The degree to which commercial contracts permeate every corner of the business world is astounding and often underappreciated. Think about it: No services are rendered, no goods delivered, no companies bought or sold without some sort of agreement in place.
In the normal course of business, all business entities must interact with other parties or institutions. Each of these is a legal relationship that your newly formed business entity will create as it grows, and each legal relationship should have a written contract in place to formalize it. Depending on the industry and entity type, the number, scope, and even names of these contracts can change. This can make it very difficult to know which contracts your business needs and which it doesn’t.
In order for you to protect yourself, your employees, your company and its assets, you must create legally binding, written contracts. Without properly drafted and executed contracts, you, your business, and your business’ assets are vulnerable.
Therefore, as a business owner, it’s important that you understand some basic points about contract law—i.e. what a contract is—so that you can ensure your contractual relationships are an asset to your company and not a liability.
Basics of Contract Law
As every first-year law student learns, formation of a valid contract requires three basic elements:
- an offer,
- acceptance of that offer, and
- consideration (also known as mutual promises).
The Offer
The offer is usually a proposal to do something for or sell something to another person. The price, quantity, and description of the offer should be clear and specific enough so both parties understand the nature of the agreement. This is vital for a court to be able to enforce the terms.
The Acceptance
An acceptance of an offer can only come from the person to whom the offer was made. It’s important to be clear in the offer exactly how the acceptance will occur, whether by promise or performance.
The Consideration
Finally, both parties to give up something of value. This exchange of benefit is called consideration. The value can be in the form of something tangible like money or property, intangible like legal rights, or a service like a haircut.
Without these three things (offer-acceptance-consideration), you don’t have a contract. In fact, a number of prominent company’s online Terms of Service and User Agreements have come under fire in recent years because they weren’t “accepted” by the users.
Contracts 2.0
Meeting these necessary legal requirements is a must, but your contracts can’t only have the most basic offer-acceptance-consideration structure. If they do, they will fit your business like an off-the-rack suit: The jacket’s sleeve length might be perfect, but the shoulders are too constricting, and it only has a single vent when you really prefer two. To be maximally effective your contracts should fit your business like a tailored suit.
Here are some hallmarks of a properly written and valuable contract. A contract will protect your business only when it:
- Is customized for your specific circumstances and deal,
- Addresses all of the parties’ expectations,
- Is accurate, objective, and complete,
- Discusses the process for dealing with all known or anticipated situations, and
- Contains protections that can be used to enforce or defend your business.
Common Contract Mistakes
Despite the obvious harms that improperly drafted contracts can wreak on a business in the form of lawsuits, liabilities, or partner disputes, contract issues are still one of the most common small business nightmares. Why?
Contracts often get a bad rap because too many business owners make these three easily-avoidable mistakes:
How Alexander Business Law Can Help
Often, when a business needs a new contract, many owner’s first impulse is to go online and search for a “____ contract template.” As I said above, a fill-in-the-blank form downloaded from the internet or bought at an office supply store will inevitably leave you and your business unprotected.
You and your business are unique, and your contracts must be tailor-made to your business and your goals, not the other way around. In order to do this, you need a trusted business attorney with real-world business experience to draft them.
Here at Alexander Business Law we focus exclusively on business-related legal matters. We have been helping business owners create profitable commercial relationships for decades. We can help you define the necessary terms of a commercial relationship and ensure that those terms are included in a well-written contract that all parties understand.
We are also passionate about crafting business contracts of all sorts, from partnership agreements and buy-sell agreements, to employment agreements and user agreements, to franchise agreements and franchise disclosure documents.
Good Contracts Are Just Good Business
The business world is permeated by contracts. Poorly written contracts can cost a business hundreds of thousands of dollars. Understanding some of the basics about business contracts will help you grow and protect your business.
Request a free copy of our handbook!
More Great Articles by Your Orlando Business Lawyers
What You Need to Know about Limited Liability Companies (LLCs)
Smart entrepreneurs know that when they start a business, they should form
10 Discussion Topics for New Business Partnerships
Growing a successful business is difficult enough without having to worry whether
The Truth about 50-50 Partnership Structures
Of the various ways to divide partner equity in multi-owner businesses, the
The Pros and Cons of the 49-49-2 (Super-Minority) Partnership Structure
Partners in new multi-owner businesses have the option to choose between numerous