Write a Business Contract: Key Considerations
A contract is simply a legally enforceable promise. There's a party who makes an offer, another party who accepts the offer; and as long as something of value is exchanged, a court will enforce the contract in most cases. When deciding how to write a business contract, you want to make sure that all of these elements are present, so that if there's any dispute a court will find that there is a valid contract that it can enforce.
Although it's not always required, it is always a good idea to get any contract in writing, especially when it comes to business. Memories are notoriously fickle and people misremember contract terms all the time. Also, if one party doesn't want to honor a contract, proving to a court the contract terms becomes an exercise in "he said, she said."
Write a Business Contract: Know the Basics
When writing a business contract, keep in mind these basic elements:
- Intent to make a contract by both parties
- A legal subject matter (you can't make a valid contract about something that's illegal)
- An offer made by one party
- Acceptance of the offer by the other party
- An exchange of something of value (called "consideration" in legalese)
- For certain subject matter, a contract is required to be in writing
There may be further legal requirements depending on the state you live in and the subject matter of the contract, but if you keep the above requirements in mind when writing a business contract, you'll be on the right track.
Offer and Acceptance
For all contracts there must be at least two parties. One party makes an offer and the other party accepts it. For example, your mechanic calls you and tells you he can replace your muffler for $300. If you say yes, you've accepted his offer. If you tell him you need a day to think about it, there has been no acceptance and therefore no valid contract has been made.
Length of Time an Offer Stays Open
When an offer is made, the person making the offer isn't expected to keep it open forever. On the other hand, offers don't expire just because they're not immediately accepted. They stay open for as long as the offer states; and in the absence of such a date, they stay open for a "reasonable" amount of time. A reasonable time takes into account factors such as the industry you're in, the subject of the contract, and past dealings between the parties. "Reasonable" leaves much room for interpretation, of course, so the smartest course of action is to include an expiration date on an offer.
For example, if you're a clothing retailer and a manufacturer offers to send you a shipment of clothes, that offer may stay open for several weeks or even months, according to industry standards. However, waiting a year to accept the offer and then expecting the manufacturer to honor the offer isn't a good idea because the offer will likely be found to have lapsed.
Revoking an Offer You've Made
If you've made an offer to someone but they haven't responded, you have the right to revoke your offer any time before the other person accepts the offer. Once they accept the offer, however, you're bound by the terms of the agreement, even if you've had a change of heart. If you've agreed to keep an offer open for a certain time, you cannot revoke the offer until that period has ended.
Rejections and Counteroffers
A rejection is simple -- one party makes an offer and the other party simply declines it. Another form of rejection is the counteroffer, which is the hallmark of haggling and bargaining for a better deal. When the other party, instead of accepting, replies with a new term (lower price, more product, etc.), this is a rejection of the original offer and new offer for the original offeror. Now, it's up to you whether to accept the counteroffer or not.
In the example from above, if you decline the mechanic's offer to replace your muffler for $300 and instead offer to pay him $250 to do the same service, you've rejected the original offer and created a new one. If the mechanic agrees, then you have offer and acceptance, and an exchange of something of value -- and therefore a valid contract.
Accepting an Offer
The act of acceptance is typically very straightforward. Someone makes an offer and you agree or don't agree to the terms. However, depending on the subject matter of the contract, there are different requirements for acceptance. For a contract for the sale of goods (anything tangible), a valid contract requires acceptance of every single term. For a contract for services (mechanics, painters, etc.) there may be reasonable, minor differences between what the parties believe to be the terms of the contract.
Following are different methods by which a party can accept an offer:
- Clearly stating or writing acceptance
- Fully performing based on the offer
- Promising to perform
- Performing improperly based on the offer (someone orders Vaseline from you, and you mistakenly send them grape juice—you've accepted the offer and formed a valid contract, though your performance is faulty)
You can choose to include language regarding what constitutes acceptance in your business contract.
An Exchange of Something of Value ("Mutual Consideration")
For any contract to be valid, there must be an exchange of something of value. Essentially, there must be an exchange of services or goods in any contract. It can be a promise to pay in the future (which is the usual arrangement), or an immediate payment, or a promise to act (or not to act). This is called "consideration" in legal terms. For example, if you offer to sell used books to someone for $40, the consideration is books on one side and money on the other side.
When you write a business contract, more than likely none of the terms will be for anything other than money, goods, or services and you won't need to worry about the absence of an exchange of things of value. Simply be aware that the requirement exists.
Have an Attorney Review the Contract Before You Commit
When entering into any contract, be sure to include the basic elements noted above. The absence of any of them may be used to attack the validity of a contract, and could result in the loss of time, money, and business. While businesspeople write and sign contracts quite regularly, sometimes it's important (and even critical) to get the assistance of an attorney. Find a qualified business and commercial law attorney near you.
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