The Important Role of Contract in Business

A contract is a legally binding agreement. 

A contract is a legally binding agreement. In all areas of life we make contracts. If you buy or sell a house, a contract is made and ‘exchanged’. When you start a job, you will probably have a contract of employment.

When you go into a shop and buy something, you have entered into an agreement with the shopkeeper you agree that the shopkeeper will give you the goods and you will give him or her money.

Under contract law, the money that you give in exchange for the goods is referred to as the ‘consideration’. For a contract to take place, there must be agreement between the parties.

This requires an offer made by one party, acceptance by the other party and, in England and Wales (but not Scotland), some consideration passing between them. 

An important point about contracts is that they do not have to be written. They do not even have to be

spoken. A customer picking up something in a supermarket and walking to the checkout is making an

offer to the shop, and that offer is implied by his behavior.


Any business buying and selling goods is continually making and discharging (completing) contracts.

Probably none of the parties involved give much thought to the legal aspect of what they are doing until

something goes wrong. 

When one party to a contract fails to carry out his part of the agreement, the other party can take legal

action against him for breach of contract. So if a business has a customer who is failing to pay, they

can take him to court.


Where one party makes a misrepresentation to the other, the contract is considered void. For example, A sells goods to B, who sells them on to C. B then fails to pay A for the goods and disappears without trace.

If A can demonstrate that he was genuinely mistaken as to the identity of B and would not have dealt with him had he known who B really was, then A can recover the goods which were subject to the original contract from C.

This is because the law takes the view in such a situation that the original contract between A and B was no contract at all. Therefore C, who was an innocent third party acting in good faith, has to return the goods to A and either bear the loss or find and sue B.


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