A Brief Introduction to Contractual Agreements.
Everyone will come across contracts, they occur day-to-day, whether in business or personal life. Whether you are ordering an item online, to the agreement with your mobile phone provider or your water supplier, through to a major business order for parts from a vehicle contractor, contracts will be involved. Even a marriage is a form of contract, which is why you need the help of the Courts to arrange a divorce.
In many situations, individuals will not notice that they are entering into a contract (when did you last read the small print before signing up to an online provider?). This is because contracts can be presented in a non-obstructive manner, allowing a transaction to flow without interruption. If you have good contracts in place, then they should protect you and your clients. What you want to avoid is finding out your contracts are not up to the task they were designed for and you end up in a legal dispute that could have been avoided.
What is the Purpose of a Contractual Agreement?
In the simplest definition, the key purpose of a contract is to act as a tool for structuring the relationship between two or more parties and formally recording what the parties have agreed to do for, and with, each other. Contractual arrangements are (normally) written agreements, enforceable by law, between two or more parties that something shall be done by one or both.
What Are the 3 Forms of Contracts?
There are many types of agreements used in business (and outside business) that are regarded as contracts. These include, but not exclusively, Partnership Agreements, Shareholder Agreements, Joint Venture Agreements and Transfer Agreements.
For the purposes of this guide let us look at some of the commons forms of contract.
- Implied Contract
This consists of obligations arising from a mutually agreed intent to promise, where the agreement and promise have not yet (and may never) have been expressed in words. The word ‘implied’ is used here as the contract comes from the circumstances that imply a mutual intent to contract. This occurs through and by the conduct of the parties.
- Standard Form Contract
This is a type of contract most people in and outside the business world will come across. A standard form contract is a contract between two parties, such as a mobile phone contract, where the terms and conditions of the contract are set by one of the parties. There is rarely an opportunity for negotiation and the terms are regarded as ‘standard’ for everyone. They can occur most commonly in service agreements, the construction and engineering sector and also in the employment law sector.
- An Oral Contract
This is (usually) a business contract that is formed via spoken communication. It is not written down, hence being regarded as ‘oral’. Solicitors will encourage clients to avoid this type of contact as it can be difficult to prove the terms of an oral contract in the event of a breach. However, this type of contract can be regarded as legally binding, but not in all circumstances. In the property sector a contract must be written down to be regarded binding. Do not confuse oral contracts with verbal contracts, as verbal contracts can refer to any contract as they are created using language in the first place.
Why you need a contract?
- They formalise relationships.
Two or more parties agree to work together on a project or mutually beneficial business arrangement, having a written contract in place means that all sides are aware of their obligations and what they are accountable for. A contract holds each party to their original agreement and can be used to clarify disputes. The contract is the trail that holds both sides accountable for the terms they set at the beginning of the relationship.
- Compliance requirements.
Compliance is an area of rapidly growing importance for most businesses. Solicitors are immersed and experienced in compliance issues from the start of their training. In some sectors, such as financial services, robust compliance is vital if you are not to fall foul of the regulating authorities. Contracts help in maintaining compliance and in promoting transparency in business processes. Internal written procedures for new and existing contracts should be part and parcel of business practice.
- Improving communication.
Good communication is extremely important for the success of any business. Contracts help nurture communication and collaboration between teams and individuals. Forging a contract means that parties have to express themselves and what they want from a relationship. The process bridges differences between parties and brings people together. From the start of the process, contracts are, by nature, a collaborative process. Communication is vital to arrive at an end document that all sides can feel confident in.
- Contracts help avoid conflicts & mitigate risk.
As mentioned in the introduction, having well drafted contracts in place can avoid misunderstandings and conflict. The negotiation process at the outset of the contract process allows the parties involved to work through issues and outcomes so mitigating the risk of serious disputes as the contract terms meet the realities of fulfilment at the ‘coal face’, as it were. The good drafting of a well-made contract should have an audit trail and this is why experienced practitioners, such as a solicitor, will record all the changes agreed. If there are questions further down the line about when and how a clause was made or altered it is important to be able to identify the process, maybe even years later.
- Contracts help cash flow.
As most firms offering services to the general public (broadband, mobile phones etc.) will confirm, contracts that are agreed quickly and smoothly, and are legally acceptable and enforceable, help to ensure regular cash flow. If your business can easily and swiftly sign up new clients, then they are helping grow that business and increase revenue. A well-written contract is the catalyst that allows both sides to understand the relationship between them and what services are going to be provided in exchange for payment. It a process driven binding agreement that says one side will deliver services in exchange for payment.
Do you need a lawyer for a contract?
One message above all others should come through from this guide. If you are negotiating a contract, make sure it is negotiated well and the end legal document is well structured and will hold up to scrutiny should it be tested. There are various online legal documents that can be downloaded from the Internet but you should consider the important fact that every business is unique and every business relationship and contract is also unique. One size does most definitely not fit all! Use a lawyer to give you peace of mind and also the edge over your competitors.
Need Assistance or Legal Advice?
rhw solicitors have a commercial law team with a vast amount of experience and know-how and we are able to advise and assist in all aspects of contractual agreements including the creation of new contracts and amendment of current agreements.