A contract is a legal agreement between two or more parties that is done voluntarily and deliberately. Contracts are mostly written but can be oral or implied where most have to do with a sale or lease, employment, or tenancy. To be enforceable a contract must meet three criteria: (1) there was an offer: (2) the offer was accepted; and (3) there is consideration. This sounds simple enough, but there are
The main idea of the majority of contracts is a set of promises, also known as a consideration. The promises made by those involved define their obligations. Contracts and agreements are important for conducting business for all sizes of companies. In earlier decades, there were few written business contracts, and many business and personal deals were done with a handshake. If a problem arose, the two parties could take the issue to court, and a judge would hear the case even if the contract was not put into writing. While a verbal contract is still legal (except for in specific situations), most contracts are documented in written form. Contracts have become increasingly detailed these days, and every effort is made to make all possibilities and eventualities clear.
A contractual relationship is determined as:
• An offer
• Acceptance of the offer
• A valid set of promises, consideration
Contracts are enforceable in a court of law. If one side breaches the contract, the party which has followed the contract rules is entitled to go to court for loss or damages. Usually, the non-breaching party’s remedy is money damages, which is what was due to them had the contract been followed. At times, the courts can order for the breaching party to follow their contract obligations. Contracts are a private law created by the parties in their agreement. The parties know their rights and obligations in their terms of a contract with statute limitations.
Even if a deal is done by handshake, it’s still legally enforceable and involves an exchange of promises. Most contracts, whether written or oral, are enforceable. Though, it’s always best to have a written contract for all business endeavors.
There are many reasons why a written agreement is better than an oral one:
- Writing down the contract’s terms and rules forces the parties to think about what they’re agreeing to. In an oral agreement, it’s easy to change your mind.
- When it’s written, parties are more likely to create a complete and thorough agreement than they would had it been agreed upon orally because it eliminates who promised what. When an agreement is not written, the parties can likely have different recollections of what happened during their agreement.
- Some contracts have to be written to be valid. For instance, the Copyright Act needs to have a license or assignment to be in writing.
- In most states, a contract for the sale of $500 or more is required in writing.
- If you have your agreement in writing, it will mean fewer disputes in court about the contract terms.
Who Can Enter a Contract?
• Besides people who are mentally incapacitated and minors, all others are assumed to have the power to enter into a contract.
• People who are a minimum of age 18 can enter a contract in most states.
• Corporations can enter contracts through their employees, agents, or officers. If an employee has the capacity to enter into the contract on behalf of the corporation is determined by corporate law.
• A corporation is its own legal existence from the employees, officers, or agents. Generally, these people are not responsible for debts or liabilities of the corporation.
Offer and Acceptance
• One party, also known as the offeror, makes a proposal, which is agreed upon by the other party, also known as the offeree, and forms a contract.
• When an offer is created, the contract is not valid until the offeree accepts the offer, but don’t assume the offeree will accept this offer since contract liability is only valid on consent.
• As an offeree, you cannot assume the offer will be open indefinitely.
• An offeror is free to revoke the offer before acceptance by the offeree. If the offeror cancels the offer, the offeree doesn’t have the legal power to accept the offer for the contract.
• If you are an offeree, contract arrangements should not start until notifying the offerer of your acceptance.
• Generally, there’s more than one step in negotiations to create a contract since the offeree can respond with a counteroffer.
• A counteroffer terminates the offeree’s legal power of acceptance.
• Consideration is what one party will receive from the other party by following the contract terms.
• If one party makes a promise while the other offers nothing back, the promise is unenforceable and is also known as a gratuitous promise.
• Lack of consideration is a rare problem for business relationships since there is a mutual consideration for both parties.
• The lack of consideration can arise in other contexts, such as amendments to contracts.
Enforceable Contracts – Valid Contracts
In addition to being clear and specific, a contract must meet certain criteria to make it legally enforceable. A legally enforceable contract is called a valid contract. Being legally enforceable means that can be used in court to support a decision on a disputed item. If a contract does not have certain essential ingredients, it is not legally enforceable. Most contracts never see a courtroom and they could easily be verbal unless there is a specific reason for the contract to be in writing.
When something goes wrong, a written contract protects both parties. If one party to a valid (enforceable) contract believes the other party has broken the contract (the legal term is breached) the party being harmed can bring a lawsuit against the party who it believes has breached the contract. The legal process, or litigation, determines whether the contract has been breached or whether there are circumstances that negate the breach. The court, however, will only hear a contract dispute if the contract is valid.
Essentials of Business Contracts
There are six required, essential elements for a contract to be valid (enforceable by a court). The first four, considered here together, relate to the agreement itself, and the other three relate to the parties making the contract.
Offer, Acceptance, Consideration, and Mutual Consent
Every contract must include a specific offer and acceptance of that specific offer. Both parties must consent to their free will. Neither party can be coerced or forced to sign the contract, nor must both parties agree to the same terms. Implied in these three conditions is the intent of the parties to create a binding agreement. If one or both parties are not serious, there’s no contract. There must also be consideration, something of value exchanged between the parties. The thing of value may be money or services, but both parties must give something. If someone gets something for nothing, that’s a gift, not a contract, and it’s not binding.
Both parties must be of “sound mind” to comprehend the seriousness of the situation and understand what is required. This definition requires that neither party be minors, both must be sober (not under the influence of drugs or alcohol when signing the contract), and neither can be mentally deficient. If one party is not competent the contract is not valid and the non-competent party can disavow (ignore) the contract.
The contract must be for a legal purpose. It cannot be for something illegal, like selling drugs or prostitution. Remember that it is not illegal to enter into a contract that doesn’t have all of these essential items; it just means that if an essential is missing the contract cannot be enforced by a court.
When a Contract Must Be in Writing
As noted above, verbal contracts can have the force of law, but some types of contracts must be in writing, some common types of contracts that must be in writing are:
• Agreements that cannot be performed within a year from the date the contract was signed
• Contracts for the sale of goods exceeding $5000
• Contracts that involve the sale or transfer of land
• Promised made in consideration of marriage (prenuptial agreements, for example)
You can actually create a contract situation without meaning to. In this situation, you may have an implied contract. For example, let’s say a vendor sends goods to a customer and the customer accepts them without paying. The customer then uses the goods to make its products and sell them. The vendor can infer that a contract has been created, even if there was no bill because the customer used the goods in its normal course of business. The contract is implied because the parties assumed a contract existed and if the contract existed it would be unfair to one of the parties (the vendor in this case). Generally, business law refers to the rules that govern commercial interactions between persons or other certified entities. These rules can come from legislation, common law rulings, or agreements made through international conventions or treaties. Most business laws either regulate entity behavior (for example, bankruptcy and taxation), or regulate transactions between different entities. But one of the unique things about business interactions is the importance and prevalence of contractual agreements between commercial entities. This is often known as a business to business commerce agreement, or more simply, a business agreement. General business agreements can control any number of commercial interactions such as purchasing goods from a manufacturer, purchasing goods produced by others, or purchasing services from another entity.
Verbal Business Agreement
Verbal agreements can sometimes create legally binding contracts, but only if the proper legal elements of offer, acceptance, and consideration are present in the interaction. But there are some that by law must be in writing, which is known as falling. Contracts for the sale of real estate is one example, but more applicable to business matters require a written contract if the terms of the contract will take longer than one year to carry out or the sale of goods valued greater than $500. Even if the transaction does not violate the Statute of Frauds, it is always a good idea to create a written document for a business agreement. If one party fails to fulfill their end of the bargain, it is much easier to enforce a written agreement in civil court if the non-breaching party needs to file a lawsuit. This greatly reduces the time and money both sides will spend disputing the transaction, because an agreement may not be enforceable. When in doubt, write it out!
Common Business Agreements
• Ownership agreements: Can also be called partnership, founder, operating, or shareholders agreements depending on what type of entity is being formed. They detail the rights and responsibilities of owners and partners as well as basic company operation details and what happens if an owner leaves or the entity is dissolved.
• Supplier agreements. These detail the terms of the relationship between one entity and another, usually the price and amount of goods. They function to prevent unwanted situations with suppliers as withdrawal or failure to provide.
• Independent contractor agreements. A business may need to outsource to independent contractors, which can range from CPAs and web developers to temporary employees to perform company services. Because independent workers are not full-time employees, a written agreement is important to make sure that no complications arise in the future.
• Non-disclosure agreements. Used by entities to ensure that employees or even contractors know their role and what information they can and cannot share during or after their time with the company.
Benefits of Business Contracts
Contracts are one of the best ways to bring clarity and structure to your operation. They allow you to specify and make note of important agreements, terms, or actions. Before we dive into specific business contract examples, you should be aware of their general advantages:
• Avoid misunderstandings – When you enter a business venture with another party, you want everything clearly stated in writing. The problem is that different parties may have diverting expectations, goals, timeframes, and obligations. A formal written agreement allows each party to paint a clear picture of the terms and conditions of the partnership, as well as expectations. This helps to forge lasting work arrangements built on mutual trust and understanding.
• Create binding agreements – Once signed, a contract is a legally binding resolution that acknowledges both parties agreed to everything therein. If one party is derelict in their duties and fails to uphold their part of the bargain, they’re in breach of their contract, which could result in firing, legal action, or the dissolution of the partnership.
• Evidence of details – The phrase “The devil is in the details” is especially pertinent for start-ups. Contracts are proof of the details that you have agreed upon with another party. This fully fleshed agreement can bind the owner(s) with investors, Owner(s) with employees and Owner(s) with third parties. Whether there are services rendered, payment obligations, or duties to be performed, all of that will be stated clearly in your various contracts.
• Describes responsibility – Contracts use clear language to highlight what each party is responsible for and the expected timeframe of action. Typically, one party gives either a good or service in exchange for money. Contracts will contain sections or clauses that describe how or why the business relationships could be legally terminated or altered. Further, parts can add indemnity clauses which highlight what actions parties aren’t accountable for.
• Provide a sense of security – A written contract can help both parties feel secure about their arrangement since both parties know exactly what they’re signing up for. Important points that will be covered may include: Their role and its requirements, Possible violations of the contract, Wages and benefits, Duties and responsibilities and Schedules and timelines. Written contracts provide protection on the off chance that the other party breaches their agreement.
• Assured confidentiality – Non-disclosure or confidentiality agreements safeguard your business’ sensitive information. Any party that signs an NDA is legally required to keep their in-house knowledge a secret or else be held liable for violations of confidentiality.
• Prevent litigation – If you don’t have a contract in place, you’re vulnerable to litigation, whether honest or malicious. If either party violates an agreement within the contract, the written agreement will be used as the framework of reference for determining fault. Having a clear and precise contract in place can help avoid being dragged into an expensive litigation process.
• Serve as a record of an agreement – Your contract is often the sole source of proof that you have for entering into a business arrangement either with workers, other parties, or other businesses. Typically, it will state details regarding the agreeing parties the services or goods rendered, the payments required and the dates of work and expected completion.
Business and Corporate Lawyer
When you need agreements and contracts for your business, LLC, partnership or corporation, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506