Legal Issues and Contract Law

Anybody purchasing goods and services on an organization’s behalf should have sufficient knowledge of contract law to know what the pitfalls might be so that they can recognize them and seek appropriate expert advice from the lawyers in a timely manner.

The basics to be understood

The first step in a contract question is always to make sure that a contract actually exists. There are certain elements that must be present for a legally binding contract to be in place:

An offer: an expression of willingness to contract on a specific set of terms, made by the offeror with the intention that, if the offer is accepted, he or she will be bound by a contract.

Acceptance: an expression of absolute and unconditional agreement to all the terms set out in the offer. It can be oral or in writing. The acceptance must exactly mirror the original offer made. A counter-offer is not the same as an acceptance. A counter-offer extinguishes the original offer: you cannot make a counter-offer and then decide to accept the original offer. It is very important to distinguish an offer from an invitation to treat – that is, an invitation for other people to submit offers.

Consideration: The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other.

Intention to create legal relations: this is defined as an intention to enter a legally binding agreement or contract. Intention to create legal relations is one of the necessary elements in formation of a contract. It is because, intention to create legal relations consists of readiness of a party to accept the legal sequences of having entered into an agreement. If there is no intention to create legal relations the contract will not be enforceable, legal or binding.

It is also important to understand some of the fundamental basics of contract. For example, many people are still under the mistaken belief that a contract must be in writing, or that it can be changed unilaterally by one party without the agreement of another, or that it can be terminated whenever one likes.

People often do not understand that silence is not consent, the difference between express and implied terms, the uncertainty caused by the battle of the forms, the difficulties which sloppy representation can cause, how force majeure can affect things, the main principles of legislation and so on.

Contract Termination and Dispute Resolution

There are various possibilities to terminate a contract:

By Frustration : contract termination by frustration takes place when a party is excused from its obligations because of unexpected events. (Note: be aware that this concept of “frustration” does not exist in several jurisdictions.)
By mutual agreement: this happens when parties voluntarily agree to release each other from their obligations.
By breach of contract : this takes place when a party fails to deliver on its contractual promises.

If a dispute between you and your supplier arises, you have several options to solve it. As a general rule of thumb, you will always try to resolve the conflict by talking to each other. In most cases, the buyer and supplier meet and discuss to find a solution that is acceptable to both of them. Be though on the critical issues that you want the supplier to resolve immediately and be flexible on less important issues.

If you don’t find a solution, you may opt for legal proceeding. However legal proceedings are time consuming and expensive. If the cost of switching the supplier is insignificant, you’d better split (do you have an exit clause?) with the supplier and place the order with a new supplier. Or you may consider alternative dispute resolution – ADR – methods, such as mediation, conciliation and arbitration that can help you resolve the disputes.

Of course, it does take considerable legal training to understand the shifting and surprising subtleties mentioned above but the basic principles are essential knowledge for anybody doing procurement work.

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