The Basics of Contracts

October 9, 2014

The Basics of Contracts

As you begin growing your business, you will inevitably begin entering into contractual relationships. In order to make these contractual relationships work for you, it is important to understand what you are signing, and why.

In this article I will cover four basic elements to a contract.

1. Offer

For a contract to be legally enforceable there must be, what is called in law, “an offer”, which creates that contract. This is especially important when you are relying on a verbal contract. In order for an offer to be legally “acceptable” there must be no terms left open to negotiation. An offer is not an “invitation to treat,” or in other words, an invitation for someone to make an offer.

2. Acceptance

Acceptance of an offer must be clear and indisputable. It cannot suggest changes to the terms of the offer, or it will be considered a counter-offer. A counter-offer to an offer will create a new offer, which can then be accepted by the offerree.

3. Intention to create a legal contract

Some agreements such as those between family members, are not the basis for a legal contract. For instance, if a friend offered to drive you to a meeting one day and you accepted this offer, it is unlikely that a court of law would find that this type of agreement evidenced an intention to create a legally binding contract.

4. Consideration

In order for court to consider a contract applicable, both parties must have give the contract “consideration”. Consideration refers to some type of advantage or disadvantage taken by both parties.

An example. If one party promises to forego seeking to collect a debt against another party in exchange for that other party paying part of the debt immediately, there is sufficient consideration. This is because one party is taking a disadvantage (not seeking the rest of its debt), as is the other (it is paying part of the debt immediately).

A contract in which only one party gains or loses is not enforceable.

Aside from these basic elements, there are a few things you should always keep in mind when you are drafting or signing a contract:

The signing parties

It is important to understand who will be signing the contract and what their authority to sign that contract is. For instance, if you operate through a corporation, it is important to sign the contract on behalf of your corporation, rather than on your own behalf – if anything goes wrong, you don’t want to be held personally liable.

Breach terms

What happens if the contract is breached? Often, parties will sign a contract assuming that the relationship will encounter no hiccups. However, one of the main purposes of a contract is to stipulate what will happen if the contract is breached. Make sure to give a good amount of thought to the terms for breach when you are drafting, negotiating, or signing a contract.

Clarity

Ensure that your contract is, especially the main terms, as clear as possible. Any uncertainty around payment terms, or other important terms, can render the contract unenforceable. This is the case when terms are contradictory.

If you are unsure about how to draft your own contract or need advice on a contract you have been asked to sign, ask a reputable small business lawyer.

Image credit: By Jessica Spengler, flickr.com.

Author

Jonathan MacKenzie

Jonathan MacKenzie is an Associate with Aluvion Law, a law firm providing innovative solutions for entrepreneurs and small businesses. Jonathan has an entrepreneurial background, having started a company to help pay his way through law school. After graduating from the University of Leicester in the UK, Jonathan joined Aluvion Law so that he could leverage both his entrepreneurial streak and his legal acumen.