The fundamentals of contract management
What are the legalities of executing contracts within organisations? In this blog, we discuss the meaning of contracts, the fundamentals of contract management, and the role of authorised signatories or signers in the process.
What is a contract?
Contract is probably one of the best-known legal concepts as it takes such a central role in modern society’s political, economic, and social life. Very often, contract is used interchangeably with words like agreement, bargain, undertaking, or deal. Whatever the term, the underlying idea of a contract is that it gives people the freedom to pursue their own lives whilst considering the rest of society. Contract is central because it allows for a free society to still live and function in order, which would otherwise turn into anarchy.
In legal terms, the simplest definition of a contract is that it is “a legally binding promise (or set of promises) or agreement between two parties or groups”. “Legally binding” here means that the promise or agreement will create rights and obligations that may be enforced by law.
The importance of contract law
Contract law is key to the existence of our modern society, and life as we know it today. In most countries in today’s global economy, goods and services are created and distributed through markets. And contracts are at the heart of how markets operate. In markets and businesses, almost every transaction that takes place involves a contract – e.g., buying or selling goods, leasing premises, hiring equipment or personnel, receiving payments, banking, etc.
Contracts and the law
What makes a contract valid?
Contracts are usually governed and enforced by the laws in the country where the agreement was made. Every country has its own contract rules.
However, contract law commonly involves the following 3 principal elements:
Offer and acceptance (agreement) – Every contract must have a valid offer and acceptance. One party makes an offer with a set of terms and the other party accepts the terms of the offer. This usually happens by making a payment or providing a signature in writing.
Consideration – Consideration is usually a payment or value that is exchanged for an offer. Whilst in most cases consideration is monetary, it can also be in the form of interest, benefit or a right.
Legality – For a contract to be valid, it has to be for a legal purpose. Any contract that requires a person to commit an illegal activity like a crime is considered to be void and unenforceable. Besides legality of purpose, a contract is only valid between parties who have full legal capacity to enter into a contract – these are legitimate, legal entities, or individuals above certain age (adults) with sufficient mental capacity or ability to fully understand the nature and consequences of their actions.
Types of contracts
There are different types of contracts, and they can be either verbal or in writing to be legally enforceable. Generally, the law recognises the following 4 categories:
Bilateral – This is the most common or traditional type of contract that involves a mutual exchange of promises among the parties. A bilateral contract is often called a two-sided contract because of the two promises that form it. In this type of contract, each party may be considered both making a promise, and being the beneficiary of a promise.
Unilateral – This type of one-sided contract usually requires a performance rather than a promise from the party accepting the contract’s offer. And the contract happens when the required act is complete. A perfect example of a unilateral contract is a “reward” promotion, offering a monetary “reward” in exchange for some sort of information or value.
Express – An express contract takes place when the parties state the terms, either verbally or in writing, at the time of formation.
Implied – A contract is implied when there’s an act or fact that clearly indicates that the parties have an intent to enter into a contract, even if no obvious offer and/or acceptance were stated orally or in writing.
Breach of contract
“Contract breach” is a term used to describe the event in which the contract is broken by under or non-performance of any of the contractual terms, warranties, or conditions.
The most common types of contract breaches include:
defective performance - where a contract is partly performed but not to the agreed standard,
delayed performance - where a contract is not performed within the required time frames,
complete non-performance - a party completely fails to perform a contract.
The consequences of a contract breach will depend on the type of terms that have been broken.
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Contract laws across different jurisdictions
Contracts are usually governed and enforced by the laws in the country where the agreement was made. Every country has its own contract rules.
In the following section, we take a look at the key differences in contract law between the EU, UK and US.
EU contract law
The European Union (EU) single market permits businesses within the block to trade on an equal basis. To facilitate this, the EU has introduced a set of measures to remove all obstacles to free trade, including any limiting contractual clauses. EU directives have been introduced for critical trading areas like e-commerce and the insurance and banking sectors. Whilst these measures have impacted contract law in some member states, the EU has no right to regulate the contract law of individual countries. So, each country maintains its own legal contract provisions and legislations vary.
Another measure the EU has taken to help unify contract law in the single market is the Principles of European Contract Law framework. It represents a set of 'model' rules for business contracts, based on fairness and simplicity. They aim to provide resolutions for issues where national laws don’t offer an answer.
The Principles are available in each of the EU's languages and businesses can use and agree to some - or all - of these clauses. Then, in the case of a dispute, EU clauses will take precedence over the contract law of the country where the contract is signed.
UK vs EU law
From a comparative law perspective, contractual contingencies significantly vary across different European jurisdictions. Under English law, for example, there’s no statutory provisions for “force majeure” like in other European countries – it’s not a standalone concept. And the only way for contractual performance to be statutorily excused under unexpected circumstances is if they fall within the fairly limited doctrine of frustration. This doctrine usually is applied by default unless the parties have agreed on a specific set of terms in their agreement.
On the contrary, most European continental countries do provide some form of mediation on the contract in unprecedented circumstances. In the Netherlands, for example, when a judge assesses if unexpected occurrences have undermined the fairness of the contract, they can decide whether to terminate or adapt it. It must be highlighted that both remedies are called upon by the law without one prevailing over the other. Since the reform of Art. 1195 of the French Civil Code in 2016, France has adopted the same model.
The most advanced contingency-adapted legislation in Europe was drafted in Germany in 2002, with the new wording of Art. 313 of the BGB (German Civil Code). “The provision indeed prescribes adaptation as the first and main remedy to a sudden and unexpected change of circumstances, which should push contractors to try the way of an extra-judicial renegotiation. On the contrary, termination can only be taken into consideration if adaptation turns out to be impossible or unzumutbar / unacceptable. Such an unacceptability shall be judicially proven through a balancing of interest’s assessment, and can only be assessed if the survival of the contract would lead to a result which is intolerable and contrasting both with the law and fairness”.
US contract law
In the US, contracts are usually governed and enforced by the laws in the state where they are made. Depending on the type and subject of agreement (i.e. sale of goods, property lease), a contract may be governed by one of 2 types of state law. These are:
The Common Law - most contracts (i.e. employment agreements, leases, general business agreements) are controlled by the state's common law. This is a tradition-based yet constantly evolving set of laws that is formed from court decisions over the years.
The Uniform Commercial Code (UCC) - the common law doesn’t govern trade contracts that are primarily for the sale of goods. These fall under the Uniform Commercial Code (UCC), a standardised collection of guidelines that govern the law of commercial transactions. Most states have adopted the UCC accordingly, making the UCC's provisions part of the state's codified laws pertaining to the sale of goods. Similar to the UK, the UCC provides a doctrine of frustration in “force majeure” circumstances, but it also includes a principle of impracticability. The impracticable principle serves a much wider purpose than simply a non-performance protection, but it can never go so far as a complete adaptation of the contract.
Executing contracts and the role of authorised signers / signatories within organisations
A failure to properly execute a contract can result in a number of issues like an unenforceable or invalid contract, and disputes. One of the key steps in executing contracts effectively is knowing who can sign what within an organisation and maintaining a valid and up-to-date authorized signatory list.
Whilst negotiating and securing a deal is usually the hardest, the final stage of the contract management process is no less challenging. A failure to execute a contract the right way can result in a number of issues like an unenforceable or invalid contract, arguments and a shorter limitation period.
To ensure the effective execution of a contract, the parties should generally go through the following 3 key steps:
1. Determine the type of contract and all formalities of the agreement – e.g., if you’re in the UK, are you dealing with a simple contract or a deed? Some types of contracts need to comply with certain formalities (e.g. if an agreement is to be executed as a deed, the signature must be witnessed).
2. Identify who can sign – Who can sign what also depends on the type of contract. For example, UK deeds can be signed by; two directors, registered as such at Companies House; one registered director plus the company secretary; or one registered director, in the presence of a witness who also signs the document (depending on the company’s articles of association and what method(s) have been authorised by the company). In contrast, simple contracts can also be signed by a person (or persons) with express or implied authority to sign. Knowing who can sign what within an organisation is then particularly important. Having an effective authorised signatory management process and policy in place can help you achieve this.
3. Choose a method of signing – Traditionally, contracts are signed by applying wet-ink signatures on hard copy documents. Nowadays, contracts can also be implemented via electronic signatures. In some cases, esignatures are still not permitted so the method of signing will also depend on the type of documents.
