20 Contract Questions: What is a contract?

This is the first of my series of posts called 20 Contract Questions, addressing some of the most commonly asked contract questions I’m asked as well as the key matters I think you need to know to help you negotiate and manage a contract successfully.

What is a contract?

A contract is a legally enforceable agreement between two or more people settting out what they’re going to give each other and on what terms. Example: I’m going to develop some software for you, for which you’ll pay me. 

The five things you need for a contract to exist and be valid:

1) A specific, identifiable offer 

2) Acceptance of that offer

3) ‘Consideration’ (a legal concept basically meaning you both offer each other something of value)

4) Intention to enter into a legally binding contract

5) Compliance with any legal formalities

Let’s go through them quickly.

There needs to be an offer: you need to tell the other guy what you are proposing. It has to be sufficiently precise for him to understand your offer- a vague or incomplete offer may not cut it. In other words: don’t be lazy or cute when setting out your terms: better to be clear and definite. Ask yourself whether a reasonably intelligent man or woman on the street could understand your offer.

There needs to be acceptance: a communication of some kind expressing that your offer is agreed.  That is usually (and best) written confirmation, like signing a contract (but it can be verbal- more on that later). In some cases acceptance can be shown by the other guy just doing what was agreed (called ‘acceptance by conduct’). However, if you can’t point to a definite acceptance of your offer, don’t assume you have a contract because, in law, SILENCE IS NOT ACCEPTANCE: if you don’t get that acceptance of your offer in some verifiable way, no contract exists.

Everyone who’s negotiated a contract knows offers and then counter-offers are exchanged, sometimes repeatedly, before agreement is reached: that’s  why the law says no contract exists until a specific offer has been specifically accepted (otherwise you’ll never have certainty on which offer became the contract) (we’ll come back to this in a later post when we discuss ‘the battle of the forms’).

There needs to be consideration: you need to offer each other something. I won’t get into detail here because it’s a relatively arcane legal requirement in practice. Three simple points should suffice: (1) make it clear what you’re giving each other in the contract; (2) if one or both of you aren’t giving each other anything, execute the agreement as a DEED to ensure it is enforceable (there’ll be another post on this soon, so watch this space); [UPDATE] some countries may not have consideration as a legal requirement at all – e.g. Scotland doesn’t.

There has to be an intention to be legally bound: you can have an offer, acceptance and consideration but if you don’t actually want to contract with the other guy = no contract. Example: if your discussions are made “subject to contract” it normally indicates you don’t yet have an intention to be legally bound and therefore no contract exists. This is a double-edged sword: it can protect you for entering contracts before you want to…but it also means your negotiations have no legal force until you both agree they do.

Legal formalities: just be aware that some contracts, like guarantees or contracts for a land sale, have certain legal formalities you must comply with. Have a chat with your lawyer about them.

Does a contract have to be written to be valid?

NO. A contract can be made verbally just as validly as it can by writing.  BUT, 9 times out of 10 it’s far more advantageous to have a written contract, because it allows you to be more specific about the deal and to create a permanent record of that deal in case of disputes down the line.  Verbal contracts tend in practice to be a lawyer’s or businessman’s weapon of last resort essentially because they don’t have those qualities of thoroughness or certainty that a written contract does.

Practical advice: if you absolutely have to, you CAN legally rely on a verbal contract, but that should be your last resort.  If humanely possible, get a written contract – it can repay serious dividends down the line.

If it wasn’t clear enough already, here’s some examples why you should use written contracts:

  • Alan and Bob think they’ve agreed a software development deal for a contract by telephone.  A month later, neither of them can agree what they’d agreed the revenue share between them would be: PROBLEM.
  • Dave and Sue want to make a game together but they’ve not set out clearly how they’re going to own the IP in the game between themselves: FUTURE PROBLEM.
  • GreatGames Limited used to employ Steve, who made them a game without telling anyone he had created it using stolen code from BigGames Limited.  BigGames sues GreatGames.  GreatGames didn’t have a contract with Steve: PROBLEM.

These are all anonymised real-life examples of contract problems that people have told me about or sought my help on.  You get the message, hopefully: there are virtually no circumstances in which it is OK to not get a written contract of some kind in place.

Exceptions: the only times when a verbal contract or no contract at all could be OK:

(1) You’re in a position of extreme trust with the other contracting partner (and even then a contract would help) or

(2) The matter in question is so small that you don’t really care if there’s a problem down the line.

Rarely should that be good enough for you, so as soon as you can, get a written contract in place.

What does a written contract look like?

Generally speaking, there are no particular formalities. Contracts can be entered into as:

  • Exchanges of emails or letters
  • A single letter signed by both parties
  • Signing someone’s T&Cs
  • A short form contract
  • A full length ‘traditional’ lawyer-drafted contract 

Legally, each is as valid as each other. In practice, you need to balance the fact that detailed contracts are nearly always most protective against the cost and hassle of getting them written up. Sometimes you can live with something rather shorter, but sometimes you’ll need to go the whole hog on a matter that’s  important to your business.

In other words, while my advice is to get a written contract in place whenever you can , that doesn’t necessarily mean spending £££, $$$ or €€€ on it – far from it. But it DOES mean you should know your way around a written contract, which is what the next parts of this series will turn to. Next up: how do I get to the contract stage?

Postscript: I’m really, really keen to get comments from you about this series of posts.  Is it any good?  Too long/short?  What would be most useful to you?  Please let me know via comments below, Twitter or email -thanks!

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23 thoughts on “20 Contract Questions: What is a contract?”

  1. This is an interesting post and brings me back to my law school contracts class. In the future posts, you should really focus on intellectual property ownership — what is licensed (and under what terms) and what is a work made for hire. I actually addressed some of these topics in a recent article (http://www.sethdmc.com/2012/05/socialarticle/).

    — @SethDMC

  2. Doesn’t this differ in Scottish law? I have heard that consideration is not a requirement for a valid contract in Scotland.

  3. Indeed Scots Law does not require "consideration", but other than that, this is a really nice summary of the law.

  4. @adurdin and Charles Oppenheim – thanks both, have amended!

    @SethDMC – I'll come on to that, but thanks!

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