At some stage in every business a contract will need to be entered into. I thought it would be worthwhile to get back to basics and explain what a contract is and what it is made up of.


What is a contract?

A contract is an agreement between two or more people. It can be in writing, verbal, implied (this is generally by way of legislation) or a combination of these.

The people who sign the contract are called the parties to the contract. I really have no idea why but it’s helpful to know the terminology that is used.

Contract law is what allows us to hold people to their word by giving us the right to take action against those that don’t keep to their word.


What is a contract made up of?

The 5 main ingredients of a legally valid contract are:

  • an intention to enter into legal relations – e.g. I want to sell my car to someone
  • an offer – e.g. my car is for sale for $1000
  • acceptance of the offer – e.g. I agree to buy your car for $1000
  • certainty. This means that the terms of the agreement are clear enough so the parties each know what their obligations are – e.g. I will deliver the car to you at 1pm on Tuesday the 4th of August at your address. You will pay me $1000 in cash.
  • consideration. This is the value you are getting for providing your goods or services. It could be money, forgiveness of debt or an exchange of services – e.g. in return for selling you my car you will give me $1000.

What the parties to the contract call their relationship, or what they consider it to be, is not conclusive as to whether a contract actually exists. It is the reality of the relationship that matters. The intention of the parties does need to be taken into account and can be decisive where the relationship is ambiguous, or where other factors are neutral.


When do you need a contract?

It’s important to have a contract in place when there is an obligation of some kind. Usually this will be when you are selling a product or service or asking someone else to provide you with their product or service.

Contracts do not need to be novels! In some situations a longer contract will be called for but not always. The coaching agreement that I use with my clients is 2 pages long.

A warning here: don’t get too tied up in the length of the contract. Short is not always best. If you need 5 pages to clearly state what each party’s obligations and rights are then use 5 pages. Clarity is the key here.

Do you have a standard contract that you use for your clients, employees and/or contractors?



Disclaimer: This article is an educational resource designed to make you aware of some of the legal needs of your business. The information provided should be treated as a guide only and should not take the place of hiring a lawyer. Reading this article does not create a lawyer-client relationship between us. If you have a specific legal issue you need help with, you need to hire a lawyer.

(Photo credit: WordRidden via photopin cc)

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