Jholo C.

Lopez
BSEE- 4B

What are Contracts?

A contract is a legally enforceable agreement between two or more parties where each
assumes a legal obligation that must be completed. Many aspects of daily life involve contracts,
including buying property, applying for a car loan, signing employment-related paperwork, and
agreeing to terms and conditions when buying products and services or using computer software.

Legal issues involving contracts arise most often when one party fails to perform the legal
obligation it has agreed to do. When a party breaches a contract by failing to perform, the other party
can often sue for money damages, or, in some limited cases, can ask the court to force the other
party to perform as promised.

Contracts can also be the source of legal disputes when they are not written clearly. Parties
who misunderstand the terms of their agreement may sue each other and have a court settle the
argument. Additionally, when a company signs a contract and later goes out of business or is unable
to fulfill its promises, the other party may have to pursue legal action in civil or bankruptcy court to
obtain relief.

Contracts usually do not enjoy the most appealing of reputations. Many people regard
contracts and legalese in general as boring, complex and vapid, yet a necessary hassle one has to go
through in today’s spick-and-span society plastered with procedures and rules. In today’s blog post,
we’ll put into the spotlight the main reasons why contracts are actually a very good creation – and
totally indispensable if you want to protect your interests.

A contract is a written or spoken agreement regarding an obligation that has to be

enforceable by law. Two entities set out mutual rights, responsibilities, and other rules towards each
other, usually regarding employment, tenancy, sales, etc. In other words, a contract regulates their
relationship by laying out the conditions of the relationship and the scope of the work. There are two
predominant types of contracts:

A written contract provides more certainty to the involved parties, and thus holds much more
weight than its verbal counterpart. From a legal perspective, spoken words are flimsy, and by putting
an agreement in writing, you’re minimising the risk of being double-crossed or violating the terms
yourself. It’s the best way to dodge misinterpretations and misunderstandings; and even if both
parties have honest intentions, details of an agreement can easily get forgotten if they have not been
jotted down.

In the case of a dispute, verbal contracts (even handshake agreements) could potentially be
seen as valid and binding in the court. However, when it comes to your legal standing and peace of
mind, it’s a very thin thread to hang by, and you should do it at your own risk.

A contract must contain:

1. An offer which is made and accepted,

2. Mutual intent to enter into the contract,
 3. Consideration,
4. Capacity, and
5. Lawful purpose.

Types of Contracts:
 Written contracts
 Verbal contracts
 Standard form contracts
 Period contracts.

1. Written contracts

Written contracts provide more certainty for both parties than verbal contracts. They clearly set
out the details of what was agreed. Matters such as materials, timeframes, payments and a
procedure to follow in the event of a dispute, can all be set out in a contract.

A written contract helps to minimize risks as it is much safer to have something in writing than to
rely on someone's word. A written contract will give you more certainty and minimise your business
risks by making the agreement clear from the outset.

Benefits of a written contract:

A written contract can:

 Provide proof of what was agreed between you and the hirer.
 Help to prevent misunderstandings or disputes by making the agreement clear from the
outset.
 Give you security and peace of mind by knowing you have work, for how long and what you
will be paid.
 Clarify your status as an independent contractor by stating that the contract is a 'services
contract' and not an 'employment contract'. This will not override a 'sham' contract, but a
court will take the statement into account if there is any uncertainty about the nature of the
relationship.
 Reduce the risk of a dispute by detailing payments, timeframes and work to be performed
under the contract.
 Set out how a dispute over payments or performance will be resolved.
 Set out how the contract can be varied.
 Serve as a record of what was agreed.
 Specify how either party can end the contract before the work is completed.

Risks of not having a written contract:

 When a contract is not in writing, you are exposing yourself and your business to a number of
risks including:
 The risk that you or the hirer misunderstood an important part of the agreement, such as
how much was to be paid for the job or what work was to be carried out.
  The risk that you will have a dispute with the hirer over what was agreed because you are
both relying on memory.
 The risk that a court won't enforce the contract because you may not be able to prove the
existence of the contract or its terms.

When a written contract is essential:

 When the contract price is large enough to make or break your business if you don't get paid.
 Where there are quality requirements, specifications or specific materials that must be used.
 Where there is some doubt that the hirer has enough money to pay you.
 When you must have certain types of insurance for the type of work you are doing.
 Where the contract contains essential terms, such as a critical date for the completion of the
work before payment can be made.
 Where you or the hirer need to keep certain information confidential.
 When it is required by your insurance company for professional indemnity purposes.
 Where there is a legal obligation to have a written contract (eg. trade contracts for building
work in Queensland).

2. Verbal contracts

Many independent contracting arrangements use verbal contracts, which only work well if there
are no disputes. A handshake agreement may still be a contract and may (though often with difficulty)
be enforced by a court. However, verbal contracts can lead to uncertainty about each party's rights
and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to
do.

Examples of paperwork that may support a verbal contract:

 emails
 quotes with relevant details
 lists of specifications and materials
 notes about your discussion—for example, the basics of your contract written on the back of
an envelope (whether signed by both of you or not).

If the contract is only partly written or the terms of the work are set out in a number of separate
documents (e-mail, quote etc.), it is to your benefit to make sure that any formal agreement you are
being asked to sign refers to or incorporates those documents. At the very least, make sure the
contract does not contain a term to the effect that the formal document is the 'entire agreement'.

3. Standard form contracts

A 'standard form' contract is a pre-prepared contract where most of the terms are set in advance
and little or no negotiation between the parties occurs. Often, these are printed with only a few blank
spaces for filling in information such as names, dates and signatures.
 Standard form contracts often include a lot of legal 'fine print' and terms that you may not
understand. They tend to be one-sided documents that mostly benefit the person who prepared the
contract (for example, by shifting as much risk as possible to the contractor). If you don't understand
the fine print or any other part of the contract, you should get advice. If you sign the contract, you will
be required to comply with the fine print even if you didn't actually read it.

Tips for standard form contracts:

 Read every word before you sign

 Read the fine print carefully and get advice about any terms you don't understand before you
sign. Once you sign a contract you are bound by all of its terms. If there is an indemnity
clause, don't sign until you understand the risks you are agreeing to accept if something goes
wrong.
 Cross out any blank spaces
 Don't leave any spaces blank. If you don't need to fill in a blank space, always cross it out so
the contract can't be changed after you sign it.
 Negotiate
 You have the right to negotiate any contract before signing, including a standard form
contract. But remember that both parties must agree to any changes and record them in the
contract you sign. Your union or industry association or a lawyer can help you prepare for
negotiations.
 Keep a copy
 You should always have a copy of any contract you sign. It is best if you and the hirer sign two
copies of the contract, so that you can both keep an original. If this isn't possible, ask for a
photocopy and check that it is an exact copy. Remember to keep your copy somewhere safe
for future reference.
 A lawyer, your union or industry association might be able to provide you with information
about some common standard terms used in contracts in your industry. They may also be
able to provide you with a standard form contract for you to use.

4. Period contracts

Some independent contractors and hirers use a 'period contract', which is a contract template
that sets out the terms for a business relationship where the contractor is engaged to perform work
from time to time. In the building and construction industry, these contracts are called 'period trade
contracts'.

The contract template will apply each time the hirer offers work to the contractor and the
contractor accepts it. This can occur when the contractor provides a quote and receives a work order
from the hirer, or the parties might sign an addendum (an addition to the contract) that sets out the
specific work to be done or result to be achieved. Once the work starts, the contract template and the
work order or addendum will form the total contract for the specific work.
 Period contracts can work well for both parties. They allow for the flexibility of performing
intermittent work over an agreed period. However, you should check the terms of the agreement to
do each new job. Are they the same as those set out in the original contract template? Any term or
condition that is different for a particular job, may change the terms of the original contract template.

If you are unsure about anything related to a period contract, get advice before you sign or agree
to new work, even if you have performed work for that hirer previously.

Why do we need contracts?

1. Contracts ensure you obtain your rights

2. Not only does a contract state the expectations of both parties, it also has to foresee how
possible problems and negative situations will be resolved. Quite understandably, the first
and foremost reason why two parties choose to sign a contract is to obtain
something. Specifically, a contract can provide guarantee you will get paid or receive
another type of remuneration – or, if you’re on the opposite end of this agreement, that the
party you’re giving money to will deliver from their side.
3. Think about employment contracts, for instance. As we’ve already established in our recent
article on employment contracts, “an employment contract should in any case refer to the
obligations of the conducted work, the payment amount and method, any specific
requirements for both parties, and any property rights to the work produced by the
employee.”
4. Contracts ease your understanding of law
5. Laws can be convoluted and/or extremely extensive, time-consuming affairs, and if in the
case of a legal misinterpretation, you can end up in quite a doozy. Here’s where the beauty of
contracts becomes most evident: The legal principles contained therein are boiled down to a
set of outlined rules; ones that are particular to your context and that you can easily abide by.
6. Have a competent legal professional draft a contract you can understand and honour,
especially if this area of law in question is unknown or a bit murky to you. If there are some
clauses or stipulations you don’t fully understand, make sure your lawyer puts it across for
you before you sign it. It’s the best way to make sure all your legal ducks remain in row at all
times.
7. Contracts protect you and your property
8. Contracts have the power to protect you by limiting your liability, which is crucial should
matters (God forbid, but you never know) suddenly start hitting the skids. Your business
assets consist of many aspects, and property, both physical and intellectual, eat up a huge
portion of that valuable cake. Intellectual property is a field that’s especially prone to
different, often lacking interpretations, so make sure you protect it by a thoroughly drafted
contract.
Here is an example of an Electrical Engineering Contract:
Questions and Answers:

1. A contract is a ___________ agreement regarding an obligation that has to be enforceable by

law.
ANS. Written or spoken

2-5. What are the four types of contracts?

ANS. Written, Verbal, Standard form and Period Contracts

6. A __________ is a pre-prepared contract where most of the terms are set in advance and
little or no negotiation between the parties occurs. Often, these are printed with only a few
blank spaces for filling in information such as names, dates and signatures.

ANS. Standard Form Contract

7. An electronic mail is a paperwork that supports which contract?

ANS. Verbal Contract

8. What type of contract is considered safer than of the verbal contract?

ANS. Written Contract

9. Are handshake agreements considered a contract?

ANS. Yes
10. In a standard form contract, you should ________ any blank spaces.

ANS. Cross out

11. Contracts ensure that you obtain your ___________.

ANS. Rights
12. A contract must contain;

ANS. An offer which is made and accepted, Mutual intent to enter into the contract,
Consideration, Capacity and Lawful Purpose.
13. What type of contract provides the best way to dodge misinterpretations and
misunderstandings?

ANS. Written Contract

14. When does legal issues involving contracts usually arise?

ANS. When one party fails to perform the legal obligation it has agreed to do or when a
party breaches a contract.
15. It is best if you and the hirer should sign how many copies of contract?

ANS. Two Copies