Formation of contract
A contract is a written or oral agreement between two or more parties that is intended to be legally binding and enforceable by law.
To form a valid contract that is enforceable, the following requirements are necessary:
• A valid offer is made by one party to another
• Valid acceptance of the offer in order for it to become a contract
• Consideration, that is the price given in exchange for goods/services. Consideration must have value and the price is usually payment made by one party to another in return for entering the transaction.
• The intention to create legal relations means that all parties intend to enter into a legally binding agreement where the obligations and rights of the agreement are enforceable.
• Certainty of terms i.e. the contractual terms between the parties are certain and complete.
It is crucial the contract clearly and accurately reflects the intentions of the parties before signing. Understanding contractual interpretation and the importance of particular clauses can help ensure that the contract reflect the agreed intentions should a dispute should arise, for example:
• Understand the factual background and have a contingency plan to cover risks associated with the contractual terms.
• Words are given their ordinary meaning in law, unless a specific meaning by the statute is required.
• When words are ambiguous and do not correspond a single meaning, a common sense approach will be applied.
• Prior communications and draft versions of the contract will not be considered as evidence because they will be very different to the finally agreed contractual terms.
• Does the contract contain any priority clauses setting out the order of importance?
Force Majeure Clause
A force majeure clause that has been expressly agreed between the parties can free them from performing their obligations under a contractual agreement without penalties, either permanently or temporarily, in whole or in part, should an unforeseeable event occur that is outside the parties’ control and make performance impossible such as, war, epidemic, earthquake, floods, fire or other natural disasters.
Force majeure clauses can provide protection and may be included in contracts such as, wedding contracts, event contracts, insurance policies, service agreements and others.
Dependent upon the drafting of the force majeure clauses, they may vary from contract to contract (or contract to sub-contract), or from jurisdiction to jurisdiction leading to a conflict or misinterpretation in certain circumstances.
If there is no force majeure clause, then the limited common law doctrine of frustration may discharge the contract and the parties’ rights under the contract may be cancelled.
Penalties for breach of contract
A breach of contract occurs when a party fails to perform its obligations or promise under a contractual agreement for which the non-breaching party may take legal action in the court of law. The court will determine whether the breach was minor or substantial and determine any remedy, such as any damages for compensation, together with any interest for the delay, or an equitable remedy when legal remedies are insufficient, including rescission, reformation, or specific performance.
If a contract includes a penalty clause expressly placing an obligation on the party who has breached the contract to provide compensation, this may be enforceable if the following are satisfied:
• there is a legitimate purpose
• the legitimate purpose is proportionate
• the clause is not the main obligation but incidental to the main obligation when the main obligation cannot be satisfied.
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