In a bustling bistro, two founders and their potential investor leant into a conversation that flowed as freely as the wine.
They talked about exciting market disruptions and technological breakthroughs but left one important point unresolved – the shareholding structure. An e-mail sent the previous week had details of the founders’ proposal, but the investor hadn't responded.
Over dinner, what they thought was agreed on turned into a contentious issue. Without a written contract to set out the terms, their once-clear understanding started to fall apart.
This scenario shows the risks of verbal agreements and the indispensable role of written contracts in crystallising the parties’ intentions. Written contracts also help to avoid misunderstandings and keep promising ventures from unravelling.
What is a contract?
A contract is a legally binding and enforceable agreement between two or more parties which outlines their promises and obligations.
Why do I need a written contract?
Having a written contract is important because it helps reduce the chances of future disagreements by:
- clearly stating the rights and responsibilities of everyone involved (for example, when, how, what and to what standard services or deliverables need to be provided);
- setting out all other important details about the business arrangement (such as when, how and how much a party needs to pay to the other, and what happens if payment dates are missed); and
- managing risk through provisions such as those relating to confidentiality, termination, audit, dispute resolution or limits on each of the parties’ liability.
How is a contract formed?
A contract is formed when the agreement satisfies the following requirements:
- Offer: one party needs to make an offer
- Acceptance: the other party needs to accept the offer
- Consideration: something of value needs to be given in exchange for the right or obligation
- Intention for parties to assume legal responsibility: this is not automatically assumed when dealing in a personal, non-business capacity
- Capacity: the parties need to be 18 or older with a sound mind
- Legality: the purpose and the terms of the contract need to be legal
Do emails I send or words I say count as a contract?
They could do, so long as the requirements mentioned above are met. However, it's important to note that relying solely on e-mail correspondence or conversations can lead to uncertainties or important details being overlooked. For instance, one party may argue that there are additional emails or conversations that change the interpretation of, or add other terms to, the parties’ agreement. An e-mail may also fail to cover all the discussions between the parties or consider, in sufficient detail, the consequences if the other party fails to live up to its side of the bargain. All of these issues can lead to misunderstandings and make it difficult to enforce rights if there is disagreement or a failure by a party to perform their obligations down the line.
What are the different types of contract?
The main contract types are:
- written contracts, where the terms are expressly stated in writing;
- oral contracts, where contracts are made verbally; and
- implied contracts, where contracts are created by a result of the actions or conduct of parties.
What contracts might I need as a startup founder?
If you are an entrepreneur, there are several important contracts that you should consider having in place. While the specific contracts you need may vary depending on your startup's stage, here are some key agreements that can help protect your business:
If you have any other questions, get in touch with our team.