Desktop version

Home arrow Sociology arrow A short guide to contract risk

IS A CONTRACT OR CLAUSE LEGALLY BINDING AND ENFORCEABLE?

As we have seen in the previous chapters, contract law seeks to protect the parties' objectives by giving agreements legally binding force. Sometimes, however, one of the parties (or both) may see the law as interfering with the objectives—especially when a legal dispute arises. one of the questions that may arise then is whether a commitment is legally binding.

The parties do not always want to make legally binding commitments. Sometimes the parties want only one party to be legally committed, while the other remains not bound. Here we are not talking about so-called gentlemen's agreement, described by Didier Rigault as "an arrangement, which is not an agreement, between two persons, neither of whom is a gentleman, with each expecting the other to be strictly bound, while he himself has no intention of being bound at all.”[1] Rather, we are thinking in terms of deliberately onesided commitments, such as option contracts, where one party is committed and the other party has the right to choose whether it will exercise the option or not. Sometimes the situation necessitates postponing commitment for one party or both, or making commitment subject to certain conditions, such as obtaining financing or some approval or license.

The parties' freedom of contract allows them to choose whether, when and to whom they want to commit themselves. Sometimes committing too early or, worse still, unknowingly, constitutes a major risk. If a party is not aware of the legally binding nature of one-sided offers in certain countries, it may come as a surprise if it has not expressly stated the terms and conditions for its offer. or if a party mistakenly believes that the offer it has received is a legally binding commitment and the offeror then cancels or changes its offer, again, a negative surprise can follow.

Another area where the legal system may cause unexpected consequences is the enforceability of liability limitations. While you can generally use clauses in your contract that limit or exclude your liability, these do not work in all cases. there are liabilities you cannot limit, and contract clauses that attempt to do so may be unenforceable. There are, for example, legal restrictions on limiting liability for death or personal injury and for your own gross negligence or willful misconduct. under some countries' laws, there are additional restrictions if you attempt to limit your liability through the use of standard terms. under some laws, there are also form requirements related to the enforceability of liability limitations. For instance, you may need to use conspicuous text or specific words to exclude or limit liability.

You do not want to commit before you are ready to. Nor do you want to be misled by clauses that you believe limit your liability when in fact they do not. understanding that the requirements of legally binding and enforceable commitments and clauses vary from one legal system to another is a good starting point. When you encounter an unfamiliar legal system governing your contract, asking for the advice of legal counsel familiar with that system is probably your best choice.

Many of the challenges, albeit not all, can be resolved by using clear language stating what the parties want. In this way, the parties can create clarity about what is legally binding. They can specify, for instance, whether they are creating absolute obligations, conditional obligations, or only preliminary plans, estimates, or non-binding intentions. Expressly stating whether the parties want their document (or parts of it) to be legally binding is especially important in pre-contractual documents, such as letters of intent. In addition, contract literacy and an awareness of risky areas, such as specific form or language requirements, is needed.

  • [1] Rigault, D. (1991) Export Contracts. A Practical Guide, 3rd edn. Oslo: NorwegianTrade Council, p. 15.
 
Source
< Prev   CONTENTS   Source   Next >

Related topics