Contracts and the Law
More than 99% of all businesses in America are small businesses. That means they have fewer than 500 employees. Small business owners operate the companies that keep the country running. Business contracts between these owners keep their companies working together smoothly.
No matter what type of business you run, you should understand contract law in order to create legally enforceable business agreements. You should know about small business programs available from the government, and your business plans should include ways to expand as your business grows. This will help you understand contracts and business law.
A contract is a legally enforceable agreement between two or more parties. A valid contract creates an obligation to honor the agreed-upon terms. A service contract creates an obligation for performance, such as construction or procurement. A sales contract (sometimes called a purchase agreement) covers the buying and selling of products.
A valid contract must contain an offer, acceptance of the offer, and consideration or payment:
- The offer includes the terms and conditions of the contract. Both parties must agree to all terms. If either party disagrees, there is no contract.
- An acceptance is a clear expression of agreement. Any changes to the offer become a counteroffer.
- Consideration is the bargained-for exchange between the parties to the contract. Each party must benefit from the contract for it to be valid. Otherwise, it is illusory or invalid.
Other state contract requirements may include parties' signatures, notarization, and recording. Business owners should check with their attorneys and the Small Business Administration (SBA) when writing or signing contracts.
Enforcing Small Business Contracts
State courts enforce contracts. Most types of contracts are common-law contracts. If they are for services or real estate, public law governs interpretation and enforcement.
Contracts for the sale of goods fall under the Uniform Commercial Code (UCC). It is a model code adopted by the states to standardize contracts for goods.
Failure to Perform
A breach of contract occurs when one party does not fulfill the contract terms. The injured party can enforce the contract under the terms provided in the agreement, or the parties can go to court to enforce the terms.
Government Agencies for Small Businesses
There are several government agencies small businesses should be aware of. Some offer aid to businesses that are just getting started, while others regulate and distribute government contracts.
The Small Business Administration (SBA)
The Small Business Administration (SBA) is the agency responsible for small business development. Because so much of America depends on small businesses, the SBA assists small business owners in improving their business enterprise. The SBA exists in all states to support for-profit businesses in getting loans, receiving technical assistance, and managing business concerns.
The SBA operates under the Small Business Act (15 U.S.C. 631 et seq.). This grants the SBA authority to act as a contracting officer on behalf of the federal government and the procurement of federal contracts. The SBA acts as a liaison between small businesses and federal agencies doing business with the civilian sector.
The North American Industry Classification System (NAIC)
The North American Industry Classification System, or NAIC, sorts businesses by economic activity. This system helps track regional economic output. Local governments and other agencies use it to compare their economy with similar areas and spot where they can improve.
NAICS helps the SBA and local government determine what companies in their areas meet HUBZone Program requirements.
The HUBZone (Historically Underutilized Business Zones) program is a small business growth plan designed to help small, disadvantaged businesses in underutilized business zones. HUBZone awards at least 3% of federal contract dollars annually to HUBZone companies.
The federal government restricts contracting opportunities for certain contracts in underutilized business zones. Companies participating in the program bid on “small business set-aside" government contracts in open bidding.
A business must meet SBA guidelines to qualify for the HUBZone program, including:
- Be a small business according to SBA size standards (fewer than 500 employees)
- Be at least 51% owned and controlled by U.S. citizens, Alaska Natives, Hawai'i Natives, a Native Tribe, or a Community Development Organization
- Have a principal office in a HUBZone
- Have at least 35% of employees living in a HUBZone
Businesses must recertify for membership every year. If the business size changes due to a merger or employees moving out of the HUBZone area, owners must notify the SBA immediately. The HUBZone map changes every five years to reflect changes in the service area, which does not affect any active contracts.
Small Business Set-Aside Contracts
The federal government keeps the procurement playing field level by offering some federal contracts to smaller businesses. These are “set-aside" contracts. Set-asides can only be bid on by small businesses or joint ventures meeting specific criteria. Set-asides include:
- Business development (8a). Small disadvantaged businesses receive at least 5% of all contracting dollars annually. Please note that as of July 19th, 2023, the SBA has temporarily suspended new applications due to court action. Please check on the current status if you feel your business may qualify.
- Women-owned businesses. Women-owned small businesses receive another 5%.
- Service-disabled veteran-owned business. At least 3% of all federal contracting dollars go to veterans who own and operate small businesses.
- HUBZone programs. At least 3% of federal prime contractor dollars go toward this program.
- Joint ventures. Two or more businesses can combine and compete for contract awards as long as they meet SBA requirements.
All applicants for contracting programs must pass the SBA system for award management. In addition to size restrictions, businesses must meet certain socio-economic standards to qualify as “disadvantaged." Women-owned and service-disabled veteran-owned businesses must provide proof of such ownership.
Federal Acquisition Regulation (FAR)
Federal Acquisition Regulation (FAR) is the primary set of rules concerning federal procurement in the U.S. It is codified at Title 1, Chapter 48 of the Code of Federal Regulations (48 CFR 1). These regulations spell out all contract clauses which must be included in any contracts or solicitations between the U.S. government or any branches (such as NASA, the Department of Defense, or federal civilian agencies), and private companies.
48 CFR 1 is important for any business subcontracting with the government to be familiar with. FAR requires a clause to be present in a contract and if it is excluded, case law may insert it into the contract anyway. Subcontractors working with the government should consult a federal contract attorney before working under such a contract.
Have Contract Law Questions? Contact an Attorney Today
Small business owners use contracts every day, but there is a wide range of complexity involved. A misstep in a contract can be fatal for a small business, and could also lead to missing the procurement of a federal contract. Both verbal and written business contracts are enforceable, so the details matter. If you need help drafting an agreement, consult a small business attorney or contract lawyer. Talking to someone with experience in the field is always a good idea.
Get started today by contacting a small business attorney with contract law experience.
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