It is virtually impossible to run a business without entering into a business contract. When two businesses form a working partnership with one another, it is important to have a legally binding agreement in place. A business contract will define the rights and obligations of all parties involved and prevent any misunderstandings that could result in a contract dispute. A legally binding business contract must contain the following key components.
The Offer
The offer is the first part of any business contract. To form a contract relationship, you must clearly identify what one party is going to do for the other party. In most cases, the offer involves one party making an offer to perform a service, sell a product, trade or provide another type of service. It is important to make the offer as specific as possible to avoid any chance of confusion in the future.
Acceptance of the Offer
Second, the party receiving the offer must accept the terms of the offer that was made. Generally, the promisee will mirror the terms made by the promisor. This indicates that both parties have reached a mutual understanding of the contract terms.
A party is not required to accept the terms of the original offer that was made. You can always make a counter-offer and include additional terms in the
business contract. A counter-offer is essentially a rejection of the original offer, so the contract formation process would start over from square one.
Consideration
Once both parties finalize the terms of the contract, you must have a “bargained-for exchange” where both parties trade something of value with one another. This is known as the consideration. You cannot have a valid contract with the element of consideration taking place.
It is important to note that consideration can take many forms and does not always have to include an exchange of money. Consideration could include providing a service, agreeing to take a specific action or inaction or exchanging real or personal property.
Obligation of Mutuality
An obligation of mutuality essentially means that both parties had a “meeting of the minds” and assent to the terms of the contract. If a contract dispute occurs between the two parties, the complaining party must prove that the business contract contains all the key elements. If the defending party decides to challenge the validity of the contract, then that party must prove that one or more elements do not exist.
Legal Capacity
Another key component of a business contract is legal capacity. Legal capacity means that both parties have the right to enter into a business contract and can meet their obligations under the contract. They must have the ability to fully understand what their contractual obligations are at the time of the agreement. People under the age of 18 and people who are not of sound mind typically do not have the legal capacity to enter into a business contract. Also, if duress, undue influence or fraud are present during the formation of the contract, then the aggrieved party could argue that the contract is invalid because of a lack of legal capacity.
Legality
Finally, for a contract to be considered legal and enforceable, it must have a legal purpose. The subject matter of the contract cannot include anything that is against the law. If the subject matter of the contract is not legal, then the contract may not have any legal standing. For example, if two businesses enter into a contract for the sale or distribution of a controlled substance, such as heroin or LSD, then the contract would be considered unenforceable because the terms of the contract involve illegal activity.
Questions About Your Business Contract?
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small business lawyer Karl Pearson at (480) 820-1800 to schedule an initial consultation. He will provide you with a frank assessment of the terms of your contract and list your options moving forward.
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