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Contract or not a contract – that is the question

on Friday, 05 February 2016. Posted in Commercial law, Legal

Often a company’s valuation is only as secure as its contracts, which is why having watertight agreements in place is vital for any business looking to grow

Contract or not a contract – that is the question

Whilst watching Dragons’ Den a couple of weeks ago, Nick Jenkins, the founder of Moonpig.com, gave an entrepreneur a grilling over a contract he had with his product manufacturer. The entrepreneur Caner Veli pitched his waterproofing product Liquiproof to the Dragons, seeking a £100,000 investment for 5% of his business at an effective valuation of £2,000,000.

You could see immediately that the Dragons loved the product and thought it had great potential, with Sarah Willingham said: “It’s the first pitch I’ve clapped at.” On further questioning, however, the entrepreneur’s contract with the product manufacturer became an issue. It turned out the contract was written and checked by the entrepreneur and one of his friends and was not legally sound. In the words of Nick Jenkins: “If you’re going to ask for a two million valuation, spend a couple of grand on your contract. Lawyers exist for a reason. [This contract] is the only thing that you have. It’s the only thing.”

Veli lost four of the five Dragons because of that poorly worded contract. In the end, Touker Suleyman did invest in the entrepreneur but taking 50% of the business in return for the £100,000 and on the strict condition that the contract was sorted out.

In our daily lives, we form numerous contracts – some within our routine, some completely unbeknown to us. It could be as simple as purchasing a product online or as complicated as signing a multimillion-pound business deal. No matter what the transaction is, one has to create a contract that is binding – if not, you will have no recourse to legal remedies if things fall apart.

Within English and Welsh legal jurisdictions, there are four fundamentals required for a contract to be valid. They are: an offer, an acceptance, consideration and the intention to create a legal relationship.

Offer

For a contract to be legally binding, goods or services or both have to be offered by a party. The party offering must have the intention to offer, whether this is to a single person, multiple persons or universally.. A contract will be made only after money and goods are exchanged between parties.

Acceptance

An acceptance must follow an offer for the contract to take shape. An acceptance has to be communicated for it to be effective. Therefore, it is prudent to stipulate the method of suitable communication.

Consideration

Courts do not accept existence of an offer and an acceptance as formation of a binding contract: it is the exchange of money or monies worth that seals the deal in an effective contract. The consideration has to be ‘sufficient’ and courts do not get involved in measuring the adequacy of the consideration.

Intention

As much as offer, acceptance and consideration are vital elements of creating a valid contract, the role of intention in forming a legally binding contract is paramount. Parties, both offering and accepting, must have the intention to create a legally binding contract. Social transactions tend to take place on the basis of understandings. However, when parties’ understandings become ambiguous they then turn to courts to interpret intentions. Usually the court relies on the facts and ‘reasonableness’ to elucidate parties’ intentions.

In commercial contracts, parties cannot rely on intention. The intention to create a legally binding contract would be in existence at the time of the offer and the acceptance in the course of business. Thus, the courts will disregard an argument of intention in commercial 

Having considered the four fundamentals of forming a valid contract, the most important part is ascertaining whether they complement each other expressly or impliedly.

Finally, if you have or are entering into a contract or agreement, then get it checked by a solicitor. It doesn’t have to cost a lot but it could save you time and money later on down the line. And if you are thinking of going in front of the Dragons – or any investor – make sure you have checked all your agreements and contracts. 

This article comes courtesy of Hodders Law, a law firm specialising in property, personal and business law.

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