What is a Contract and do I need a formal written Contract?

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In modern society, contracts are a fundamental aspect of private and business relationships, shaping the way we conduct business and interact with one another.

 

A contract is simply an agreement between two or more parties that contains the terms and conditions of the agreed transaction or contractual relationship.  For example, a contract could be for a simple straightforward agreement to purchase goods or services, where a buyer agrees to pay a sum of money in exchange for the seller’s goods and/or services.  On the other hand, it could involve detailed and complex legal obligations spanning months / years, such as in a joint venture, or a transfer of shares in a company.  Regardless, a contract provides the framework for businesses and individuals to conduct their daily lives and operations.

A legally binding agreement and contract is validly formed when the following essential elements are present:
  1. A valid Offer – legally understood as an expression / indication of willingness to contract / enter into an agreement on a set of specific terms. It must be clear, definite, and communicated to the other party.  For example, a watch offered for sale in a watch shop with a price tag.

 

  1. Acceptance of the valid offer – the other party’s agreement to accept the offer on the same terms of the offer. It must be unconditional and communicated to the offeror. For example, agreeing to buy the watch for the price stated on the price tag.

 

  1. Consideration – exchange of something of value between the parties. For example, the purchase price stated on the price tag for the watch would be the consideration given to the watch shop in exchange for the watch; both the purchase price and the watch itself would be good consideration.

 

  1. Intention to create legal relations – the intention to create legal relations is a fact-specific inquiry that is typically understandable based on the context and setting. For example, a domestic setting where spouses provide promises to each other or give gifts (such as anniversary watches) to each other – these are unlikely to form any contract.  On the other hand, business / commercial settings would likely give rise to the formation of a binding contract, much like the example of buying a watch from a watch shop above.

 

  1. Other elements such as consent, capacity, and certainty

A formal written contract is not always necessary – a simple contractual transaction when buying tools at a hardware store or food from a restaurant are obvious examples. 

 

However, in more complex matters, when there is no formal written document and the contract is purely oral/verbal, it would be much harder to identify the exact terms of the agreement, especially when it is disputed later on.

 

It is thus more prudent and advisable to have a formal written contract drafted for more complex situations and agreements, especially those spanning a long period of time where parties may not remember exactly what was agreed as time progresses.  Some examples include:

  • When entering into a joint venture / business partnership
  • Hiring of employee / Engaging independent contractors and/or consultants
  • Providing / Engaging services involving intellectual property rights
  • Establishing long-term supply lines and agreements
  • Transactions relating to property

 

A formal written contract benefits the parties as it makes clear the legal obligations of each side, and it also helps to prevent disputes by providing the clear terms of the agreement and how disputes should be resolved (should there be a disagreement). 

 

While it may not always be practical to have a written contract for every situation, it would be prudent to at least outline the terms and conditions in writing.  This is because without a formal written contract, it opens up parties to dispute as to what had been agreed – when one party tries to enforce the terms of the agreement, then he/she would find it hard to prove that there was an agreement to enforce in the first place.  Even if an agreement could be shown, the exact terms of the agreement would also need to be proven.  Thus, when actually trying to enforce an agreement without a written contract, there are many practical difficulties one might face when disagreements arise.  If in doubt, it would safer to obtain legal advise as to whether you would need a written contract and if so, to have that written contract carefully drafted minimize the disputes later on.

If you require any assistance, you may contact:

Anthony Wee, Managing Director
Francis Chan, Executive Director

180 Cecil Street #11-02
Bangkok Bank Building
Singapore 069546

 

6335 5848
[email protected]

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