Despite the fact that business contracts can be very complex, the elements needed to make the enforceable and valid are in and of themselves fairly straightforward to understand. This might make you wonder about the pages of legalese you’ve seen in contracts from service providers and others in the past. The truth is this language won’t help you much when creating business contracts with third parties in order to build your business in a reliable and legally dependable way.
Instead, you want direct language that both parties clearly understand and that will be easy to assess in a dispute resolution situation like mediation, arbitration, or even formal legal proceedings (and can likely help you avoid these dangers). So accurate and detailed everyday language is actually a good thing if you hope to make your contracts enforceable and legally binding.
Must a Contract Be in Writing?
Most of the time, oral contracts are considered legally binding. However, there are a few exceptions in a few states, for example, if a contract is to last longer than a year it typically has to be in writing. The bottom line, however, is that you want something that is not only binding, but that is easy to enforce. Because of the often unclear nature of oral contracts, written contracts can provide incredible clarity and protection from dispute when compared to oral contracts and therefore it is highly recommended your business only use written contracts.
What Is Required?
In order to be binding and enforceable, all contracts need two things:
1. That the parties involved are in agreement. That is, that there is a clear offer made by one party and that the other party clearly accepts that offer within the terms of the contract.
2. There is an exchange between the two parties of something of value like goods, services, or money for one of the other in return. Typically, this is payment of cash for services or goods delivered.
Let’s look at these two requirements in greater detail:
Requirement #1: Agreement Between Parties
The basic gist of the first requirement is that the clearer it is that all parties agree to all terms stated within the contract, the stronger it will be and easier to enforce. Reality is that things are not always so clearly black and white. Things get blurry. It’s not always so clear if everyone fully agreed to everything unless it’s explicitly stated that they do. Over time, much has been learned about issues where agreement isn’t so clear:
Offer & Acceptance
To understand why this can be unclear, think of an example where you buy lunch. You walk up to a food cart and the vendor tells you the special is chicken for $5.99 with a side of potatoes.
This would be his offer. If you tell him, “Sounds great, I’ll take it,” you’ve accepted the offer. If instead you tell him, “I think I want beef today,” you’ve rejected the offer. However, if you say,
“I do like chicken, but I really want a salad instead of potatoes,” you’ve not accepted the offer, but have made a counter offer. This is where things can be a little unclear.
When the discussion involves things more involved than what sandwich you are having for lunch, the stakes are higher and if there is a misunderstanding – someone has to pay for it. This is why making offer and acceptance clear is crucial to contracts.
At What Point Acceptance Occurs
The goal here is to determine as accurately as possible when acceptance does in fact occur as clear in the contract as possible. However, even when this is done, a party may want time to think about an offer. In the interim, the other party may reconsider and wish to change specific terms so that disputes can arise. To minimize the chances for this, certain rules should be followed concerning how long an offer should remain open, how you should revoke an offer,what sort of expiration date you may want to include, as well as how to handle counter offers.
How Long Does an Offer Remain Open?
The issue you run into is that without stating specifically in the contract how long the offer isvalid, it is legally considered open for a “reasonable” amount of time. This is clearly open tointerpretation and can be the source of a dispute that could simply be removed by including anexpiration date within the contract itself. This leaves no room for doubt.
If you are on the other side of the contract and considering an offer without an expiration datestipulated, it’s in your best interest to accept it as soon as possible if you want to go through withit before they want to change the offer. Until you accept it, it can be revoked at any time.
Revoking an Offer
The party making the offer has the right to revoke it at any time before it’s been accepted. Theonly exception to this is if they agree to leave it open for a specific amount of time. In this case,they must abide by these terms in order to avoid dispute. Since making a counteroffer does not constitute as acceptance, the party making the offer may still revoke the original offer if you respond with a counteroffer – they are not obliged to keep the original on the table.
Offer Expiration Dates
When a contract has an expiration date, or an option, this typically comes with a fee. A typical option is a 30-day option where the seller (an option is typically used in the exchange of goods for cash) agrees to not offer the product or goods to anyone else for 30-days while the buyer considers the offer. Regardless of whether or not a seller charges for the inclusion of an expiration or option in the contract, they are obliged to follow them.
Counteroffers are an integral part of the negotiation process and are simply an offer made by the one party against the other party’s offer. For example, a seller offers you chicken and potatoes for $5.99 and you counter offer by asking for chicken and salad for $5.99. Typically, if the party agrees to the counteroffer, acceptance happens at that point.
It’s important to note that inconsequential differences cannot be used to void a contract where a counteroffer was accepted. In our example of the lunch special, if the food vendor agreed to provide salad instead of potatoes and it turned out the salad wasn’t as big as the side of potatoes, they wouldn’t owe you the different in potatoes.
Exchanging Something of Value
The second major component of any contract besides the offer and acceptance is the actual exchange of value. That is, if you expect the terms of your contract to be legally valid, there must truly be a give and take – both parties must give something of value to the other.
Defining the Thing of Value, or “Consideration” to Be Exchanged
Legally speaking, whatever is to be exchanged of value between parties in a contract is called the “consideration.” In most cases, the consideration is a promise to render future services, or deliver goods or payment. For example, the promise to deliver a daily special with chicken and a salad in exchange for the promise to pay $5.99.
A Contract Vs. A Gift
If one party is simply doing something for the other or giving them something, they are under no legal obligation to follow through on their agreement to do so. For example, if someone promises to bring a pie to your party as a favor but instead shows up with punch because the store was out of pie, you have no legal recourse to attempt to hold them to their original promise to bring pie.
On the other hand, if there had been an agreement where both parties agreed to provide pie for events for each other, a contract would exist, and legal recourse would be available.
Promises vs. Action
There are a few situations where the consideration is met by actions instead of actual promises to perform them. For example, if you asked the food vendor for salad and instead of saying anything, they just gave you the chicken with salad – this would constitute agreement and that a contract was made. Legally, you wouldn’t be able to say, “I changed my mind, you should have double-checked first,” and be freed from the original verbal contract you had already entered into.
Yoel Molina, Esq. (alias "Mo")
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