Issue No 19
Agreements are used widely between suppliers and their channel partners and yet frequent examination of these agreements highlights a lack of understanding of the formal requirements of an agreement.
Agreements are an important tool in the management of a distribution channel and the understanding of the rudiments of contract law is essential in framing or reviewing an agreement.
The law of contract is a child of commerce, having been developed almost entirely by the English Courts, from about the middle of the 18th century. Because of this, the law of contract differs dramatically from other branches of the law in one important respect. It is that, in a sense, that the parties to a contract make the law for themselves. What the law says to the people, is that provided you meet certain formal requirements, and avoid certain prohibited objects, the law will recognise your contract; and because of that recognition the law will enforce the contract, if that be the wish of one or more of the parties to it.
As to prohibitive objects, contracts that have come into being for the purpose of giving effect to some criminal or civil wrong, will not be enforced. And nor will the Courts enforce contracts which are against “public policy,” such as unreasonable restraints of trade.
What are the formal requirements?
If only for a short article, the formal requirements may be compressed into three headings, being agreement, intention, and the presence of either form or consideration.
There has to be mutual understanding. From that understanding, it must be clear that there is agreement as to the parties, the subject matter of the contract, and the rights and obligations which are created.
There must be a plain inference that the parties intend to make a legal contract. That is, a contract enforceable in law. In this way, a social arrangement between friends, although containing clear agreement between them, will not constitute a contract binding in law, because that was not their intention.
Page 2 Top
Form or consideration
A formal contract is a contract under seal, and thereby a deed. It gains its validity because of its form. Contracts not under seal are simple contracts. To enforce such a contract the law requires consideration.
Consideration has been called the price of the promise. But it does not have to be in money. It can be an act. Nor does it have to be adequate. It only needs to be of some value in the eyes of the law. Something present or future, which passes from the person wishing to enforce a contract to the other party.
Unless there is some special requirement (for example, the creation of an interest in land) a simple contract may be oral, or in writing, or for that matter partly oral and partly writing.
The ease by which a simple contract may be created should make people in business wary of their conduct. A letter or an oral statement that puts forward a proposal, may well take on contractual significance if the person to whom the proposal is put accepts it. And then, relying on the proposal, acts in a way which could be construed as being to that person’s disadvantage, thereby creating consideration.
The converse of the proposition in the last paragraph, is that if someone wishes to create a contractual situation, the way to go about it is to accept a proposal from another party, and then act to one’s disadvantage.
The warning to be wary is also relevant with an existing contract. Unless the contract specifically sets out how it may be varied, the contract could well be varied orally, or in writing, or by the conduct of the parties.
Quite simply, in the context of business it is a natural inference that the parties intend a contractual relationship. And if this were so, then at least one of the three formal requirements will be met.
The law of contract has produced an enormous body of cases. This is not surprising, because it impinges on so many of our every day activities. We may not be aware of the law, but every time we buy something from a shop, or ride on a bus, the law of conduct comes into play.
Regrettably, a considerable proportion of contract cases go to their construction. Much too frequently, the parties have not made their mutual understanding clear. As a result, over the years the Courts have brought into being a large number of rules that apply to the interpretation of a contract.
Some of these rules relate to evidence. In this way, a Court will look for evidence as to the existence of a document; whether the document is, in fact, a contract; and evidence as to its terms. In the case of an oral contract, the conduct of the parties will be examined. The purpose of such an exercise is to determine not only if a contract exists, but also the terms of that contract.
The construction or meaning of a contract, is a matter of law. Therefore construction is a matter for a Court and not for a jury (if there was one). When constructing a contract, a Court will give to an agreement a meaning that will best give effect to the intention of the parties. But a Court will not create an agreement for the parties. Therefore, if the language and the terms are so vague as to deny certainly, the purported agreement will not be enforced.
Page 3 Top
What emerges from all of this?
From the great body of cases which make up the law of contract, a number of useful lessons are to be learned, such as the following: