A contract is a promise that is legally binding. It can be written or oral. When two parties make a contract, one party agrees to do something for the other in exchange for something of value. For a contract to be considered legally binding, it must include four key elements, namely, offer, acceptance, consideration, and the intention to create legal obligations.
It is worth noting that an offer and acceptance do not have to be separate or formal. In most cases, people contract by signing a document with the agreed terms or by one party making an offer that the other party accepts. Acceptance can be expressed through words or actions. Because of this, it is essential to be aware of what makes a contract. You should be careful not to unintentionally bind yourself to an agreement by your actions or conduct when the intention was to only agree on initial negotiation terms.
What are the four essential elements of a contract?
- Offer
An offer is a promise by one party to enter into a contract based on specific terms. To be a valid offer, the offer must be firm, complete, clear, certain, capable of being accepted and made with the intention of being bound on acceptance.
Many disputes arise because people fail to draft a comprehensive written document and no lawyers are involved in the negotiation process.
Practical tips –
- Use a single document: Set out the entire details of understanding between the parties in one document. Include a clear “entire agreement” clause to ensure the document represents the entire understanding between the parties.
- Approach offers carefully: Unless using corporate standard terms and conditions- avoid sending out offers which can be immediately accepted. Instead, send out an invitation to negotiate and wait for the other side to make the offer.
- Share unsigned agreements: Avoid sending out signed agreements, provide a blank agreement that requires your counter signature to become binding.
- Apply caveats: Use caveats such as “subject to contract” to avoid any negotiations being interpreted as a formal offer. This helps avoid misunderstandings and assumptions.
- Establish expiration dates: Binding offers should have a clear expiration date. This ensures that the offer remains valid only for a set period.
- Specify a particular manner of acceptance – Clearly state the preferred method in which the other party must accept the offer. Whether written response, email, or other means, clarity in acceptance methods reduces confusion and potential disputes.
- Acceptance
Acceptance refers to the final and unambiguous agreement to the terms of an offer. An offer must be accepted exactly as stated for it to form an agreement. An acceptance can be explicit or implied. An express acceptance is an affirmative statement by the offeree (person who accepts or declines) that they accept the terms of the offer. An implied acceptance is when the offeree takes some action that indicates their acceptance of the offer e.g., where a supplier does not communicate acceptance but delivers the goods per the order and requests payment.
However, it is important to note that if a party accepts an offer but introduces changes to the terms or rejects certain terms, a contract is not formed as the offer has been rejected. In such cases, a counteroffer has been made and the counteroffer is open for acceptance or rejection.
Practical tips: –
- Acceptance by intended recipient: The acceptance must be by the person to whom the offer was originally made. This cannot be accepted by someone else on their behalf
- Follow prescribed forms: Acceptance must be in the prescribed form (if any)
- Avoid conditional acceptance: Do not accept an offer (whether expressly or by conduct) with the hope that some unacceptable terms in the offer can be renegotiated later. Once accepted the offer is binding
- Ensure clear and unambiguous acceptance: Once you are satisfied with the terms make sure your offer is unequivocal- do not turn the acceptance into a counteroffer by adding additional terms.
- Consideration
A contract is based on the notion of reciprocity- one party cannot enforce a promise unless it has given or promised something in return. This, in legal terms, is called “consideration.” Consideration can be of any value, even if it is not equal to the promise made. It is important to note that the parties are free to make a deal that may not be beneficial to one side. In some cases, as in employee non-compete agreements, the courts may consider the fairness of the consideration.
Practical tips:
- Be clear on the consideration: Always make sure the contract clearly states what consideration is being given, even if it is a small amount.
- Intention to create legally binding obligations
For a contract to be valid, both parties must have the intention to enter into a legally binding arrangement. If there is no such intention, then there is no contract. In determining whether or not the intention to create legally binding obligations exists, the court will consider the parties’ conduct as a whole and not just their subjective intention.
A contract must not be against public policy to be enforceable.
Practical tips: –
- Certainty: Clearly state whether the agreement is intended to be legally binding, regardless of the label attached to it, i.e. “MOU” or “heads of terms”
- Be careful of labels: Be cautious of ambiguous labels and clarify the intention to create legally binding obligations.
- Capacity: Ensure each party has the legal capacity to contract – whether age or mental capacity
- Lawfulness: An agreement which requires the parties to engage in illegal activities makes such an agreement illegal. (The purpose of the agreement must not violate the law)
By following these practical tips, you can navigate the process of entering a contract more effectively and reduce the risk of misunderstandings and disputes. Seeking legal advice will also provide valuable guidance and ensure that you and your rights are protected.
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Should you require any assistance with the implications and application of any contract or the negotiation of a contract please feel free to contact us at info@peolegal.co.bw or +267 3975779.
The information contained in this Legal Brief was intended for our clients and correct to the best of the authors’ knowledge at the time of publication. Before making any decision or taking any action, you should consult the contacts listed here.