Contracting Basics

What is a contract?

• A written or spoken agreement between two or more persons or entities which creates a legal obligation to do or not to do a particular thing.
• Contracts can include not only what you write, but what you do and say.
• Written contracts seek to record the basis on which parties have agreed to act

For a contract to be formed there must be an offer, with certainty of terms, followed (maybe after various counter-offers) with acceptance and, in most jurisdictions, consideration. Consideration is something of value, which may be nominal, and does not need to be money.


Why do you need a contract?

You need a contract to protect COMPANY-X’s business by:
• creating written evidence of what was agreed upon to avoid disputes or misunderstandings later on;
• defining the obligations of the parties and identifying all the key terms relating to the arrangement up front;
• identifying and allocating management of risk and apportionment of liability between the parties;
• providing a supportive operating framework (making your supplier management easier in the long run);
• providing for a system to resolve disputes; and
• modifying terms that would otherwise be imposed by law.


Different types and forms of contract

You may work with many different types of contracts that are defined by the type of purchase. These may include software contracts, supply contracts, equipment contracts or services contracts. There are also different forms of contracts. The most common are purchase orders, short form contracts and long form contracts.

Purchase Orders are for once-off agreements.

Short Form contracts are best for low spend, low risk, low complexity or short arrangements.

Long Form Contracts are best for high spend, high risk, high complexity or longer arrangements.

Statements of Work/Task Orders

You may also encounter other legal documents specifically Statements of Work or Task Orders. A Statement of Work or Task Order is a document that references a Master Contract and sets forth the specific deliveries or services that a Supplier would provide under the Master Contract. You may hear the terminology Statement of Work (SoW) and Task Order used interchangeably. The correct terminology to use will be that specified in the Master Contract. The two documents together comprise the full contract.

Statements of Work/Task Orders (Con’t)

If COMPANY-X attempt to make a claim that a supplier did not perform according to the Master Contract, then the Statement of Work or Task Order will serve as the main evidence of what the parties agreed in relation to the specific delivery or service.

Letter of Intent

You may also hear the term ‘Letter of Intent’. Procurement Policy P511 establishes the COMPANY-X position on issuing letters of intent. If a letter of intent is needed you must first contact your PCMLT member and then COMPANY-X Legal prior to its use or release to the supplier.

A letter of intent indicates an intention to negotiate and perhaps the key matters on which you are prepared to negotiate. They do not indicate an intention to be contractually bound to one another. Letters of Intent require very careful drafting to ensure that a Contract is not formed.
You may sometimes hear a Letter of Intent referred to as a MOU or ‘Memorandum of Understanding’. These terms mean the same thing.