When you enter into business contracts ( i.e. employment, supplier/vendor, partnership, franchisee/franchisor, bank loans, mortgage loans, etc.) do you understand contracts basics? Can you interpret boilerplate provisions? Are you sure your contract is enforceable? An attorney should review all business agreements to ensure that can you avoid making common contract mistakes. These mistakes could cost you your business in the future if the proper steps are not taken to protect you and your company.
Contracts are legal binding agreements and they are a part of operating a business. All contracts have legal jargon that attorneys are skilled at decifering. Attorneys will often add and subtract language in the contract to ensure that it is clear and concise to protect you. Contracts are not binding for one of the parties, but for both parties. If one party does not fulfill its obligation under the contract, the other party has legal remedies for damages.
To be enforceable by a court, every contract (whether written or oral) must meet multiple requirements. Let’s take a look at each of them.
- Consideration. Each party has to promise or provide something of value to the other. Without an exchange, there can not be a contract.
- Offer and acceptance. There must be a clear or definite offer to contract (“Do you want to buy this?”) and an unqualified acceptance (“Yes!”).
- Legal purpose. The purpose of the agreement must not violate the law or public policy. For example, you won’t be able to enforce a loan agreement that charges interest in excess of what is allowed by usury laws. Any agreement made for an illegal purpose is not legally binding. You must be a capable party and understand what you are entering into by signing the contract.
- Mutual assent. This is also sometimes referred to as a “meeting of the minds.” The contracting parties must intend to be bound by their agreement and must agree on the essential terms.In addition to these general rules, federal and state laws may impose more requirements on particular types of contracts. For example, certain consumer contracts must meet additional requirements, and some contracts must be in writing.
The Contract as a Document
The term “contract” often refers to a written agreement, including some or all of the following elements:
- Introductory material
- Definitions of key terms
- A statement of the purpose
- Obligations of each party
- Assurances as to aspects of agreement (sometimes phrased as warranties, representations, or covenants)
- Boilerplate provisions
- Asignature block
- Exhibits or attachments.
The Contract as a Process
When you contract with somebody, you participate in a process that typically involves three phases.
- Phase 1: Contemplating the deal. The parties each assess the prospective arrangement and its risks (“Can I trust her?”) and attempt to predict the future (“Will I regret paying this price for the computer next month? Will it be outdated?”).
- Phase 2: Reaching an agreement. During this phase the parties negotiate and agree on the terms, usually formalized in a written contract or some other documented evidence of the arrangement (such as a receipt or purchase order, for example).
- Phase 3: Performance and enforcement. Once the contract is in place, the parties are legally required to perform their mutual obligations. If one party fails to perform, the other can sue to enforce the deal.
Contract Basics at NOLO.com was the source of this information.