What is a contract?

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A commercial transaction is an agreement between two or more

parties, or people, to enter into an arrangement or an agreement.
This arrangement or agreement involves an exchange of some
description – an exchange of goods for value, either on a one-off
basis or in a continuing relationship. Commercial transactions
take many forms. They range from very large scale, one-off
multi-million dollar transactions to smaller scale, ongoing
commercial arrangements. Contracts form the basis of both
types of arrangements.

It is essential that contracts are drafted in the correct legal form

and are enforceable. The language and structure adopted in an
agreement will determine the clarity and the readability of the
document.

Generally, an enforceable contract requires the following legal

requirements:

● certainty and completeness

● consideration, and
● an intention to create legal relations.

How is a contract formed?

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Generally, an enforceable contract requires the following legal

requirements:

● Certainty and completeness;

● Consideration; and
● An intention to create legal relations.

Certainty and completeness

A court will hold that a contract is void for uncertainty if it is

vague or uncertain in its operation. Any clause within a contract
must be capable of interpretation with reasonable certainty. The
need for certainty highlights the requirement for clear and
precise drafting by lawyers in the drafting of all contracts.

Consideration

The existence of an agreement between two or more parties does

not mean that a contract exists. Consideration is essential to the
existence of a contract. Of course, the exception to the
requirement for consideration occurs where a promise is
contained in a deed. Provided a deed is correctly executed, there
is no requirement for consideration.

Intention to create legal relations

The importance of the “intention” of the parties to the contract is
important. In this judgment of Toyota vs Ken Morgan Motors, the
intention of the parties was an important consideration in the
determination of whether a binding contract was on foot. An
analysis of what the parties had “intended” to arise is an
influential factor in determining the existence of a contractual
relationship.

Why are contracts important in

business dealings?
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It is important to remember that a commercial contract plays a

fundamental role in any business transaction. Commercial
contracts in business transactions provide:

● legally binding agreement between parties;

● prevention of misunderstanding;
● security and peace of mind;
● confidentiality;
● avoidance of litigation proceedings;
● official record of the business agreement.

Different legal systems

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Legal contracts serve a number of purposes, it is important that

we understand the broader legal context of contracts in order to
make the best decisions we can. That is Common Law and Civil
Law systems.

This short video from House of History presents brief

descriptions and the historical origin of both systems.

This is an additional video, hosted on YouTube.

Civil law system

Key characteristics of the civil law system include:

● Legal rules are laid down in the form of legislative

enactments based on legislators, rather than court
precedents
● Cases are determined based on the legislation
● Court precedents can be authoritative, but they are not
binding
● Examples include Japan, South Korea, Indonesia and
Thailand.

Common law system

Key characteristics of the common law system include:

● The law is developed from the rulings of judges, which are

based on tradition, custom and precedents.
● Case precedents are used as the primary source of law.
● Examples include Malaysia, Singapore and India.

While civil law countries experience growing jurisprudential

complexity, common law countries are increasingly adopting
statutory law.

Civil law system

Key characteristics of the civil law system include:

● Legal rules are laid down in the form of legislative enactments

based on legislators, rather than court precedents
● Cases are determined based on the legislation
● Court precedents can be authoritative, but they are not binding
 ● Examples include Japan, South Korea, Indonesia and Thailand.

Common law system

Key characteristics of the common law system include:

● The law is developed from the rulings of judges, which are based
on tradition, custom and precedents.
● Case precedents are used as the primary source of law.
● Examples include Malaysia, Singapore and India.

While civil law countries experience growing jurisprudential

complexity, common law countries are increasingly adopting statutory
law.Why is it important to understand broader legal systems?

Being able to understand and differentiate common law and civil law
matters is important because:

● it allows you to learn about the legal environment and the legal
options available
● it enables you to identify the legal effect of contractual provisions
and determine the appropriate solutions, and
● it helps avoid unnecessary or unexpected obstacles and
conflicts.

Important to remember
Contracts governed by a civil law jurisdiction are usually shorter than
contracts under the common law system. In the event of a dispute,
civil law courts will decide and examine cases based on codified law.
There is no need to restate the legal principles governing the
contractual relationship of the parties. Conversely, common law
contract principles are based on certainty and predictability. The
legislation under the common law system would not be able to fill the
gaps, hence contracts drafted based on the common law system need
to be lengthy and detailed to effectively describe the true intent of the
parties. The two systems also adopt different contract formation
theories, interpretation of contractual terms and remedy principles, as
well as distinguish the legal effect of certain forms of contracts.

Read and understand the

common terms
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The goal with any contract is to ensure that the legal agreement
for all parties is clearly represented on paper. That sounds like an
easy task, but even an easy to understand concept can be
difficult to express on paper – especially when there are many
options or variables involved.

Common terms are included in almost every contract, so be sure to go

over them before you get too far into the contract so you have a clear
understanding of what they mean and which terms represent each
 party. These are usually found by words such as, “shall mean,”
“heretofore known as,” or otherwise wrapped in quotes. An example
might look like this:

Renaissance Money Lenders (“RML” or “Website”) contains a

multitude of money management and small business tips (“Content”)
available for general information and entertainment purposes only and
does not constitute legal advice. RML agrees to try and maintain
accuracy for all Content contained in Website, but acknowledges that
terms, conditions, and information, (“Terms”) especially in regard to
third party products, services or websites (“Third Party Offers”) is
subject to change without notice. Readers and viewers (“Visitors”) are
advised to verify accuracy of Terms or perform appropriate research or
contact a financial or legal professional before participating in any Third
Party Offers or acting on any information found in Content.

In this example, “RML,” “Website,” and the other words wrapped in

quotes are defined, then used throughout the remainder of the
contract. They will be capitalised so if in doubt, go back to the
beginning of the contract to look up the meaning of the term. You can
create a quick reference list if it helps you (and this is a good idea if
you are reading a multi-page contract with dozens of defined terms).

Ignore legal jargon when reading

for understanding
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A simple way to read a contract and understand it is to underline

the keywords and ignore the legal jargon.

Focusing on the keywords gets you to the heart of the meaning and
will speed up comprehension. You may also consider marking through
unnecessary language and reading it that way. Just be sure to review
a clean copy after you understand the general meaning.

Below is an example of a short contract for a

car rental that you could come across, which
words would you underline as keywords?

This agreement is hereby made between {Renter Name} (hereafter

referred to as “the Renter”) and {Owner Name} (hereafter referred to
as “the Owner”).

The Owner hereby agrees to rent the following vehicle to the Renter:

{Car Make, Model, Year, Colour, License Plate #, VIN #}

The Renter will rent the car from {date} at {hour} to {date} at {hour}.
The Renter agrees to pay a base fee of {base fee} plus {amount} per
mile over {agreed mileage}.
The Renter agrees to return the vehicle in its current condition (minus
normal road wear-and-tear) to the Owner on the return date and hour,
with {fuel expectation}. The Renter is also free to turn the vehicle in at
{other locations}.

The Renter understands that the vehicle is for use only in {locations}
and cannot be taken {other locations}.

The Renter swears and attests that {he/she} has a legal, valid license
to drive this type of vehicle in this {state/country}, and that there are no
outstanding warrants against said license. The Renter’s driver’s
license is: {driver’s license number}. The Renter further swears and
attests that {he/she} has insurance that will cover the operation of this
vehicle.

The Renter agrees not to allow any other person to drive the vehicle,
except for authorised drivers listed and approved here. {Other Driver’s
Name}: {other driver’s license number}.

The Renter agrees to use the vehicle only for routine, legal purposes
(personal or business). The Renter further agrees to follow all city,
state, county, and government rules and restrictions regarding use
and operation of the vehicle.

The Renter agrees to hold harmless, indemnify, and release the

Owner for any damages, injuries, property loss, or death caused while
the Renter operates this vehicle. The Renter will be held accountable
for any damages or cleaning fees incurred while renting the vehicle.
The Renter has had the opportunity to inspect the vehicle before the
renting term begins and confirms that it is in good operable condition.

The Owner swears and attests that the vehicle is in good working
order and has no liens or encumbrances.

(Renter Signature)

(Owner Signature)

(Date)

Get a draft copy of the contract,

a pen, and a quiet room
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If you can, grab a hard-copy of the contract, a bright pen, and

dedicate some alone time with just you and the contract. Be sure
to minimise distractions and do whatever it takes to eliminate
interruptions. Be sure to go through line by line and write down
any questions, comments, or notes you need clarified. It is
especially important to ready every word of the contract if you
are not fluent in the contract’s language.

For example, you could use a highlighter to highlight sections you

need to clarify/change, a red pen to write questions/comments, and
initiale in red in the sidebar by each section you are happy with.
Initialing by each section that you are OK with will help prevent
reading the sections multiple times and help keep the focus on those
sections that need more attention. If possible, read the contract again.

If you prefer to review documents on the computer, then go through

the contract on Word and use “track changes” to add your own notes
as you go. “Track changes” will show any changes you make to the
contract in a different colour, making it easy to review online, or in
print. Again, it is a good idea to note the sections that don’t need
changes so you don’t reread them multiple times.

© The College of Law

Pay attention to the language

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A contract comes down to the details. What will you do, and what
will the other party do? You have to be comfortable with these
details. Here are some terms that are commonly found in
commercial contracts:

Term
When does the contract begin and when does it end? How long will
you have this agreement? What if someone wants to end the
agreement?

Renew
What happens at the end of the agreement? Some contracts have one
Term (like, the contract is good for a year) and then after that time, if
you or the other party doesn’t properly end the agreement, the
contract will automatically extend for another period of time. If your
contract automatically renews, how does this work? What if you want
to change some of the promises?

Indemnity
In the event there’s a lawsuit, will you protect the other company? Will
they protect you?

Exclusivity
Is this the only agreement you will have about this specific situation?
What if you want to enter into similar agreements?

Confidentiality
Is this agreement, or its details, a secret? Who needs to keep things
secret?

Fees / Payment
If money is exchanging hands, how much? When is the money
exchanging hands? How is this payment conducted?

Breach
What responsibilities do you have? What responsibilities does the
other party have? If something goes wrong or someone fails to do
something required in the contract, what will happen?

Now that you understand the contract, your responsibilities, and

the other party’s responsibilities, you may have some negotiating
to do. Get your questions and comments together and set up a
time to talk with the other side. Be your own advocate. Don’t be
afraid to ask for what you want. Also, do not make assumptions;
if you have questions, talk things out. And, as always, remember
to keep things professional.

Depending on your negotiations, the contract may need revisions. If

there is something that needs to be addressed, have the contract
rewritten to encompass the new terms you and the other party agree
to. If the change is minor, you can probably just scratch through the
section on the contract and initial it. But if it is a major change it will
probably be best to draft a new copy.