As an entrepreneur, many of your business transactions are based on contract agreements. From employees, to clients. From business partners, to shareholders. The kind of agreement that exists between you, as an entrepreneur, and these people, is contractual in nature. The Law of contract and Commercial Law exist to govern all business or commercial transactions.
A contract is an agreement between two or more parties. Which is made with an intention that it shall be legally binding on them. That is, upon non performance of the obligations prescribed in the terms of the agreement, or a breach of the contract, the injured party can sue the offending party.
As people tend to take advantage of each other, in the quest for survival, the law is there to safeguard people’s rights and maintain equality before the law. Just as the Law of Human right exist to protect the rights of the people and Labor Law covers all the activities of the labor market, so also Commercial Law is there to guide all commercial transactions, like contractual agreements in business. The major reason people enter into contract, is to have legal coverage, upon default of the terms of the contract from any of the parties involved. Because, the law makes it possible for them to get redress, when their rights are trampled upon.
But how do you distinguish a contract from an ordinary agreement that is not legally binding? There are some basic elements that must be present before any business agreement can be regarded as a contract under the law;
The following are the elements of a valid contract:
One of the basic elements of a contract is an offer. It is an expression of willingness, by one party, to enter into a contractual agreement with another party. With the intention that, it shall becoming binding on both parties upon acceptance of the offer by the recipient (offeree). Before any business agreement can be regarded as a contract, an offer must have been made. There are always two parties involved in an offer. The offeror i.e the person making the offer, and the offeree i.e the person, to whom the offer is being made. An offer must be communicated by the offeror to the offeree, either by word of mouth or in writing, before it can become effective.
Once an offer is made and successfully communicated to the offeree, the next step in making a contract is acceptance by the offeree. An acceptance is the final expression of agreement to the terms of an offer. It is the offeree that communicates acceptance to the offeror, showing willingness to be bound by the terms of the offer made by the offeror. Acceptance may also be communicated expressly i.e by word of mouth and writing or impliedly i.e by conduct.
For acceptance to be valid, it must not be conditional. It must correspond with the offer and it must be made with full reliance on the offer. It is only an offeror or his agent that can accept an offer. Acceptance must be duly communicated to the offeror before it can become effective.
Intention To Create Legal Relations
An agreement can not be qualified as a contract if there was no intention to create legal relations between the parties involved. The parties involved in an agreement, must have intended to be legally bound by the agreement. That is, if either of the party should default or breach the agreement, the other party can take a legal action. Intention to create legal relations is relevant when distinguishing between ordinary social agreement and contractual agreement. If you agreed with your spouse to bring your children home from school, it is obvious that you both did not intend to be legally bound by the agreement. Unlike in the case of purchase of land, where offer to buy the land will show an intention to be legally bound by the agreement.
Another important element of a contract is consideration. A promise must be given in exchange for another. Before you can enforce an agreement under the law, you must have contributed something valuable in the eyes of the law to the agreement. That is, you must give something valuable , whether a promise or an act, in return for another. Consideration may not necessarily be money. But, it must be a thing of value as it is regarded under the law as the price paid in return for the promise of the other party.
A person bringing an action against another party in a contractual agreement, must be able to prove that he has contributed a thing of value or suffered a loss, as a result of meeting the terms of the agreement. For example, someone gets a job offer and accepted its terms (assuming the remuneration is on salary basis). The person does the job and after the end of the month, he is denied payment of salary, It means the agreement has been breached by the employer. In this case, the job done by this person is the consideration and such a person can take a legal action against the employer.
You must have legal capacity to enter into a contract before you can engage in contractual agreements. As an entrepreneur, you can not enter into a contract if you are bankrupt. So also, an insane person does not have legal capacity. Neither does a minor (under aged). Prisoners as well, do not have the capacity to enter into contractual agreements. The involvement of the above class of people, who do not have legal capacity, in business or commercial transaction, can render the resulting contract invalid.