Understanding Contracts: Key Insights for Entrepreneurs

Contracts form the backbone of business interactions. They can arise from carefully drafted documents or even a simple email saying, "OK, let's go with this." But when does a contract truly bind the parties involved? Understanding the four levels of assessment highlighted in Supreme Court rulings can save your business time and money.

The Four Levels of Assessment

1. Form

The form refers to the technical creation of a contract: offer + acceptance = binding contract. In Finland, written form is not typically required, and email contracts are common. However, if the acceptance includes changes, it constitutes a counter-offer that requires new acceptance.

2. Authority

Authority concerns the signatory's power to bind the company. In a limited company, the board represents the company, and the CEO has the authority in regular business operations. The board can delegate rights through explicit authorization, power of attorney, or company bylaws. Position-based authority—like that of a CFO or sales manager—applies mainly to routine, low-value transactions according to Supreme Court guidelines.

3. Awareness

Awareness refers to what the other party knew or should have known about the signatory's authority. Good faith protection often provides security, but if you were aware of the lack of authority, you cannot claim it.

4. Significance

Significance distinguishes routine transactions from exceptional ones. The larger and more unusual the contract, the more likely explicit authorization is required.

Practical Case Studies

Case Study 1: KKO:2024:15

This case involved a renovation project worth over two million euros. A project engineer communicated the execution of the contract via text message. However, when the project fell through, the Supreme Court ruled that the contract did not bind the company. The project engineer's position-based authority was insufficient for such a significant transaction, and the construction company could not rely solely on a consultant's announcement.

Case Study 2: KKO:2011:21

In this case, a retailer signed a contract with a regional manager, but the chain company denied the contract's validity. The Supreme Court noted that the retailer was aware from previous collaborations that the regional manager could not bind the company alone—CEO approval was always necessary.

Case Study 3: KKO:1996:84

This case concluded differently. A municipal engineer announced a contract approved by the technical committee over the phone. Although the municipal council later chose another contractor, the Supreme Court held that the contract bound the municipality. The crucial difference was that the municipal engineer conveyed a decision from an authorized body, while the project engineer would have needed authorization to execute the transaction independently.

Practical Guidelines for Entrepreneurs

Before entering into a contract, ensure clarity in the offer and acceptance. Verify the other party's signing authority in significant agreements. Determine whether the individual is making a decision or relaying someone else's decision. Previous collaborations can reveal the other party's internal rules.

Internally, keep your company's representation rights up to date in the business register. Document authorizations in writing and establish a clear structure for the value of contracts that individuals can sign.

The formation of a contract is a two-part question: Does the contract exist, and does it bind the parties? The offer and acceptance may be in order, but if the signatory lacks the authority to represent the company, the contract is not binding. The best way to avoid costly surprises is to check, ask, and document.

Conclusion

Understanding the nuances of contract formation is essential for business leaders. By focusing on the four levels of assessment—form, authority, awareness, and significance—you can navigate the complexities of contracts more effectively. This knowledge not only protects your business but also empowers you to make informed decisions.

For more insights on legal matters, visit Legaunsel.