“Should all commercial contracts be signed?”
Before we answer this burning question it is probably best to explain how a legal contract is formed. For a legally binding contract to be formed there needs to be four things:
- An offer – for example, one party makes an offer to provide services or goods to another party.
- Acceptance of the offer – the other party accepts the offer.
- Consideration – this is the exchange of promises between both parties as part of the contract deal. For example the payment of money in exchange for goods is the simplest way of demonstrating consideration.
- Intention – there must be an intention between both parties for the contract to be legally binding.
Binding contracts are therefore formed in all sorts of everyday situations. From a more official looking environment where a contract is signed in a boardroom by the Directors of two companies. To a customer going into their local store and buying a newspaper.
Now that we have explained how a contract is legally formed, we can now address the question posed in this blog…. Should all business contracts be signed?
What is a signature on a contract?
A signature is merely a ‘symbolic gesture’ indication of the parties to offer and accept the terms of a contract, and their demonstration of their intention to enter into a legally binding contract. Three of the four things needed to form a contract.
However not all business deals or transaction circumstances would call for a signature on a contract to show that a contract has come into force.
Your organisation operations may call for different methods for concluding business contracts.
For example you may sell goods and services to other businesses and you may feel it is impractical to require your customers to sign an agreement every time they purchase from you. Therefore you may have a purchase order system in place. Purchase orders are simply documents used by a customer to order goods and/or services from you. The order indicates an offer to enter into legal contract. You can then accept the order. The best way to do this is to send a communication to the customer explicitly stating that you accept the order on your terms and conditions of supply. This will help you win the ‘battle of the forms’ where the other party has presented their own terms and conditions of purchase in the offer. Your terms and conditions of supply will override the other party’s terms. Once this is done a legal contract will be formed.
You should note that even where you do not send a written acceptance, by delivering the goods and/or services to the customer, this may demonstrate your acceptance through the performance of the contract. This is known as acceptance by the course of dealing.
A last note on purchase order systems. You should ensure your accounting systems are well equipped to ensure that a customer’s purchase order corresponds with the invoices sent to that same customer for the order. You should look at electronic accounting systems, such as Quickbooks, rather than paper-based systems which can create excess paper trails and become an administrative nightmare to manage.
If you sell goods and services via a website, you may require your customers to tick a box on their device to show their agreement to your terms and conditions of sale, prior to them submitting their order. If you do use this method then you should ensure your customers have clear access to the terms and conditions. This blog does not address the specific terms and conditions you require but you should be mindful that there are specific legal requirements you must adhere to if you are selling to consumers as opposed to businesses.
Are electronic signatures valid?
The practicalities of a commercial deal may make it more difficult for business contracts to be signed by all parties involved. For example where parties are based in different countries and it is not possible for them to physically meet to sign a business contract. Therefore electronic signatures may be more valid.
The example provided above of a customer ticking a box via a website, is an example of an electronic signature. Another example of an electronic signature would be a person pasting their signature into a contract and emailing the contract to the other party.
Electronic signatures are becoming more common. They are seen as a more efficient way of securing a contract with another party. They are just another way of demonstrating that a business contract has been concluded.
The Law Society has provided guidance to help parties execute contracts using electronic signatures. We recommend that any business which is thinking of using electronic signatures to conclude a contract should read the guidance.
What about verbal agreements?
Even verbal contracts can be enforceable. However the problem you may have is proving there was a contract in the first place without any written terms. And even if you can prove that contract has been formed verbally, how do you show exactly what was agreed between you and the other party. Contracts4You always advise that you should conclude a contract in writing with another party, especially in more commercial business settings.
It should be noted that there are also some contracts which must be in a written form. Examples of where a contract must be in the form of a deed include where there is a transfer of real estate, or where a power of attorney is being created, or where intellectual property rights are being assigned.
Managing your contracts
To conclude signatures are good practice in the commercial world and will be more appropriate for specific commercial deals between parties. However depending on your business operations there may be other ways of signifying the conclusion of a contract.
Just remember in order to show you have a simple legally binding contract (i.e. contracts which do not need to be executed as deeds) in place with another party, you must show that the four factors required to form a contract has been established – offer, acceptance, consideration and legal intention.
You should ensure your business has robust contract administration processes as part of its overall contract management process. This will ensure your business does not face problems when issuing contracts and has a clear audit trail of contracts that have been concluded. Simple tasks like carrying out an audit or review of your current contracts and contract making processes, and delivering training to your staff, will make a big difference within your business.
Contracts4You are contract management specialists. Our experienced consultants can support you with designing a robust contract management system which will not adversely impact on your current ways of working. We will work with you closely to audit your current contracts and contract management processes, and subsequently advise on any improvements that could be made and even deliver training to your staff if required.
You can contact Contracts4You by emailing firstname.lastname@example.org or telephone 0800 699 0706.
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