Different Formations of Contracts

In principle, an agreement is concluded with an offer and acceptance. However, the freedom of contract gives the contracting parties the right to decide how the contract is concluded. Written form is recommendable but sometimes unnecessarily formal for daily routines. The more valuable the contract is the more important it is to direct resources at the preparation and documentation of the contract. In practice, precedents and general conditions make the drafting of contracts easier.

Written contracts

It is usually recommended to conclude the contract in writing, setting out the purpose of the agreement, contractual conditions, duties of the parties to the contract, rights and obligations. It is also advisable to sign each separate page of the contract and its attachments. It is easier to prove the existence of an agreement and the agreed terms with a written contract.

Offer – order – order confirmation

A contract may come into existence without an actual document. The formation of the contract is then based on an offer and an acceptance. The contract may for instance entail an offer, an order and confirmation of the order. When a contract comes into existence in this way the exact time when the contract becomes binding is not always entirely clear. The conditions of the contract also come into existence in separate stages. The offer and acceptance must be identical in their content. Amendments in the acceptance must be examined separately. All materials should be kept safe to enable their later examination.

Letter of confirmation

If the contract is concluded over the telephone, uncertainties as to its content may lead to e.g. unnecessary claims for refunds. Problems can be avoided by sending the other contracting party a letter of confirmation which sets out the contents of the contract. The letter of confirmation may also be requested to be signed and returned to the sender.

The letter of confirmation does not bring a contract into existence. Consequently, it does not constitute acceptance. The letter of confirmation only serves as a device for future reference, as the contract itself has already been formed before the letter was sent.

Oral agreements

Oral agreements are usually suitable for simple transactions of small financial value. The problem of oral agreements is proving the conclusion of the contract and the conditions of the contract in conflict situations. Hence, it is normally advisable to conclude contracts in writing.

Implied contracts

Implied contracts may come into existence as a result of conduct without any expression to bid to an agreement. A common example of such contracts is contracts subject to a monthly fee. If the customer for instance continues paying the monthly fee for a service or product after the expiration of the contract period, they are bound by a new contract without it having been expressly agreed. Creation of implied contracts requires that the provider of the service or product continues to perform the contract as before. Implied contracts may also arise where an employer allows a fixed-term employee to continue working after the expiration of the fixed term.

Memoranda

Memoranda done during the course of negotiations may also constitute contracts, if the mutual understanding of the contracting parties may be clearly concluded from it. The more detailed the memorandum is, the more likely it is to be regarded as a contract. It is nevertheless advisable to use the memorandum merely as a basis for the contract and draft the actual contract separately. All material used during negotiations, such as memoranda, e-mails, faxes, offers etc. are good to keep safe. If the contract is ambiguous, documents from the negotiation stage may be used to establish the original intentions of the parties.

Contracts coming into existence as a result of negotiations

Contracts are often concluded as a result of extensive negotiations. Negotiations serve to find a common ground on which the contracting parties are willing to conclude the contract. Negotiations are generally not binding on the parties. Usually, a contract is concluded until the negotiations are finished, and an actual contract has been made.

However, negligence or bad faith in the negotiations may lead to liability for damages. If an agreement is not reached despite negotiations, the negligent party or the party in bad faith may be obligated to compensate the other party for the costs and damage caused by the negotiations. According to a judicial precedent of the Finnish Supreme Court (KKO:2009:45), the party withdrawing from the negotiations regarding leasehold agreement in respect of commercial property after nearly one year was liable of compensating the owner of the property for rental revenue which the latter had lost when he, counting upon the formation of a new contract, had refused to extend the previous tenancy. According to the precedent the withdrawing party had during the negotiations acted in a way to give rise to justifiable expectations with the owner of the property regarding the formation of the leasehold agreement.

Continuous contracts

All contracts are not one-off agreements but can be concluded for a longer duration. In the field of commerce for example, it is often sensible to negotiate distribution agreements for several years at a time. Contracts of a longer duration may also be monthly contracts.

Contracts requiring specific formalities

Certain contracts require compliance with specific formalities set out in legislation. E.g. deeds and leasehold agreements of commercial properties and hire-purchase agreements are contracts which must be set out in a specific form. Contracts requiring specific formalities and transfers of real estate are dealt with in Freedom to decide on the content of the contract and leasehold agreements in respect of commercial property dealt with in General information about leasehold agreements in respect of commercial property and hire-purchase agreements between companies in Hire-purchase agreements.

Electronic contracts

Contracts may also be concluded electronically, by e-mail, text message or multimedia message, via fax or internet. In principle, electronic contracts are just as valid as written ones. Electronic contracts have not traditionally been suitable for contracts requiring a specific form, but this is not a clear rule anymore. Nowadays, a sale of real estate, for example, may be concluded electronically in the electronic commerce system.

However, using various transmission networks in connection with electronic contracts may cause problems with e.g. signing, the proving of the conclusion time of contract and the content of contract and the risk of hacking.

Contracts born out of separate stages

Contracts do not necessarily come into existence in any one of the above-mentioned ways. Contracts may be created by using elements of various methods of forming a contract. An important thing is to find a suitable method for the company to come to the most cost-efficient result.