All business operations require contracts. Employment contracts, operating agreements, and purchase orders are all necessary contracts. Small business owners should know the ins and outs of contract law when writing any document so they don't run into legal issues later on. You don't need to go to law school to be able to understand contract law, but there are strict requirements on what you must include in a legal contract to avoid litigation or confusion.
What Is a Contract?
A contract is an agreement between two parties who have agreed to carry out certain obligations to each other. Contracts may be verbal or written and involve simple tasks or complex multinational trade mergers.
All contracts, big or small, must contain key terms and elements to be enforceable:
- Mutual assent between the parties: This must indicated by a valid offer and acceptance. All parties must agree to the contract terms and obligations.
- Consideration: A contract requires one party to do something in exchange for payment from the other party. Consideration does not need to be monetary, but it must be comparable to the other party's obligation.
- Awareness of the contract: Both parties must know they're agreeing to a contract. This sounds obvious, but many contract disputes occur because one side sends an offer to the other before taking an equivocal response for acceptance.
- A legally enforceable contract: Both the subject of the contract and the payment or consideration must be legal. Nothing prevents criminals from creating a contractual agreement, but it is not enforceable by a court.
- Capacity: All parties must be mentally and legally able to agree to the terms of the agreement. Minors can agree to a contract, but the terms are unenforceable against them.
Types of Contracts
All contracts are legal documents. Oral contracts are legally binding. They merely lack the documentary portion. The contract may be enforceable if the parties agree to a performance and a payment. If you believe you have an oral contract and may need help enforcing it, you should immediately see a contract attorney.
You can write some types of contracts yourself using online templates. Many legal services offer these templates for contract drafting purposes. You should still have them reviewed by an attorney for legality. Things to note:
- Partnership agreements and other business contracts feature pages of boilerplate language required by state law. If you can take this from internet resources, you can save time and possible errors.
- Employment agreements should contain a job description, pay rate, and other job-related information. You may wish to include nondisclosure agreements or attach those to the main contract.
- Real estate contracts include sales agreements, rental contracts, and transfer deeds. You should have them reviewed by an independent attorney, no matter who drafted the original contract.
When You Need a Contract Attorney
There are times you shouldn't do it yourself. When you're establishing a new business or facing legal action, you need legal assistance. These situations need someone with experience in the area of law and in contract review and negotiation to protect your interests, and can likely be done for a flat fee or a retainer.
Whether you're a sole proprietor or a new partnership, business formation is more complicated than building a website and running some ads. Many entrepreneurs thought their idea was a sure thing and found they were violating laws and regulations everywhere.
The safe thing to do is to consult a business law attorney who can explain how to file articles of incorporation, fill out your business license and rental agreements, and complete all your contracts so your partners and vendors know what they're doing. This ensures that your startup has a chance to generate income.
Contract negotiations are when parties hash out the terms and conditions of their agreement. Negotiations include prices, delivery dates, amounts, and whether litigation or arbitration will settle disputes.
Even negotiations between small businesses are complicated. Contract negotiations between large companies can involve teams of business contract lawyers and take weeks or months to resolve. Since mutual assent is essential for a final contract, both sides must agree on terms. Having the right lawyer on your side helps avoid future legal matters with contract interpretation.
Commercial litigation often involves breach of contract allegations. Breach of contract claims can stem from a number of causes but break down into three basic types:
- Failure to perform: One party does not perform its duties according to the contract. For instance, you shipped your product, and the other party did not pay.
- Anticipatory breach: One party believes the other party will not perform, so it cancels its own performance. You wanted to ship your product but then learned that the other party had declared bankruptcy. You delayed shipment until you knew they could pay you.
- Partial breach: One party performed its duties but did not fully conform with the contract.
A breach may be material - a serious breach of the contract - or immaterial. For instance, if the product should have arrived Tuesday afternoon and it arrived Wednesday morning, that would be an immaterial breach. If it should have arrived Tuesday and didn't arrive until Wednesday of the following week, that would be a material breach.
Other Types of Contract Review
Although most people think of contracts in terms of businesses and corporations, contract review is important in many other areas of law. Even if you have legal representation, you should consider having a contract lawyer review an agreement during litigation in other matters. Some areas that might require an expert include:
- Family law: Divorce settlement agreements, custody agreements, and real estate division all involve contracts.
- Patents and trademarks: Intellectual property is not just computer software. Any invention or concept you create is your own and needs a copyright, which is a contractual agreement.
- Insurance and legal settlements: If you receive an insurance payout or settle a personal injury lawsuit, you'll need someone to review the settlement agreement. This is especially true if you did not have legal help during the negotiations. Many insurance claims are settled without the help of a legal professional, but you should still have the agreement reviewed before signing.
Finding a Contract Business Attorney
If you need legal advice on a contract, you don't need an attorney with years of experience. You need someone with knowledge of the laws in your jurisdiction who knows the rules governing contracts in your state. Consider consulting with a contracts lawyer in your area with the know-how and training to help you with your business and contract legal work.