What Is A Contract?

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A contract is a formal agreement between two parties.  It means that each party has agreed to do something and that if either of them fails to do it they are covered both by the terms of the contract and by contract law.

In law, contracts can be formed between any two or more individuals or organisations by them agreeing to do certain things, usually in return for payment.  Contracts can be formed verbally and by custom and practice – where normal practice is to do a certain thing for a certain fee, for instance.

Where a voluntary organisation has a contract with a public body, this will usually mean that the voluntary group is contracted to deliver specific activities and/or services in return for a specific sum of money from the public body. These contracts will normally be formal written documents, signed by senior members of both organisations, with all the terms and conditions written down.

A contract is a commercial agreement and, as such, the income from it may be liable for tax and VAT.

Key issues to consider:

  • does the contracted service fit your organisation’s aims?
  • can you fulfill all the terms of the contract?  Consider the consequences of failing to do so, including possible loss of reputation with a key stakeholder
  • if the contract has been put out to tender, can you cope with the tendering process and timescales?
  • is there a ‘get out’ clause or clauses?
  • what are the notice periods for terminating the contract?
  • when will your organisation get paid?  Will this cause any cash flow problems?
  • you will often not only have to do what you are contracted to do, but also to have formal evidence mechanisms to prove this.
  • Have you considered the implications of performance management associated with the contract?

Agreements with public bodies vary in levels of formality and legal standing, and whether an agreement is legally binding depends on the intention of the parties involved.  If a public body wants to procure a service, a contract is best practice.