Introduction to Contract Law

What is a contract? 

Contracts are promises that are enforceable by law. It may be to do something, or refrain from doing something. They usually involve two parties with one making an offer and the other accepting. If one of the parties fails to keep the promise, the other is entitled to legal remedy or recovery. A contract can only be enforced if it is binding and a contract can be made orally or in writing. 

Contracts in the business sense set out how relationships between parties conducting business with each other will be governed. 

Common issues that should be clarified in contracts include: 

• What happens if goods are delivered late
• What happens if certain obligations are not completed
• What happens if certain information that should have been disclosed hasn’t been
• What happens if one of the parties don’t pay

Are contracts interpreted the same around the world?

The laws of England and Wales are the preferred laws for financial, commercial, corporate and banking transactions across borders. These laws are known as Common Law, and it is a system of laws that derives from English law and is based on historical precedent set out in courts. Most English speaking countries use Common Law. 

Countries that don’t use Common Law typically use Civil Law. In Civil Law systems the law is set out in codes (the commercial code, the criminal code). 

Other legal systems include the Russian Law family, which includes Russia, some eastern European countries, and China. It is a combination of common and civil law concepts. 

Muslim countries including the Middle East, Pakistan and Malaysia have a Sharia Law system, which also includes concepts of common law or civil law in areas of commercial law. 

How is a contract formed? 

The use of heads of terms, memorandums of understanding and letters of intent is a key area to watch as they can be legally binding or not-legally binding. In practice they are often intermediary documents that allow parties to set out the steps that they would like to take in terms of their relationship. These intermediary documents are the statement setting out the intentions of each party. 

These agreements often set out in note form or bullet-point form some of the points reached by the parties, which may then have to be set out in a more detailed and complex set of contractual terms. Some advisors recommend that such documents be expressed as “subject to contract” so parties do not feel bound and it gives a strong indication that the parties did not intend to be legally bound.