Describe the type of contractual agreements and comment on their applications in business
This assignment will describe the different types of contractual agreements that exist and comment on their applications in business. A contract can be described as an agreement that legally binds parties and as a result there are an infinite number of contracts that can be created, however this assignment will discuss contracts falling within four broad categories and these are those that relate to the constitution and structure of the company, those contracts relating to the business of the company and its financial affairs, those contracts which exist as between employee and employer and finally those relating to company property both real and intellectual. This assignment will discuss these four categories in detail and conclude on the importance of contracts to business.
Despite the fact that companies enter into a number of contracts, contracts have as their basic requirements that there is in place an agreement as a result of their being an offer and a matching acceptance. The contract must also contain an element of value which is known as consideration and both parties must intend to create legal relations. The validity of all contracts can be affected by issues such as capacity and illegality and therefore it is important to be careful in creation of the contract and during the performance of the contract.
The first category described above is those relating to the constitution and structure of the company. Shareholder agreements fall within this category and these are created as when a company is created shareholders do not always have similar needs and expectations. (Aylward: 2003) A shareholder agreement sets out how disputes and disagreements will be settled amongst individual shareholders. Another type of agreement that may arise in business is director’s service contracts; these are essentially the director’s contract employment with the company. Whilst these strictly fall into the category of employment contracts, these contracts often have requirements which differ from the standard contract of employment, such as approval from shareholders (Webster; 2007)
The second category of contracts to be discussed was those contracts which relate to the business of the company and its financial affairs and this is a particular large group. Franchise agreements are created where the franchisor supplies products or teaches the franchisee the company how to deliver a particular service. The franchisee will then sell the product or service to a particular market and for that privilege will pay up-front fee and continuing royalties to the franchisor. (Brickley; 2002). In addition to these types of agreement a company may enter into a joint venture agreement. A joint venture agreement is an agreement that is made between two or more businesses in which they agree a common strategy. Many agreements that are created in business are not individually negotiated and it would be impossible for businesses to create individual contracts for every aspect of the business. Large organisations therefore often use standard form contracts when dealing with consumers in the supply of goods or services. They are also used quite often between businesses where there is a course of dealings. This can cause some difficulty when two businesses both deal with their own standard form of contract and has come to be known as “battle of the forms” following the case of Butler Machine Tool Company v Ex-Cell-O-Corporation 1979. Companies may also use outsourcing agreements and contracts for services these may be in standard form or may be created for each individual transaction. The reality is that a great number of contracts will be on a standard form basis as businesses often find themselves in similar situations as their deal with particular goods and services. Where standard form contracts are not appropriate businesses may use a partial standard form contract, using what is known as “boiler plate” clauses. Boiler plate clauses are standard clauses which are used in contracts. They may use one or all of them.
Included in this category fall contracts which relate to the financial affairs of the company. The most common of this type of contract is a debenture. A debenture is essentially a document by which a company acknowledges its indebtedness under a loan. Debentures can create either fixed or floating charges over a company’s assets as security. A debenture can be an individual debenture which may evidence a large sum of money that has been lent by one person (usually a bank) or the company can create one loan fund which is known as “debenture stock”. This is issued to create a class of debenture holders each of whom is given a debenture stock certificate evidence the proportion of rights of the holder against the company and this is a contractual arrangement.
The third category of contractual arrangements is those that exist as between employees and employers. There are two specific types of employment contract; individual contracts of employment and collective agreements. Dealing first with the contract of employment this to be legally binding must fulfil all the normal contractual requirement, .i.e. offer and acceptance, consideration, and intention to create legal relations. These contracts however have particular importance as they govern (although a large part of employment law is now governed by statute) the employment relationship dealing with issues on conclusion of the relationship such as notice periods, redundancy rights and of particular importance in these agreements are confidentiality agreements and restraint of trade clauses. Restraint of trade clauses and confidentiality agreements seek to protect the employers information and prevent the employee from working for a competitor within a given time period. (Clarke: 2002) Many of these types of clauses in contracts will be invalid and not many of them stand up to close scrutiny however there have been several attempts to incorporate these into contracts and therefore are an important part of employment contract law. The second type of employment law contract is the collective agreement and these are essentially agreements which are negotiated between trade unions and employers which relate to the terms and conditions of employment. A collective agreement is therefore essentially an agreement between the employer and a trade union. Collective agreements often follow lengthy processes of negotiation between representatives of the union and the employers and often deal with generic employment issues such as wages, hours of work and general working conditions.
The final category relates to contracts which are used to create rights in property both real and intellectual. Intellectual property rights are essentially trademarks, copyright and Patents. Businesses that create new inventions and original works are given statutory protection under various statutory schemes. In certain situations the business may wish to allow other people to utilise these rights and they can do so by creating licensing agreements with other companies. Licence agreements are a particular type of contract that creates limited rights for individuals or companies to use intellectual property rights owner’s rights. Equally a business may enter into agreement that allows it to use another companies intellectual property rights. These are important agreements as intellectual property is often an important of business and although they are not tangible rights if they are breached they can result in a significant loss.
The other type of property agreements that a company may enter into are those relating to real property. This encompasses circumstances such as the ownership of property and leasing or tenanting of property. These are very specific types of agreement and are often in fact deeds and not straightforward contracts. Deeds have to be witnesses in front of other people and create very specific rights. These kind of contracts crate important proprietary rights and must be dealt with by specialist lawyers.
As has been discussed there are a number of different kinds of contracts that businesses will use but they all have with them the same aim and that is to ensure that parties are aware of their obligations and what breach of those obligations will entail. Contractual relationships pervade every aspect of business life and it is therefore s important that contractual arrangements are clear as if they are not then the law will in certain situations imply terms into the contracts and a person will be bound to those terms even if he has not agreed them, this means that the parties freedom to contract is sometimes thwarted. This will undermine the basic concept of contract law and that is that a contract is as a result of a “meeting of the minds” and that each party is free to reject or accept whatever aspects of a concept he so chooses. This is of course not always the case and commercial reality often dictates particular pressures such as financial pressures and those relating to their competitors etc. Therefore to conclude contracts play an important and significant role in business.
Books and Journals
Allan V & Riches S, (2009) “Keenan and Riches Business Law”, Pearson, 9th Edition
Aylward J, (2003) “Shareholder Agreements Pay Dividends”, Tolleys Practical Auditing and Accounting 14 8, 88
Brickley J, (2002) “Royalty Rates and Upfront Fees in Share Contracts: Evidence from Franchising”, Journal of Law Economics and Organisations 18 (511)
Clarke L, (2002) “Recent Cases- notes – Breach of Confidence and the Employment Relationship”, Industrial Law Journal 31 353
Webster M, (2007) “Companies Act 2006: Directors”, Company Secretary’s Review 30 22, 169
Butler Machine Tool Company v Ex-Cell-O-Corporation 1979