Business Contracts FAQs

A contract is a legally binding or valid agreement between two parties, which gives rise to legally enforceable obligations.

The law will consider a contract to be valid if the agreement contains all of the necessary elements. An agreement that lacks one or more of the elements is not a valid contract.

For a contract to exist, all of the following elements must be present.

• Two or more parties with legal capacity
• Promises agreed between them (normally identified by an offer and acceptance)
• Sufficient certainty to be enforced
• Intention to enter into a legal relationship
• Consideration exists (or a deed or estoppel)
• Compliance with any special formal requirements
• No illegality or vitiating factors, eg fraud, duress etc

An oral agreement is a binding contract unless the law requires a written contract. Contracts relating to the purchase of land, credit and insurance, contracts of guarantee and door-to-door sales are a few examples of where written contracts are required before the agreements are binding.

A breach of contract is a contracting party’s actual failure or refusal to perform (or a clear indication of its intentions to not perform) its obligations under the contract. A breach could be effected by repudiation of obligations before the beginning of the contract, repudiation of obligations before its completion, or a conduct that prevents the contract’s proper performance (such as interfering with the other party’s performance).

When a breach of contract occurs or is alleged, one or both of the parties may wish to have the contract enforced on its terms, or may try to recover for any financial harm caused by the alleged breach.

If a dispute over a contract arises and informal attempts at resolution fail, the most common next step is a lawsuit. However, courts and formal lawsuits are not the only option for people and businesses involved in contract disputes. The parties can agree to have a mediator review a contract dispute, or may agree to binding arbitration of a contract dispute.

When you breach a contract, the other party to the agreement is entitled to relief (or a remedy) under the law. The main remedies for a breach of contract are:

• Damages,
• Specific Performance, or
• Cancellation and Restitution.

Breach of a major term (condition) of the contract (called fundamental breach) entitles the aggrieved party to treat the contract as discharged, consider itself free from its own obligations under the contract, and sue the offending party for damages arising from the breach.

Breach of a minor term (warranty) allows for suing for damages arising from the breach, but does not allow any party to treat the contract as discharged except where terms of the contract override this implied legal provision. In contrast to rescission of contract, a breach of contract does not operate retrospectively.

A contract is deemed to be discharged, that is, concluded and no longer binding, in the following circumstances:

• Discharge by performance
• Discharge of contract by substituted agreement
• Discharge by lapse of time
• Discharge by operation of law
• Discharge by impossibility of performance
• Discharge by accord and satisfaction
• Discharge by breach

There are a number of reasons why a court might not enforce a contract. If there is a valid defence to a breach of contract, it may be voidable, meaning the party to the contract who was the victim of the unfairness may be able to cancel or revoke the contract. In some instances, the unfairness is so extreme that the contract is considered void. In other words, a court will declare that no contract was ever formed. There are some reasons a court might refuse to enforce a contract.

1. Lack of Capacity to Contract
2. Undue Influence, Duress, Misrepresentation
3. Unconscionability
4. Public Policy and Illegality
5. Mistake

Read more about the notion of protection from unfair contract terms.

The following things should be considered before signing any contract:

• Determine the parties to the contract
• Make sure the contract clearly states the rights and duties of the parties
• Determine what remedies the contract contains for breach of the contract
• Specify how disputes will be resolved
• Consider lawyer’s fees and costs
• Include a merger/integration clause
• Make sure the contract cannot be assigned without your written permission
• Consider consequential damages
• Address when and how the contract will terminate
• Have a lawyer review the contract

A person who has the ability and the opportunity to read a document before signing it is contractually bound by the terms of the document even if the person signed it without reading it. The signer cannot avoid liability based on the argument that no explanation was given to him of the terms of the contract.

Even if a person is unable to read or understand the terms of the agreement, he is still bound by the terms of the agreement since he should have tried to obtain an explanation of the agreement. The exception to this rule is that if the other party knows, or has reason to know, that the signer cannot read or has a limited education, some Courts would hold that the other contracting party should have read the document to the other party or explained the terms.