How to understand a contract

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Why is this important?

Contracts are ‘legally binding’ agreements, which, in a legal context are valid and must be fulfilled, with certain exceptions. For an agreement to be regarded as a contract, it must contain four essential ingredients — the offer, acceptance, intention of legal consequences, and consideration. It is important to understand that if any of these are missing the agreement is not considered legally binding.

What to do

Offer

There must be an offer to do something, it must be clearly stated, and definite in its intention. However, an ‘offer' can be withdrawn by the other party at any time before it is ‘accepted' or if it is a standing offer fixed for a period of time. An offer can also lapse when the time for acceptance expires or after a reasonable time in the circumstances. Generally, the greater the value of the contract, the longer the life of the offer.

Examples of an offer include:

advertisements which include price details
tender submissions
formal quotations
proposals to lease

Examples of what is NOT an offer include:

‘ball park' estimate
requests for proposals
expressions of interest
letters of intent

Acceptance

The offer must be clearly understood and its acceptance must be definite. Only what is offered can be accepted and if any new terms are suggested, this is regarded under contract law as removing the original offer made (or counter offer). Where acceptance is given with conditions, the acceptance is not complete until the conditions are fulfilled. These are regarded as conditional contracts.

Acceptance can be given in the following ways:

verbally
in writing
by action which clearly indicates acceptance

Any acceptance by mail is complete at the time of posting and sometimes, a letter must be received eg insurance acceptance. Any acceptance by electronic means, such as email or fax, is completed at the time of receipt.

Acceptance is not valid if:

it is presumed through inaction or lack of response
you say 'I will assume you have accepted if I do not hear from you within three days'. Acceptance requires a positive action, that is, one of the three forms noted above.

Intention of legal consequences

The parties to the agreement must understand that the agreement can be enforced by law. However, for a contract to be binding, it does not have to expressly state that you understand and intend legal consequences to follow. For commercial contracts your intentions are presumed, for example, to be legally bound. The parties to a contract can decide not to be legally bound by the agreement, but this must be clearly stated and is then an agreement that is not legally enforceable. For example, given that your intention will be presumed, it must be made absolutely clear if you do not intend your agreement to be a binding agreement.

Consideration

In a business arrangement, the promise must involve an exchange of something of value (the ‘consideration'). This is usually the payment, or promised payment of money but can be anything of value. However the payment is not required to be a fair one and a consideration can also be the promise not to do something (to refrain from exercising some right). A consideration cannot be something which cannot be given a commercial value.

Source: SMExcellence

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