What is a Contractual Agreement?
- What is a Contractual Agreement?
- Essentials of a contractual agreement
- Purpose of a Contractual Agreement
- Types of Contractual Agreements
- Examples of When to Use a Contractual Agreement
- Real Estate Transactions
- Business Partnerships
- Employment Relationships
- Leasing Arrangements
- Construction Projects
- What Should Be Included in a Contractual Agreement?
- Get Help with Contractual Agreements
Let’s suppose two good friends engaged in a conversation regarding a business. Both of them came up with the idea that they would become business partners and work on the business together. A long time passed on this conversation, with neither friend approaching the other for a discussion about what to do.
The friend who initially proposed the idea started his own business disregarding the friend to whom he initially proposed the idea; after getting knowledge about this, the other friend decided to sue the friend for infringing their verbal contractual agreement. The first friend denies that there ever was a legally binding agreement. So the question arises, what is a contractual agreement, and when can we enforce it?
What is a Contractual Agreement?
A contractual agreement is a legal term often used as a substitute for “contract.” Contractual agreements are enforceable by law; but now the questions comes, what are agreements? An agreement is an offer and acceptance between two or more parties to do or not do something in return for consideration. Normally, agreements do not become contracts until and unless there is a payment of consideration by at least one of the parties.
Essentials of a contractual agreement
Contractual Agreements require certain elements for an agreement to qualify as legally binding. These elements include an offer, acceptance, consideration, the capacity to enter a contract, and the intention to enter a contract. Let us discuss these elements separately:
An offer is a proposal given by an offeror to an offeree to do or not to do something. An offer can be made in person, through an authorized agent, or remotely through remote communication methods such as mail, Fax, Telex, post, text, email, or any online method. A mere inquiry about something does not amount to an offer and should be explicitly stated. A contractual agreement always has an offer.
An acceptance is an approval of an offer; acceptance is always made by the offeree to the offer given by the offeror. An acceptance can be towards doing or not doing something, i.e., the omission or commission of an act. Acceptance should be explicit and clear, it can be made in person, through an authorized agent, or remotely through remote communication methods such as mail, Fax, Telex, post, text, email, or any online method.
Acceptance, unlike an offer, is considered to be communicated immediately after it has been posted despite the offeror not having any knowledge of the post; however, if an instantaneous method of communication is used, then acceptance is considered to be communicated once the offeror has received the message of acceptance. This rule is also known as the postal acceptance rule and was declared in a famous case known as Adams v Lindsell (1818). When an offer is accepted, an agreement is formed between the parties.
Consideration is something that a party gives in return for a promise to do or not to do something or merely the performance of the contract. Consideration is the main element of a contractual agreement that distinguishes a mere agreement from a legally binding contractual agreement. Consideration can be monetary or in the form of actions, either a commission or an omission of an act.
“The consideration must not be past” is a famous legal quote that implies that for an act to be considered as consideration for a promise, it must be done after the promise has been made and not before the promise; two famous cases on this legal principle are Lampleigh v Braithwaite (1615) and Roscorla v Thomas (1842).
In Lampleigh v Braithwaite (1615), a man was convicted of murder who sought assistance from a companion to get a pardon from the King; the companion put in all their efforts and received the pardon, he then proceeded to ask for payment of 100 Pounds, but the convict refused to pay, the court held that he is liable to pay since the actions of the companion amounted to consideration since it was implied that his services were to be paid for and that his actions were only performed after the convict asked.
In Roscorla v Thomas (1842) a man bought a horse from the defendant who, after the purchase was completed, promised that the horse was sound and healthy. Shortly after, it was revealed that the horse was, in fact, not safe and healthy, so the complainant sued for damages while also stating that the defendant promised that his horse was healthy. The defendant held that his promise meant nothing since the contract was completed before the promise was made, and there was no consideration made in response to the promise. The court ruled in favor of the defendants.
The “capacity” in legal terminology refers to the ability of a legal person to enter into a contractual agreement. In essence, capacity is a term usually used when an agreement is made with a minor or a legal person that is bankrupt; in both cases, the legal persons are not qualified to form contractual agreements with anyone.
Hence, if anyone under 18 forms a contractual agreement, they are not legally bound by this contract and if someone makes a contractual agreement while being bankrupt, they are not essentially capable of contracting so it is not legally binding on them but due to circumstances of the case and characteristics of the bankrupt, the contract may be enforced. However, most likely, the outcome of such cases is a rescission of the contract, which means putting both parties in their pre-contractual positions.
The “intention” refers to the objective or aim of a person to enter into a contractual agreement with the other party. Without intention, it is really difficult to prove that a contractual agreement exists. Usually, the cases of intention are based on duress which is the forcing of a party to enter into a contract; contractual agreements cannot be made under duress due to the sole reason that the party did not have any intention of entering into the contractual agreement in the first place.
The reason why, in the initial example, the judge might dismiss the case, is that it is implied that people who form “social agreements” do not intend to enter into legally binding contractual agreements. Since the two were friends and were not serious initially, it can be implied that they formed a social agreement.
Purpose of a Contractual Agreement
The purpose of a contractual agreement is for both parties to benefit from the commission or omission of either party or through the consideration of both parties. Hence, in a sale, the seller receives monetary compensation for a good that he sells to the buyer who benefits from owning the good. In services, the seller of services receives monetary compensation for his services and the buyer benefits from the services of the seller.
Types of Contractual Agreements
There are mainly two types of contractual agreements, unilateral contractual agreements, and bilateral contractual agreements. In unilateral, only one party assumes the obligation of performing under a contract and is often made to a general group of people or the public at large; an example of a public reward for the reporting of a missing article or person can be given, only the person who posted the public notice is assuming obligation under the contract.
In bilateral contractual agreements, both parties mutually agree to perform their obligations under the contract. Both the offeror and the offeree, after forming the contract, are legally bound to follow the contract. The majority of contracts fall under this category.
Contracts are written and can be made verbally where the conduct of the parties or witnesses may be used as evidence of the existence of a contractual agreement between two parties. Contracts can also be implied or explicit whereby the parties implicitly point that they have entered into a contractual agreement e.g. when we buy things at a shop, we bring them to the counter where the employee scans them and we pay for them without uttering a word; this is an example of an implicit contractual agreement, whereas, in explicit contracts, the parties enter into a conversation and explicitly agree on the terms of a contract.
The negotiation of contractual terms does not amount to the completion of a contractual agreement and oftentimes, a possible contract may be dropped during the negotiating phase without legal consequences. Basically, during the negotiation phase, an offer is followed by a counter-offer and no acceptance is made, hence a contractual agreement is finally made once a party communicates acceptance to the other party’s terms.
Examples of When to Use a Contractual Agreement
Contractual agreements are the ultimate tool to legally bind another party to perform an obligation. Hence, from the sale of goods to the performance of services, everyone should form contractual agreements so that they can legally bind others to perform their obligations under the contract.
Real Estate Transactions
It is a legal agreement between a buyer and a seller that outlines the terms and conditions of a real estate transaction. The contract includes information about the property being sold, such as its location, size, and features, as well as the purchase price, the closing date, and any contingencies, such as a home inspection contingency or a financing contingency. In order to protect their interests, both parties should carefully review and understand the terms and conditions outlined in the contract before signing.
It is a contract between partners in a business partnership that outlines the terms and conditions of the partnership. This agreement is used to establish the roles and responsibilities of each partner, the distribution of profits and losses, and the procedures for dissolving the partnership. A partnership agreement is an important tool for protecting the interests of each partner and ensuring that the partnership runs smoothly. It can also help to minimize the risk of disputes arising between partners.
An employment contract is a legal agreement between an employer and an employee that outlines the terms and conditions of the employment relationship. This contract has information about the job responsibilities, compensation, and benefits. It is important to clearly define the terms and conditions of an employment relationship, as this can have significant legal and financial implications, including liability for taxes, benefits, and employment-related laws.
A lease agreement is a legal agreement between a landlord and a tenant that outlines the terms and conditions of a rental arrangement. This contract includes information about the rental amount, the length of the lease, and any restrictions on the use of the property, such as pet policies or parking regulations. It is essential to carefully review and understand the terms and conditions outlined in a lease agreement before signing, as this contract is binding and enforceable under law.
A construction contract is a legal agreement between a builder and a client that outlines the terms and conditions of a construction project. This contract includes information about the scope of work, the payment terms, and the timeline for completion.
What Should Be Included in a Contractual Agreement?
Mainly the contracts between parties mention who the buyer/seller/offeror/offeree is and what the terms of the contract are; they should also mention the age, identity, address, description of goods or services, and all other relevant clauses that are important for the performance of the parties. However, in case something has been missed from a contract, it can later be added through verbal contractual agreements or can be set up in separate contractual agreements.
Get Help with Contractual Agreements
In case you are experiencing any problem with a contractual agreement formed or if you want to draw up a contractual agreement, LegaMart is always here to assist you in your endeavors.
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In summary, a well-drafted contractual agreement is a crucial tool for establishing a clear understanding of the expectations, responsibilities, and obligations of the parties involved in a business relationship. By including essential elements such as the identification of the parties, the object of the contract, obligations, duration, confidentiality provisions, dispute resolution, and governing law, a contractual agreement helps to minimize misunderstandings, reduce the risk of disputes, and ensure that the parties are protected.
Whether you seek assistance from an attorney, use online templates, or work with a contract management service, it is important to carefully review the agreement before signing to ensure that it accurately reflects your understanding of the terms and conditions of the business arrangement.