1.1 What is a contract? and how to construct it
Contract: an agreement between two or more parties determining their enforceable rights and obligations under a certain (one-off) transaction or their (ongoing) relationship.
A contract will often include any conditions for such rights or obligations to become effective or for its termination, any covenants (and contractual prohibitions) enabling each party to enjoy the full benefit of their agreement, any warranties ascertaining that each party will receive what the other party has promised, and the effects in case of a breach of contract. Chapter 4 will explain what these legal concepts (conditions, covenants, warranties and various related contract clauses) mean.
Oral or written? Most contracts do not need to be in writing to be enforceable. Contracts that are by law required be in writing typically relate to the sale of real property or to the grant of licences under intellectual property (copyright, use of trademark or patent). A mere oral agreement may be difficult to prove, and introduces a considerable uncertainty regarding its precise scope and interpretation.
Written contracts may be given an ‘official’ look and feel, following a common structure (see section (a) below), or be presented more informally (see section (b)), as a letter agreement. Normally, courts will accept an exchange of e-mails as evidence of a contract, but typically, e-mails are not written with the greatest accuracy and discipline and may easily leave important aspects of the parties’ agreement unaddressed. Therefore, in cross-border context, it is strongly recommended that a contract is in writing.
Requirements for validity. Some legal systems – including many common law systems – require that the parties intend to enter into the contract (where the intention is a requirement on its own), but the threshold will be met easily. In common law, this intention to be bound is demonstrated by the existence of ‘consideration’: the fact that every party committed itself vis-à-vis the other by assuming an obligation of any (not illegal) kind. In practice, this requirement is easily met (the symbolic one Dollar or Pound sterling). Other legal systems – notably the Roman (French law-inspired) legal systems – require that the contract is not for an illicit cause (a negative criterion).
When is a contract binding? A contract is ‘entered into’ (and becomes ‘binding’ between the parties) once they reach consensus, agreement. In somewhat abstract terms, when one party makes an ‘offer’ and the other ‘accepts’ it. In a supermarket, this works simple: the supermarket offers its products (for sale) by allowing consumers to pick them from the shelves; and the customer’s handing it over at the cashier constitute acceptance; once paid, the transaction is complete (ownership shifted, warranties apply, etc.). When offer and acceptance do not readily match, the other party may make a counteroffer (and this may go back and forth). This process of offer-counteroffer-counteroffer-acceptance is negotiation.
As with contracts, offer and acceptance are not subject to formalities: the context, circumstances, customs and stipulations can take any form. Therefore, professional parties who make an offer will also clarify that it is subject to (conditional upon) agreement in writing. On the other hand, if a party starts performing its presumed obligations, this will likely a proof of its ‘acceptance’ (of the other party’s last counter-offer – see section 5.1(c)). So, if one party sends the other an e-mail unconditionally outlining or proposing the parameters of a transaction (or even a collaboration) without any reservation as to its being non-binding (not marked “for discussion purposes only” or “subject to contract” or “subject to board approval”), that e-mail may well constitute an offer that can be accepted by the other.
One-off transactions and ongoing relationships. Contracts can address the parties’ single transaction (a simple sale of a product or batch of goods, or the provision of a certain service), as well as establish the parameters of their ongoing relationship. This may change the characteristics of the arrangement:
- In a one-off transaction, the rights and obligations focus on the specifications of the product or service, on the (timely) delivery and who-does-what in respect of transportation, the payment of the purchase price or service fee, and what happens if something goes wrong. Examples of such contracts are the ITC Model Contracts for the International sales of goods, and for the International provision of services.
- In an ongoing relationship, these are less urgent as such relationship is partly built on mutual trust; the contract will then provide for procedures (for forecasting, ordering and joint product development), the establishment of a relational framework (establishing the governance and evaluation of the relationship) and the formalisation of continuing rights (in the use of trademarks, know-how, and training). Examples are the ITC Model Contracts for International distributorships, Commercial agency, Long-term supply of goods, Manufacturing, as well as the ITC Model Contractual alliance and (incorporated) joint venture.
Importance of a contract. Does it matter if there would be no ‘formal contract’ between the parties? Maybe not. But if a seller has not limited its liability to a certain maximum amount (as is often appropriate and acceptable) then if there is a defect in its supplied goods, all damages must be borne by the supplier. Conversely, if a customer did not stipulate that purchased goods had not been manufactured in violation of laws and regulations, then the delivery of those goods might not be objected (and the customer may even be held liable for undertaking or facilitating illegal activities).
Applicable law and dispute resolution. In a cross-border contract, it is very important to provide for an appropriate dispute resolution mechanism, and to determine which national law will govern the contract. In many international transactions, (mediation combined with) arbitration is inevitable.
‘Contract’ or ‘agreement’? There is no fixed terminology for referring to a contract, agreement or (contractual) arrangement. Most lawyers will understand a ‘contract’ to be the written reflection of a business transaction or legal relationship; but many will argue that an ‘agreement’ does the same. Moreover, the term ‘agreement’ is commonly understood to reflect the (mental) being in agreement, the having achieved consensus (on all details of) a transaction. Regardless of these somewhat arbitrary approaches, most English-language contracts are entitled as ‘agreement’ (not ‘contract’).