Open Contract

Open contracts are those contracts that provide freedom to parties to insert, revise, or delete the terms and conditions. Under the agreement, clauses and provisions can be modified (often by the vendor) even with the absence of mutual consent. In some cases, they are contracts without an end date.

Contracts are proof of the agreement between parties on the execution of specific matters. Throughout the contract's execution, various changes may arise that may be beneficial to one or more parties. These contracts provide scope for making adjustments as needs arise and offer greater flexibility when compared to a traditional contract.

Open contracts are agreements that come with the scope of making adjustments to their existing terms in the future. It is framed between two or more parties, and the changes made need no mutual consent. The contract will be executed as long as both parties agree to the changes. 

Unlike traditional contracts, all parties involved can make changes, and hence, it is a flexible form of contract. They are helpful, especially in long-term contracts that may require updating existing contractual terms. The changes may occur due to various changes such as market demand, policy updates, delays, changes in transportation or mode of transportation, etc.

They also apply to property contracts where contractual obligations are missing. For instance, there might be no specific dates mentioned, but the duration for execution, such as within six months, is mentioned. They are also seen in employment contracts, where the duration of the contract or the position is not mentioned and is later updated based on the individual's skills. They could be for a shorter term as compared to a regular traditional contract and hence provide less scope for growth. 

They help bring clarity to the additional requirements needed for the proper execution of the contract. The changes made may be for the benefit of one or all parties or to prevent any damages to the involved parties. Irrespective of the cause, these contracts prevent disagreements.

An open contract is similar to any other contract. It is drafted to execute certain business transactions and hence shall contain the following elements:

• General terms and conditions.
• Terms of service.
• The execution duration.
• Details of parties involved.
• Penalties in case of improper fulfillment of conditions.
• Points that nullify the contract.
• Payments and settlement dates.
• The effective date.
• Signature of involved parties

Let us look into some examples that help us understand the concept better.

Example #1

Imagine Dan is an individual who wants to build a home for him. He approaches ABC Constructions Private Ltd for it. They suggest entering into an open contract as they want flexibility in the settlement and date of finishing the construction. This is because if it were a closed contract, the terms would be flexible, and it would make progression easier in terms of future changes. Suppose the agreement was made for a $ 100,000 amount in a month, and the labor charges went up or material charges went up, Which would exceed the predetermined amount. 

This may result in a compromise of quality because the contract demands limiting it to $100000. Suppose the contract was an open contract and a clause of an additional 10% in case contingencies were added; ABC Ltd could use that for better execution. Similarly, flexibility in dates owing to unexpected delays can result in fewer execution mistakes.

Example #2

The real-life study explores how adopting principles from European contract law can aid in reforming Iranian contract law, mainly through the concept of open contracts. These contracts allow parties to modify, delete, or insert terms and conditions, which is beneficial for long-term and complex agreements like those in construction or the supply of goods. The study emphasizes that such flexibility is crucial for addressing issues like economic fluctuations and changing social conditions. It argues that open contracts, which have been rejected mainly due to traditional perspectives in Iran, could significantly improve legal frameworks by providing more adaptable and secure agreements, especially in specialized fields such as oil contracts.

The analysis of open contracts reveals that they are considered valid and binding in both Iranian and European legal systems, challenging the view that they are merely preliminary agreements. These contracts cannot be terminated arbitrarily but are subject to enforcement and sanctions if obligations are violated. The study suggests that recognizing open contracts within civil law could provide a more flexible and efficient legal structure, aligning Iranian contract law with international standards and addressing the evolving needs of trade and commerce. 

Given below are some of the advantages and disadvantages of these types of contracts.

Advantages

• It provides a way to protect the rights of all involved parties.
• The renewal of contracts may be fine as the new change would include points.
• It helps in communicating the interests of all parties involved through the changes made.
• It conveys the existing terms and conditions clearly to the involved parties.
• The changes made can help in better management of the rules laid out and prevent deviations from the established way of execution of the contract.
• They are a great option in case of contracts that have scope for improvement or changes in the future.

Disadvantages

• Uncertainty in the exact dates of execution can lead to faster processing of the contract.
• Agreeing can be difficult and may even lead to cancellation, as the changes made may be favorable for one and undesirable for another. 
• Making additional changes can be expensive.
• It is riskier compared to traditional contracts.
• Ambiguity can exist in deciding the limit of making changes or areas of making changes. This may lead to unwanted litigations.
• The frequency of changes can affect the proper execution of terms and conditions provided in the contract and may lead to unnecessary delays. 
• In the case of open agreements in employment contracts, employees can be taken advantage of (by giving a different job or low-end salary, etc.).

The differences between both the concepts are given as follows: 

• An open contract is a contract that offers the option of bringing in future modifications. At the same time, a closed contract is a contract between parties that does not come with the option of further modifications.
• Changes are made in open contracts irrespective of mutual consent from the parties involved. On the other hand, changes in closed contracts can be made only after the mutual consent of all parties involved.
• Open contracts have higher chances of resulting in disputes and legal problems due to the ambiguity involved in execution. Future changes suggested may alter the course of execution and result in undesired outcomes. Closed contracts have clear terms and conditions outlined in the document. Hence, it eliminates ambiguity and the need for disputes.