contract

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Contract

A term of reference describing a unit of trading for a financial or commodity future. Also, the actual bilateral agreement between the buyer and seller of a transaction as defined by an exchange.

Contract

1. A legal agreement between two parties in which each agrees to do, make, buy, or sell a good or service, or in which one party grants a right or undertakes an obligation, often in exchange for a fee. A contract is less commonly called a binding agreement. See also: Option contract, Futures contract.

2. Informal for a unit of trade in options and futures.

contract

1. In futures trading, an agreement between two parties to make and take delivery of a specified commodity on a given date at a predetermined location.
2. In options trading, an agreement by the writer either to buy (if a put) or to sell (if a call) a given asset at a predetermined price until a certain date. The holder of the option is under no obligation to act.

contract

a legally enforceable agreement between two or more parties generally relating to a TRANSACTION for the purchase or sale of inputs, goods and services. A contract involves obligations on the part of the contractors which may be expressed verbally or in writing. Formation of a contract involves one party making an offer to the other party which must then be accepted by the latter party. For example, one firm may offer to supply a product to another company at a given future date and on specified terms. In return, the latter company would agree to pay a specified sum of money as consideration for the product to be supplied. Both parties would then be legally bound to honour their agreement to sell and to buy the product. In the event of either party failing to comply with the terms of the contract the other party could seek damages for breach of contract through the courts.

A complete contract stipulates each party's responsibilities and rights for every contingency that could conceivably arise during the transaction. Such a complete contract would bind the parties to particular courses of action as the transaction unfolds, with neither party having any freedom to exploit weaknesses in the other's position. It is difficult to develop complete contracts since parties to the contract must be able to specify every possible contingency and the required responsibilities by the contracting parties; stipulate what constitutes satisfactory performance; make the contract enforceable; and have access to complete information about circumstances surrounding the contract.

In practice, most contracts are incomplete contracts in which precise terms of the contract cannot be fully specified. In such situations, one or other parties to the agreement may be tempted to take advantage of the open-endedness or ambiguity of the contract at the expense of the other party. See ASYMMETRICAL INFORMATION, MORAL HAZARD.

In addition to contractual relationships between a firm and its external suppliers/ customers, organizational theorists have paid particular attention to the role of contracts in the internal relationship between the employees (‘agents’) and owners (‘principals’) of a company in running the business. See PRINCIPAL-AGENT THEORY entry for details. See also CONTRACT OF EMPLOYMENT.

contract

a legally enforceable agreement between two or more people or firms generally relating to a TRANSACTION for the purchase or sale of goods and services. Contracts may take a standardized form, with the same conditions of exchange being applied to every one of a large number of contracts, for example, airline ticket contracts. Alternatively, contracts may be lengthy and complicated because they are carefully tailored to a specific transaction such as the contract to build an office block for a client.

A complete contract stipulates each party's responsibilities and rights for every contingency that could conceivably arise during the transaction. Such a complete contract would bind the parties to particular courses of action as the transaction unfolds, with neither party having any freedom to exploit weaknesses in the other's position. It is difficult to develop complete contracts since parties to the contract must be able to specify every possible contingency and the required responses by the contracting parties, to stipulate what constitutes satisfactory performance, to measure performance, to make the contract enforceable and to have access to complete information about circumstances surrounding the contract.

In practice, most contracts are incomplete contracts in which the precise terms of the contract relating to product specifications, supply or delivery terms cannot be fully specified. In such situations, one or other parties to the agreement may be tempted to take advantage of the open-endedness or ambiguity of the contract at the expense of the other party. See ADVERSE SELECTION, MORAL HAZARD,ASYMMETRY OF INFORMATION, ASSET SPECIFICITY.

contract

A legally enforceable agreement. Its requirements are

• Competent parties
• Subject matter
• Legal consideration
• Mutuality of agreement (also called “meeting of the minds”)
• Mutuality of obligation

As a general rule, oral contracts are enforceable unless they relate to real estate or are incapable of performance within one year, guarantee the debts of another, or are evidenced by some writing signed by the person sought to be charged (“This is to confirm our agreement…”) There are other exceptions, but they are not relevant here. It is often difficult to enforce oral contracts because the parties usually have differing recollections of the exact terms of the agreement.

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