In our last post we discussed what a contract is and why you need a contract in any business relationship. In this post we will be looking at the important elements of a contract in simple language and what to look out for when negotiating a contract.

Read: When Do You Need a Contract?

For a contract to be valid and enforceable, certain elements must be present and they are:

1. Offer: An offer is a definite promise by a party to do or refrain from doing an act with the intention to be bound by the promise in exchange for something of value. The offer must be unequivocal and final and there must be a clear intention to enter into a contract by the person making that offer. For instance, a real estate agent offers to lease a property for a particular amount.

When do you need to be negotiating a contract

2. Acceptance: This simply means the offer made was accepted. Acceptance is the final expression of approval to the offer. It is pertinent to state that there will be no contract if the parties are still negotiating or discussing the contract.

3. Consideration: Consideration is basically the benefit or value either party receives from the contract or the loss or detriment suffered by the other. Oftentimes, consideration is money, but it can be a service, an object, or anything else of value. Where there is no consideration there is no valid contract.

4. Capacity: This is the legal ability to enter into a valid and enforceable contracts. Not everyone has the capacity to form a contract and even when they do the contract may not be enforceable against them. For instance an infant, a drunkard or a lunatic has no capacity to form a contract.

5. Intention to enter into Legal relation: This is essential to the formation of a contract. It simply means the intention to be legally bound by the contract and the legal consequences. For instance, in a case where a promise is made between husband and wife or father and son, contractual intention is usually absent.

Where elements of a contract has been satisfied it is essential to determine the obligations undertaken by parties to the contract. It is important for parties to define the terms of the contract during negotiation and ensure same is agreed upon by parties or reduced into writing.

For the purpose of negotiating a contract it is pertinent for you to consider and agree on the following:

1. Subject matter of the Contract: It is important to define the goods or services which is the substance of the agreement. The subject matter of the contract is the essence of the contract, why a contract is being formed in the first place. For instance the substance of a Sales Agreement is the specific goods for sale.

2. Consideration: As stated earlier it is important to negotiate and agree on the consideration for the contract in order to avoid disagreement. The consideration clause should clearly define the specific, cost or expenses and payment schedule.

3. Duration: It is important to agree on the date the contract comes into effect and when the contract comes to an end. For some certain type of agreement it is a necessary condition to specifically state the commencement and tenure of the contract for a contract to be valid. E.g. a lease agreement.

When do you need a contract?

4. Terms and Conditions: It is imperative to extensively discuss and agree on the terms and conditions of the contract. This is necessary because parties are bound by the terms of their contract and the court will construe the contracts in line with the intention of parties. For instance, the terms and conditions for a sale of goods may include the specifications, quantity, delivery, performance appraisal, termination etc.

5. Obligations of Parties: The roles and duties expected of each party to the agreement to ensure the success of the agreement must be particularly highlighted, discussed and agreed on. This is important in order to avoid speculation and disagreement in the long run.

6. Risk and Liabilities: Potential risks and liabilities that may arise in the course of the contract should be identified. Parties are to discuss how they will handle risks and liabilities such as unforeseen costs, non-compliance with regulations insurance coverage etc. Also, the party expected to bear a particular liability should be specified and agreed to by both parties.

Before entering a contract it is important for you to identify your goals and priorities and focus on the important items for you to ensure a long lasting relationship. Do not be in a haste to sign the agreement, take your time, discuss and understand the terms of the agreement before executing same.

In the next post we would be looking at why you should never sign a contract without your lawyer’s review and approval. Watch the space.

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