As a small-business owner or employee, you’ve probably had your fair share of experience with contracts. Contracts, whether they involve the sale of products or the purchase of office furniture, enable commerce to work.
This article will examine the basics of business contracts. Why is this important? Because understanding what constitutes a legally enforceable contract allows you, the small-business owner, to make sure everything is in place when you and your employees engage in business deals.
The elements of a contract are quite simple: offer, acceptance, consideration, and mutual assent. Each element has its own specific requirements and intricacies. Understanding these elements allows a small-business owner to tailor business deals to her particular business needs, as well as protect her from future problems and issues.
Most of the time, it is clear as to whether an offer has been made. Offers can be made either orally or in writing, depending of the type of transaction. The best thing for a business owner or employee to do is to use the word “offer” when quoting a price or proposing a deal. That way, the ambiguity is minimized when analyzing whether a contract existed. Suppose you call a printing company to print business cards for your employees. The printing company representative says he will print 1,000 business cards for $100. That is an offer. Now, until the offer is accepted, it will remain on the table unless the printing company revokes it. Revocation of an offer is allowed at any point until acceptance.
There are situations in which offers may not be so clear. In such situations, the best thing to do is to think about what is reasonably present. But more often than not, an offer is clear in one form or another.
As noted above, a required element of a valid contract is acceptance of an offer. Because offers are usually straightforward, acceptance of such offers is usually straightforward. Let’s continue with the business-card example. The printing company representative offers to print 1,000 business cards for $100. At that point, an offer has been made. Now, you can do a couple of things.
First, you could simply accept the offer by agreeing to the deal. When you accept the offer, you are now liable for payment because a contract has been created.
Second, you could come back with a counter-offer, which would invalidate the original offer. Now, you have made the offer, and it is up to the printing company representative to accept or reject your offer.
Third, you could think about it. If you make this choice, the offer is still on the table and will be for a reasonable time.
Acceptance is not a difficult concept to understand. The important thing, however, is to realize that acceptance is necessary to complete a contract.
Consideration is the most difficult element to conceptualize. Simply put, consideration is “a bargained-for exchange.” Consideration is present when a performance or return promise is bargained for, if it is sought by the promisor in exchange for his promise, and is given by the promisee in exchange for that promise. Back to the business-card example. Once the offer has been accepted, there is an exchange of things of value, i.e., consideration, in that the printing company has promised to print 1,000 business cards, and you have promised to pay $100 for them. In other words, the exchange of physical product and money constitutes “a bargained-for exchange.”
One thing to bear in mind when analyzing whether the consideration element is met is the idea of gifts, or one-sided agreements. Both sides of the deal need to offer something of value. As in the business-card example, both the printing company representative and the business owner gave something of value, namely the physical business cards and the money. However, if your friend owns the printing company and offered to print the business cards as a favor, then no contract was created because you didn’t give anything of value in return, i.e., no consideration.
As probably expected, all parties need to agree on all major issues in order for the contact to be enforceable. Mutual assent represents such an idea. If the parties aren’t on the same page, then an enforceable contract may not be present. Of course, different circumstances call for different findings.
In the end, the most important thing to understand with regard to business contracts is that contracts are formed all the time, regardless of whether you always realize it. A small-business owner can minimize any trouble with contracts by being mindful of the four essential elements of a contract. The last thing a business owner wants is for a huge deal to be ruined because the so-called contract was not enforceable.
**The above analysis is a simple overview. It is strongly recommended that a small-business owner consult an attorney before making such business decisions that would affect the business form and/or everyday business operations, because different rules apply to different businesses and circumstances.