Monday, December 13, 2010

What is a Contract

An agreement between two or more parties establishing an enforceable legal relationship,
  • Example: a Supplier agrees to sell a Product or Service to a Buyer and the Buyer agrees to pay for such product or service


An agreement between two or more parties creating an obligation to do or not to do a particular thing.
  • Example: In settlement of a claim the Buyer has against the Supplier, the Buyer and Supplier enter into a settlement agreement where the Supplier agrees to pay the Buyer a sum of money to resolve the claim and the Buyer agrees not to sue the Supplier on that claim.

Contract must meet 6 requirements
  • Offer
  • Acceptance
  • Legal Purpose and objective
  • Meeting of the Minds
  • Consideration
  • Competent Parties

A common form of offer is Buyer’s purchase order.

Offers must be clear. Any offer should answer the 4 W’s and 2 H’s. Who will do it, what will they do, where will the do it, when will they do it, how will they do it, and for how much.
  • Supplier shall deliver 100 widgets, part number XX0003, to Buyer FOB origin, Supplier’s Dock in Taipei, Taiwan on March 17, 2012 for US$25.00 per unit.

Offers must be Communicated to the other party.
  • Communication can be in writing, electronic or oral.

Offers must be expressed with the intent to enter into a contract.
  • For example a request for bid, quote or proposal by Buyer would not be considered to be showing the intent to enter into a contract.

In making an Offer you should provide a time by which the other party must accept it.

Offers will terminated by:
  1. Lapse of time allowed to accept the offer. If no time is stated, the offer terminates after a reasonable period of time has passed.
  2. Rejection by the other party will terminate the offer.
Offers may also be rescinded by the offering party.  To rescind an offer required that it be communicated prior to acceptance by the other party. You can rescind (withdraw) an offer orally, electronically, or in writing.
If you make an Offer and the other party proposes something different in response, you original offer will cease, but the proposal by the other part functions as a Counter Offer which you would need to accept to create an agreement. If you don’t accept their counter offer there is no agreement.


Acceptance may occur a number of ways.
  1. There can be communication by the other party of their acceptance.  When purchase orders were issued hard copy, there was an acceptance copy the Supplier would sign and return to the Buyer. With the advent of Electronic Data Interchange transmissions, acceptance is transmitted by an EDI signal.
  2. Acceptance may be by performance. Doing the specific actions that were requested by the offer.
Acceptances must be unconditional and any communication that would purport to change the terms of the offer is a counter offer.

If the Supplier hasn’t communicated their acceptance can you withdraw your offer ?
There are several situations where you can’t:
  1. If the offer is irrevocable.  For example if you asked the Supplier to provide a bid and required that you have sixty days to accept their bid. The Supplier’s bid would be an offer than they would not be able to revoke it within that sixty day period.
  2. When the Supplier has commenced the work and would be harmed by the withdrawing the offer. This is referred to detrimental reliance where since the other party acted in good faith and relied upon your offer to commence work and because there was detrimental reliance on their behalf you would be prevented from withdrawing your offer. This is called promissory estoppel.

Legal Purpose

The parties cannot contract to do something that’s illegal and if what they contracted to do subsequently became illegal the agreement would be voidable

Meeting of the Minds

Meeting of the minds occurs when the parties to a contract both have the same understanding of the terms of the agreement. The terms included on the face and attached to a Purchase Order or included in a written contract describe the meeting of the minds on the subject matter. Further most purchase agreements also include what’s called a merger clause that states that the agreement combines all prior understandings and represent the entire agreement or the parties intending to show that the agreement represents a meeting of the minds between the parties.


Consideration is the legal concept of value in connection with contracts. For a party to be obligated to provide you something or agree not to do something, you must agree to provide them something or agree not to do something. Consideration can be anything of value promised to the other party to induce them to enter into the contract. Consideration can be money, goods, services, rights, interests, benefits, promised actions, or withholding action. Consideration must exist in every contract for it to be enforceable and it must also exist in amendments to contracts for those amendments to be enforceable.

Competent Parties
A competent party is one that is:
  1. Mentally competent (capable of knowing what they are doing)
  2. Authorized to enter into the contract
  3. Of legal age
  4. Of normal mentality (not be impaired by injury, mental disease, or the influence of drugs or alcohol.
In a procurement setting the most important factor that could impact the enforceability of an agreement and whether the agreement was voidable is authority.  Whether the individuals signing the contract have the legal authority to bind their respective entities.

No comments:

Post a Comment