Performance Management
Contracts (E)
What is the purpose of the contract? What are the main elements of contract? Do you need a legal advisor for contract design?
Posted: Nov 2008
During any process or activity there is usually more than one party. In case that there are more parties in process, they interact between each other. During this interaction there is exchange of service, product, raw material, assets, money, consulting or anything else that represent value for parties involves.
In this process parties have their own interests to interact, but they all have a concern of risks, that other party might not always act according the agreement. In order to define parameters of relationships, parties set rules of their interaction in a written form that is most commonly known as Contract or Agreement.
By making Contract or Agreement, involved parties defines mutual relationship, by describing their activities, activity framework, time span, rights and obligations and, finally, define consequences for breaking these rules, if that is necessary.
It is recommended to have professional legal advisor, whether he/she is employed by one of parties, or a hired advisor, to compose the contract. However, involved parties should have basic knowledge of contract design. No matter how skillful is the legal advisor, contracting parties know their business the best. Therefore involved parties should actively participate in design of the contract.
The concept, design and length of contracts can vary in details and complexity, but usually there are common elements of any contract.
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Contract is written in common language of contracting parties. If there is a need, the contract can be written in bi-lingual or multilingual form, where translations of paragraphs are placed next to each other.
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Introduction to contract should give details about involved parties ( company name, Address, Representative, registration number, VAT number, etc ).
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Elements of contract are defined in separate articles, numerically marked from Article 1. onwards. Every article describes a certain logical unit.
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Scope of the Agreement should be the first set of articles that describes basic elements of interaction of parties involved. These activities can be selling, renting, hiring, exchange, consulting, ...
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Business Partner's Rights and Duties are the set of articles that defines rights and responsibilities of parties. These rights and responsibilities are not limited only to the scope of the contracts itself. Rights and responsibilities can also be stated to annex to the contract.
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Prices, discounts and terms of payment define the process of settling the balance of exchange defined by the contract.
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Extent of the agreement defines the period of contract validity. The contract can be defined to be terminated at the end of period, but it can also automatically extend, until the new document is signed.
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Interim and Final Provisions defines elements not directly related to main activity. This set of articles should define the procedure in case of unexpected events that influence or prevent normal development of contracted activities.
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All involved parties should sign and stamp the contract at the bottom of the last page. It is recommended to stamp all copies of the contract, in order to make contract difficult to change by any party. Every party keeps usually more than one copy of the contract.
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Annexes can be added next to the contract, in case that some process activity needs be explained in more details. Also, annexes can be signed any time after the contract is signed, in order to define additional elements of relationships, that didn't exist or the parties were not aware of at the moment of contract signing.
These are main elements of contract agreement. Content of the contract may differ, depending of the contract type. It is important that all parties participate in contract design. It is better to avoid any misunderstanding or disagreement before the contract is created and signed, since conflicts that comes out of breaking of signed contracted elements are leading to anything else but not to the purpose of the contract – benefit and prosperity of involved parties.
