit in exchange for £25’. Here the £25 would serve as the consideration for the offer to provide a box of exotic fruit. Consideration is essentially the enforcement of the promise, and without this, a contract cannot be legally binding.
There are 3 types of consideration to note: a promise to do something, a promise not to do something and a promise to pay money.
Intention to Create Legal Relations
A contract requires both parties to intend a legally binding agreement. In business dealings, the law usually presumes this intention exists.
Certainty of Terms
Without certain terms and conditions, contracts may be unenforceable. As a result, it is crucial that the terms drafted into your agreement are not vague or ambiguous, but are certain and complete.
As a business owner, make sure your agreement terms are clear enough for everyone to understand and apply as intended. Otherwise, failure to do so can negate the effectiveness of your contract and ultimately result in the courts deeming it unenforceable.
Takeaway
No matter your course of business, ensuring that you have effective and binding contractual agreements in place is pivotal. Many businesses fall into costly litigation trying to fix problems they could have avoided by putting a clear, concise contract in place.
Please note the above is a simple explanation of the elements of a contract. For a comprehensive understanding of what terms and conditions your business requires, please contact one of our commercial solicitors today for a consultation.
Sources:
www.ukpracticallaw.thompsonreuters.com
https://hallellis.co.uk/contractual-consideration
https://www.lexisnexis.co.uk/legal/guidance/forming-enforceable-contracts-certainty
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