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2. Other than the essential elements as mentioned on question 1, what are the other important matters that the parties should note when making a contract?

Privity of contract

Normally speaking, a third party cannot sue or be sued regarding a contract, and only the parties to a contract can rely on the contract terms to take legal action. However, there are some exceptions to this principle, such as:

  • If the contract is signed by an agent or representative on behalf of one of the parties, then that agent (who is a third party) may also bear the liability if he or she acted fraudulently or signed the contract without authorisation.
  • It is common in insurance contracts to subrogate the insured person's rights to the insurance company. For example, if someone injures you and the insurance company subsequently pays your claim for the injury, then that insurance company (as a third party) can take over your legal rights to claim against the wrongdoer.

Express or implied terms of a contract

Generally speaking, the contracting parties are free to agree on the terms of a contract (unless such terms are illegal). However, some of the terms may not be expressly stated on the contract. These terms, known as "implied terms", are terms that have not been orally mentioned or written down by the parties, but that are still incorporated into the contract according to the law or previous dealings between the parties.

Liquidated damages (compensation)

Liquidated damages are a genuine pre-estimation of the loss or damage that would result if a certain event were to happen during the performance of the contract. A contract term that specifies liquidated damages binds the parties, whereas a "penalty clause" in the contract (i.e. when there is no genuine pre-estimation and the amount of compensation is arbitrary stated) is not binding.

Legality

Certain contracts are illegal under the law. Here are some examples: a contract to insure the life of a person in whom the insurance buyer has no insurable interest, contracts to commit a crime, contracts to corrupt public life (to bribe government officials), contracts to defraud the Inland Revenue Department, and contracts to oust the jurisdiction of the courts.

Genuine consent of the parties

There must be no threats of physical danger in the drawing up of a contract (i.e. a party cannot be forced by the other party to enter into a contract). Otherwise the contract may be voidable, in which the party who needs the protection can seek to avoid the contractual liability.

Discharge of contract

A contract may be discharged by mutual agreement, performance of contractual duties, breach or frustration (the occurrence of certain unforeseen events that make a contract impossible to perform). With regard to the performance of contractual duties, the law requires the parties to perform all of their obligations under the relevant contract.

(Note: This answer highlights only a few of the important issues. There may be other information that you need to know before signing a contract, in which case a lawyer is in a better position to help you.)

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