What is a contract?
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Latest update: Sept. 27, 2021

Contracts are entered frequently and in many different situations, in addition, it is not uncommon for persons entering a contract to be unaware that a contract has been entered and for issues to arise. It can therefore be of use to have some insight into what a contract us and what may be important to think about. It can occur that situations develop in a way that was not intended and in these cases, it is good to understand and know if and how this can be corrected. We will briefly describe here what a contract is, how a contract becomes binding and what the meaning of a contract is.

By way of introduction, it is good to know that a contract can be governed in law, partially governed in law or completely ungoverned. We will below touch on agreements that regulate economic rights and obligations between two or more parties, referred to as, general property law. These are so named as ‘general’ as the rules are applicable to all contracts, whereas certain contracts may be covered by special rules, for example contracts for leases, rental of a commercial premises, financial loans and employment.

Important questions

The issues we will touch on throughout this text are;

  • What is a contract? This is a question that may appear as very simple but there exists some uncertainty around what a contract actually is.
  • How does a contract become binding? This is important to understand given that only the person who is bound by the contract can be held accountable for unfulfilled obligations under the contract.
  • What is the content of the contract? Often one party to the contract pays the other party for the delivery of a good or service. But, it can occur that delivery is hard to determine, for example, when a service is completed but more work is to be carried out. In this case, is the additional work included in the original price or not?

What is a contract?

A contract is made up of two components – offer and acceptance.

First an offer to enter a contract is made. If the recipient of the offer respond with a yes – an acceptance – a contract is formed.

Both an offer and an acceptance can be made orally or made in writing and lead to a valid and binding contract. To keep in mind is the fact that an oral contract can be difficult to sort out should a disagreement arise given that it can be difficult to prove what was actually contracted.

Should the recipient of an offer answer with a yes but this is conditional on a change to the original offer, this is considered to be the same as if the recipient had answered no to the offer. In this case, the party that made the original offer is to now answer yes or no to the new changed offer and this must be done actively. As an example, if company A sends an offer with company A’s terms and conditions to company B and company B answers yes to the offer and accompanies their yes with their own company B terms and conditions, company A must react to this amended or new offer in order to not be bound by company B’s terms and conditions.

A company that sends offer is bound of that offer. An offer is normally a detailed offer that is directed specifically to a company or a personal, for example, a quotation. There does however exist something called an invitation or request for an offer which is directed not to one party but many, often unspecified recipients. In this case, the reverse than that explained above applies when a contract is formed – it is up to a party who receives the request for an offer or invitation to leave an offer to the company which the company can then choose to accept, or not.

Contractual principles

A basic principle for contracts in Sweden is that everyone is free to decide for themselves if they wish to enter a contract or not – freedom of contract – and that if a contract is entered, the parties to that contract must fulfil their commitments under that contract – contractual obligation. While exceptions to these general principles do exist, but we will not touch on these in great detail in this text. Should a party not fulfil their commitments under the contract, the other party can turn to the courts or enforcement officers to force fulfillment of the obligations.

The idea that everyone has the ability to see to their own interests forms the starting point for the law. However, there are certain cases and people who are more in need of protection, an example being consumers. This is the reason why the European Union works actively and continuously to develop rules protecting consumers. These rules developed at the European Union level form the basis for a lot of Swedish law in this area.

Some exceptions which are good to know;

  • There exists rules set out in the law which are obligatory or mandatory.

Should two or more people enter a contract that contains terms that differ from the mandatory law, the terms within the contract that differ from the mandatory law will not be valid and binding.

  • There exist a duty of loyalty between parties to a contract. This means that the parties should be loyal towards and help one another, such as for example, giving information to help the other party avoid or minimize damage.
  • There exists an obligation to see to and protect one’s own interest and not be careless.

How does a contract become binding?

For a contract to be formed, there must be parties to the contract, these can be natural or legal persons. A natural person is a human being. Legal persons are organizations who have the status as a legal entity. To have the status as a legal entity means the ability to have rights and obligations – for example, to enter into contracts, own property, have receivables or debts. An example of a legal person is a limited company, a partnership, cooperative, municipality or bankruptcy estate.

In addition, a person wishing to enter a contract must have the legal capacity to do so. A natural person can enter a contract if they are of legal age and do not have a trustee (in the event of bankruptcy or when, for example, a limited guardian has been appointed.

A legal person enters a contract by a natural person acting on their behalf. This can be done in many ways but we will here use the example of a limited company to exemplify. The law surrounding legal signatories governs who can carry out legal acts within binding effect (such as entering into a contract). For limited companies, the Companies Act outlines who can act as the limited company’s legal deputy and thereby signatory. It is the Board of Directors who acts as legal signatory and not each individual member of the Board of Directors. It is however common that the Board of Directors, by a decision of the Board of Directors, give one or two or people the right to act as legal signatory. This is not to say that other parties cannot be given this right – persons other than the Board of Directors can also be designated as legal signatories, such as the CEO who has the right to take certain legal actions.

Contracts can also be entered by a grant of authority. In this case a natural person - the agent to whom the grant of authority has been given – can enter a contract on behalf of another person (the principal). It is important in these cases to ensure that it is clear what the agent has the agency to enter a contract about. There are a number of different types of grants of authorities but these will not be covered in this text.

Depending on the signatory’s influence on which business the company is involved in, a signatory can have the same responsibility as the Board of Directors and CEO. Should the signatory sign a contract which the company shareholders consider has damaged the company, the shareholders have a right to sue the signatory to compensate for the damage. In addition, there is a rule on authority, which means that if a person enters a contract that they do not have the legal capacity to, based on the rules set out in the Companies Act or other instructions that they have received to perform their job, the contract will not be binding on the company but on the individual who will be personally responsible for the contract.

What is the content of a contract?

What is stated in the contract is the starting point for determining the contract’s content based on the notion that it illustrates the parties’ common intention. In the best case, there exists a clear contract that the parties to the contract have discussed and read thoroughly with full understanding of the content. In this case, the question ‘what is the content of the contract’ is easy to answer.

Unfortunately, it is commonly the case that contracts are not complete. Parties may have agreed on certain topics but not written them down or written them down in an unclear and conflicting manner. There is no law setting out how content of contracts should be determined if incomplete, but guidance can be taken from the decisions of the Supreme Court.

If a contract is incomplete, an overall assessment may be made considering the circumstances before the contract, the objective of the contract, the contracts wording, structure and any applicable customs. Additionally, If it arises that one party has understood and been aware that the other party did not understand the contract, the party with that knowledge and understanding will be bound by the other party’s view and understanding of the contract. An assessment will also be made as to whether the contract was reasonable and fair, this is done based on the assumption that both parties have wished for fair and reasonable content in the contract and that a contract can be adjusted due to unreasonableness.

Summary and key points

A contract exists when a person with legal capacity leaves an offer to another person who accepts the offer. Offer + acceptance = contract.

Oral and written contracts are valid. Oral contracts make it more difficult to prove what has been contracted but written contracts can also contain unclarities. One should therefore be careful to take the time to carefully formulate and understand a contract before it is entered.

It is always good to be clear about how a contractual relationship can be terminated – before entering the contract.

Unclear contracts where the parties are of different understandings often lead to disagreements and disputes.