Commercial Contracts Guide

A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. Contract law is based on the Latin phrase pacta sunt servanda (agreements must be kept).  Breach of contract is recognised by the law and remedies can be provided.  Almost everyone makes contracts everyday.  Sometimes written contracts are required, e.g., when buying real estate.  However the vast majority of contracts can be and are made orally, like buying office supplies or coffee at a café.  Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).

Contract Formation

In common law jurisdictions there are three key elements to the creation of a contract.  These are offer and acceptance, consideration and an intention to create legal relations. In civil law systems the concept of consideration is not central.  In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.

Offer & Acceptance

Perhaps the most important feature of a contract is that one party makes an offer for a bargain that another accepts. Offer & Acceptance has been called a 'concurrence of wills' or a 'meeting of the minds' of two or more parties. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement.  An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to contract.

Offer

An offer is an indication by one person ("offeror") to another ("offeree") of the offeror's willingness to contract on certain terms without further negotiations.  An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the "offeree".  The "expression" referred to in the definition may take different forms, such as a letter, newspaper, fax, email and even conduct, as long as it communicates the basis on which the offeror is prepared to contract.

Firm Offer

A firm offer is an offer defined by UCC § 2-205 of the Uniform Commercial Code of the United States. It holds merchants to a high standard of care in making an offer by certain offers irrevocable for a certain length of time. It in essence creates an option contract without any consideration. It reflects a change from traditional common law that treated all parties to a contract the same way, to a more modern view that holds certain parties to a higher standard of behavior.  There are two versions of the UCC firm offer rule in effect. The old UCC § 2-205 states that an offer is firm and irrevocable if: (i) it is an offer to buy or sell goods; (ii) it is made by a merchant; and (iii) iit is a signed writing.

There are at least two additional requirements. First, in no event will the period of irrevocability be longer than three months. Second, if the offeree submits a form on which the offeror is supposed to set out the offer, then the irrevocability condition must be separately signed by the offeror. If all of these conditions are met, then the offer will be irrevocable either for the period stated in the offer, or for a reasonable time if no time is stated in the offer.   

Invitation To Bargain

 In contract law, an invitation to bargain is an action by one party which may appear to be a contractual offer but which is actually inviting others to make an offer of their own. The distinction is important because if a legitimate contractual offer is accepted by another, a binding contract is immediately formed and the terms of the original offer cannot be further negotiated without both parties' consent.  An invitation to treat may be seen as a request for expressions of interest.  For example, advertisements are generally considered invitations to bargain, so the person advertising is not compelled to sell to every customer.

Revocation of Offer

An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror. If the offer was made to the entire world, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option.  If the offer is one that leads to a unilateral contract, then unless there was an ancillary contract entered into that guaranteed that the main contract would not be withdrawn, the contract may be revoked at any time.

Acceptance

Acceptance is a final and unqualified expression of assent to the terms of an offer.  It is no defense to an action based on a contract for the defendant to claim that he never intended to be bound by the agreement if under all the circumstances it is shown at trial that his conduct was such that it communicated to the other party or parties that the defendant had in fact agreed. Signing of a contract is one way a party may show his assent. Alternatively, an offer consisting of a promise to pay someone if the latter performs certain acts which the latter would not otherwise do (such as paint a house) may be accepted by the requested conduct instead of a promise to do the act. The performance of the requested act indicates objectively the party's assent to the terms of the offer.

The essential requirement is that there must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent. This manifestation of assent theory of contract formation may be contrasted with older theories, in which it was sometimes argued that a contract required the parties to have a true meeting of the minds between the parties. Under the "meeting of the minds" theory of contract, a party could resist a claim of breach by proving that although it may have appeared objectively that he intended to be bound by the agreement, he had never truly intended to be bound. This is unsatisfactory, as the other parties have no means of knowing their counterparts' undisclosed intentions or understandings. They can only act upon what a party reveals objectively to be his intent. Hence, an actual meeting of the minds is not required.

This requirement of an objective perspective is important in cases where a party claims that an offer was not accepted, taking advantage of the performance of the other party. Here, we can apply the test of whether a reasonable bystander (a "fly on the wall") would have perceived that the party has impliedly accepted the offer by conduct.

Communication of Acceptance

There are several rules dealing with the communication of acceptance:

1. The acceptance must be communicated: Depending on the construction of the contract, the acceptance may not have to come until the notification of the performance of the conditions in the offer as in Carlill's case, but nonetheless the acceptance must be communicated. Prior to acceptance, an offer may be withdrawn.
2. An offer can only be accepted by the offeree, that is, the person to whom the offer is made.
3. An offeree is not bound if another person accepts the offer on his behalf without his authorization.
4. It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance.
5. If the offer specifies a method of acceptance (such as by mail or fax), you must accept it using a method that is no less effective than the method specified.
6. Silence is generally not construed as acceptance although there are some exceptions.

Mirror Image Rule

In the law of contracts, the mirror image rule states that an offer must be accepted exactly without modifications. The offeror is the master of his own offer. An attempt to accept the offer on different terms instead creates a counter-offer, and this constitutes a rejection of the original offer.

In the United States, this rule has been altered with respect to merchants dealing under the Uniform Commercial Code (UCC Section 2-207). In such situations, an acceptance that does not match the terms of the offer is nonetheless effective as long as the material terms are agreed upon. Example: Marty the T-shirt printer(merchant) offers to make and sell 1,000 yellow T-Shirts with "Bring the Ruckus" on the back for $100 to Vinny of Vincent's Shirt Barn(merchant). Vinny accepts the offer and writes change to "Bring da Ruckus" on the back of the invoice. This constitutes acceptance and the contract will be enforceable in spite of the alteration because the change is immaterial and both are merchants.

Consideration

Consideration is a controversial requirement for contracts under common law (for example money). It is not necessary in civil law systems, and for that reason has come under increasing criticism. The idea is that both parties to a contract must bring something to the bargain. This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience. Three rules govern consideration.

1. Consideration must be sufficient, but need not be adequate. For instance, agreeing to buy a car for a penny may constitute a binding contract.  While consideration need not be adequate, contracts in which the consideration of one party greatly exceeds that of another may nevertheless be held invalid for lack of sufficient consideration. In such cases, the fact that the consideration is exceedingly unequal can be evidence that there was no consideration at all. Such contracts may also be held invalid for other reasons such as fraud, duress, unequal bargaining power, or contrary to public policy. In some situations, a collateral contract may exist, whereby the existence of one contract provides consideration for another. Critics say consideration can be so small as to make the requirement of any consideration meaningless.
2. Consideration must not be from the past. For instance, in Eastwood v. Kenyon, the guardian of a young girl raised a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was past consideration, because it was completed before the husband promised to repay it.
3. Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.

Intent to be Bound

There is a presumption for commercial agreements that parties intend to be legally bound. On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy, for instance between children and parents.

Formalities & Writings

Contrary to common wisdom, an informal exchange of promises can still be binding and legally as valid as a written contract. A spoken contract should be called an oral contract, which might considered a subset of verbal contracts. Any contract that uses words, spoken or written, is a verbal contract. Thus, all oral contracts and written contracts are verbal contracts. This is in contrast to a "non-verbal, non-oral contract," also known as "a contract implied by the acts of the parties", which can be either implied in fact or implied in law.

Most jurisdictions have rules of law or statutes which may render otherwise valid oral contracts unenforceable. This is especially true regarding oral contracts involving large amounts of money or real estate. For example, in the U.S., generally speaking, a contract is unenforceable if it violates the common law statute of frauds or equivalent state statutes, which require certain contracts to be in writing. An example of the above is an oral contract for the sale of a motorcycle for US$5,000 in a jurisdiction which requires a contract for the sale of goods over US$500 to be in writing to be enforceable. The point of the Statute of Frauds is to prevent false allegations of the existence of contracts that were never made, by requiring formal (i.e. written) evidence of the contract, however, a common remark is that more frauds have been committed through the application of the Statute of Frauds than have ever been prevented. Contracts that do not meet the requirements of common law or statutory Statutes of Frauds are unenforceable, but are not necessarily thereby void. However, a party unjustly enriched by an unenforceable contract may be subject to restitution for unjust enrichment. Statutes of Frauds are typically codified in state statutes covering specific types of contracts, such as contracts for the sale of real estate.

1 | 2 | 3 | 4 | 5 | 6 | 7 | 8  Next >>

*Please note that the Sample Business Contracts are provided as a reference only to assist you in better understanding the types of business and commercial agreements.  These samples should not be utilized as templates to "draft" your own agreement because such the agreement or provisions thereof may be invalid, illegal, or not comply with the laws and regulations of a particular jurisdiction and therefore may be invalidated or unenforced by a court of competent jurisdiction.