What is a contract?

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Anna Hurmerinta-Haanpää: What counts as a contract?

* embedded from the Panopto platform at Aalto University (privacy policy)

A contract is often much more than just a single signed document. Depending on the jurisdiction and the type of the contract, contracts can be written, oral, or even based on the parties’ behavior. Usually business-to-business contracts can be in any form the parties agree. Also, in international business-to-business contracts, the parties have been traditionally relatively free to agree on the terms of their deal. This is called the freedom of contract principle. Legislation can set limits for this principle. For example, many sustainability legislation protects SMEs from unfair contract terms.

In many jurisdictions, certain obligations may arise already before a contract has been signed. There may be binding promises which have been made during the negotiation process, or a promise to conclude a contract. Sometimes, even letters of intent or Memoranda of Understanding can be interpreted to include binding commitments. Also, during supplier onboarding or tendering processes, when the contract is still not signed, suppliers may be asked to provide information, complete questionnaires, or accept documents such as a (Supplier) Code of Conduct or Supplier Requirements – often digitally or through supplier portals.

Obligations may also rise gradually. Particularly in long-term contracts there may also be obligations, which have been left open for later maturing.

One traditional way to prevent promises, which are not planned to be binding promises, from haunting later is to include “an entire agreement clause”, which excludes all the other commitments which have been made before signing the contract. Even such a clause does not necessarily prevent all claims arising from earlier given promises.

A common misunderstanding is that only a properly signed document creates a binding contract.

Even though promises given in negotiations, oral agreement or even behaviour can become part of a contract, it is usually advisable to use written contracts. This way, misunderstandings and conflicts can be more easily handled and possibly even avoided.