Understand International, Business, and Personal Perspectives on Contracting

Our plan in covering this unit is to divide it into four sections. First of all, we’re going to talk about perspectives on contracts, general perspectives. We’re going to take a quick look at the sources of contract law and the two key variables in determining the sources. Then we’re going to spend most of our time on the key elements in creating a contract. And my goal there is to give you a checklist to stuff into your pocket for future negotiations when your involved in contract negotiations. And then finally, we’re going to take a look at the tension that can arise between your business objectives and your legal objectives and make some suggestions for dealing with those tensions.

So let’s start with the first section on some general perspectives on contracts and contract law. Let’s start with this simple definition of a contract, basically it has two elements. A contract is an agreement number one enforceable by law. So you and I can enter into a number of agreements, we can agree it’s a great day outside, but that’s not enforceable by law. So our goal here is an agreement that will be held up in a court of law. And there are many different perspectives that you can use in looking at a contract. One perspective is a global perspective. And that’s illustrated by this quote from the Wall Street Journal.

In setting up market systems in former communist lands, one thing should be kept

in mind: It can’t be done without first creating a legal system that protects the right of all individuals to hold, buy, and sell property without the legal protections for the contracts through which those transactions are conducted. A system of contract law and the means to enforce it are fundamental. And what this writer is basically talking about is what we refer to as the rule of law. Before you make any investment decisions relating to another country, probably your very first question is will my contracts be enforced? Are they enforceable? Will the courts honor the contracts that are made? Otherwise, you’re taking a great risk in making those investments. So you can take a global perspective in looking at contracts.

You can also take a business perspective. And here’s one way to look at contracts from a business perspective. Obtaining a contract is the primary goal of a business entity. In other words, when you look at any business, and you scrape away all other activity. When you scrape away strategy, marketing, finance, HR, accounting, what’s left at the core of any business entity. And it’s contracts. Without those contracts, the entity would not exist. We talk a lot in business about value creation. Well, contracting is where value creation takes place. And the business people who are the best negotiators are going to create the greatest value. So that’s the business perspective on contracting.

And then finally, there’s a personal perspective and that runs something like this. In the world of contracts you as the writer control the script and produce the play. You and I everyday enter into many contracts. It could range from a simple contract such as walking into a McDonald’s and buying a hamburger. Or it could be a more complex contract that relates to you personally. For instance when you buy a house, probably the largest financial deal that most people make. Or it could relate to your personal work. The kinds of contracts that you make on behalf of your business. But the key message here is regardless of where you make the contracts, you exercise a principle known as freedom of contract.

The law gives you a lot of freedom in writing that contract to create your responsibilities and to also create your duties. And in exercising that freedom, there is a well laid out framework of legal principles that we’re going to talk about and that’s, again, the checklist that you can use in future negotiations. So these are some perspectives to keep in mind before we dig into the details of contract law.