When creating a binding agreement, it is important to agree the broad terms of the contract with the other side before negotiating the structure of the agreement as this can take some time. Whilst the structure will vary based on the type of contract you are entering into, there are a number of key ingredients of a contract which need to be present regardless of whether it is an oral contract or a written document. This article explains the essential elements of a contract to protect your interests.
What are the key elements of a contract?
A fresh-faced law student is likely to answer this differently from an experienced corporate lawyer because in the business world, there are certain things that every valid contract should have which the textbooks don’t tell you about. Let’s look at a few of the essential elements of an enforceable contract. For example, a professional at Macmillan Lawyers & Advisors would tell you that beyond the written clauses, it's crucial to understand the commercial context and the specific needs of the parties involved, to create a robust and effective contract.
How to define the relationship (DTR)?
We all know that a binding contract needs at least two contracting parties with the intention of creating legal relations but did you also know that it is important to define the relationship (DTR) in legal contracts? When a company is granting a licence to another or hiring a consultant, the relationship they want is that of independent contractors. This prevents either party from representing, acting for, or binding the other.
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Defining the legal capacity
Parties entering into an agreement need to define their capacity in an agreement. For example, a hiring manager making an offer of employment to an employee will be entering the employer into the agreement as opposed to themselves personally. When engaging with consultants, it is important to understand if they are self-employed as a sole trader or if they work under a company in order to properly define their legal capacity. Not defining the legal capacity can create confusion and for example result in confidential information being disclosed to parties who are not bound by the terms of your written contract.
What are the risks of not defining the relationship?
When a business contract does not DTR, it runs the risk of creating an agency, partnership, employment, or even a joint venture relationship. This means that a party can be unwittingly subjected to the special obligations imposed upon agents or employers such as a duty of loyalty or a statutory requirement to set up a workplace pension scheme. Not satisfying these obligations can result in a breach of contract .
Which contract elements should not be silent?
Furthermore, since contract law does not readily presume anything to do with confidential information: if your contract is silent, there is no guarantee that it will be secure. There is no common law duty to protect someone else’s confidential information which means that every prudent contract should expressly impose confidentiality obligations where such information will be disclosed. A good contract will also indicate how long the obligation will last for, and even consider if it will survive termination.
How to create a confidentiality clause?
Even so, confidentiality clauses are weak without liabilities for breach being considered. Business contracts typically authorise sharing confidential information with a party’s agents e.g. lawyers, employees, and directors. You want to ensure a party is liable not only for their breaches but also for those of their agents. Since it is possible to limit liability for certain things, a sensible contract will insist on liability for matters such as an agent’s breach.
How to terminate a contract?
A business contract may be silent on its duration where there is an ongoing relationship between the parties. In response, the law may imply a term that the contract can be terminated on reasonable notice. However, since a court considers a wide range of case-specific factors to determine whether a notice is reasonable, it is impossible to predict the outcome. It is also difficult to imply this provision into a contract which grants one party a right to terminate. A prudent contract should therefore set out its duration and provide for its renewal and termination.
How to overcome the legalese?
These are only a few examples of terms which may seem very simple but without express provisions for them in your business contract, then a basic level of protection is not guaranteed. It is crucial to be vigilant when signing contracts yet it remains difficult to do so with all the legalese.
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The opinions on this page are for general information purposes only, and are not legal advice on which you should rely. Please consult with a lawyer if you want legal advice.