Forming a Valid Business Contract

Contract drafting doesn’t always require a business lawyer to draft the contract; the benefit of having a lawyer assist in contract drafting comes from their experience dealing with many different situations and their ability to foresee many potential outcomes. Many contracts include a huge amount of incomprehensible legalese, but this doesn’t always have to be the case. The majority of contracts will not be aided by the inclusion of legal gibberish. In fact, hard-to-understand legal language isn’t imperative or even helpful. Instead, contracts are best drafted using plain, easily understood English.

The majority of contracts need include only two things to be legally enforceable:

• All the parties involved must agree, once an offer has been extended by one party and subsequently accepted by the other party.
• There must be an exchange of something of value, like services, good, or a promise to exchange goods or services.

A contract doesn’t always have to be in writing. But in some cases, a contract has to be written in order to be legally enforceable (see our article regarding the statute of frauds for more info). Some states require by law that real estate contracts for more than a year be in writing. To be sure, you should find out whether your state’s law require that the sort of contract you are contemplating drafting or entering into must be written. Even if such is not the case, it is usually best to put a contract in writing, as oral agreements are often hard or impossible to enforce.

Let’s look more in-depth at the two essential elements of every contract: agreement (upon offer and acceptance), and an exchange of something of value (known as consideration).

An Agreement

Even though it might appear to state the obvious, an imperative part of a contract is that each party agree with one another on the big issues. In reality, there’s no shortage of situations where it is hard to differentiate between an agreement and preliminary discussions regarding the possibility coming to a future agreement. To better clarify these gray area cases, laws of contract have developed certain rules and standards for discerning the existence of a legal agreement.

Offer and Acceptance

The most fundamental law of contracts is that a legal contract arises when one party extends an offer, which the other party accepts. With respect to most kinds of contracts, offer and acceptance may be done in writing or orally. For example, imagine you have been shopping around for a print shop to print flyers for your company. One shop says it’ll do 5,000 of your proposed flyers for $300. This statement would be that shop’s offer.

Now, if you state to the shop owner that he can proceed with the printing job, you will be making an acceptance of his offer. Under the law, you telling the shop owner to proceed creates a contract, and means you will be liable for your end of the agreement (paying the $300). However, if you let the printer know that you’re unsure and would like to keep shopping around, then you will not have accepted the offer, and no contract will have been created.

If, however, you were to tell the printer that his offer sounded good with the exception that you would like the printer to use four colors rather than the two he offered, then no contract will have been created. This is so because you will not have accepted each of the central terms of the printer’s offer. Rather, you have actually changed one term, and by doing so have probably made a counter-offer.

When Does Acceptance Occur?

In everyday business, the apparently simple concepts of offer and acceptance may become pretty muddy. For example, in some cases an offer is not promptly and unequivocally accepted for whatever reason, such as the other party’s wanting to think it over for a while, or trying to get a better deal. Also, before the party actually makes acceptance, you may change your mind and decide to revoke or change your offer. Delayed acceptance of your offer or revocation of it, in addition to making a counteroffer occur often and are situations that could potentially lead to misunderstandings and disagreement on whether a contract has been entered into. To avoid these possible disputes, the following are some general rules to follow.

How Long an Offer Will Stay Open

If an offer does not come with an explicitly stated date on which it is to expire, the law says it will stay open for a “reasonable” time. Of course, what is “reasonable” in a particular context is subject to interpretation and will differ based on what kind of business it is and the facts of the situation.

The best way to make offers is to do so with an expiration date, in order to avoid leaving any room for interpretation by the other party. If you wish to accept another party’s offer, the best strategy is to do so ASAP, while there is no doubt about the offer being open. Do be mindful that before you accept, the other party can revoke his or her offer.

Revocation of an Offer

The person who makes an offer has the power to then revoke that offer at any time before the other party accepts it. So, if you’ve made an offer and the other party asks for some time to mull it over, you may revoke the offer at any point so long as the other party has not accepted it. However, once the offer has been accepted, revocation is not possible, and you will be bound by your offer and the other party’s acceptance. One exception to this rule will come into play if the parties make an agreement that the offer will stay open for a specified period of time. Then, it may not be revoked during the specified period.

An Offer With an Expiration Date

Offers with expiration dates are called “options,” and they usually do not come without a cost. Imagine someone offers to sell you a tractor for $10,000, and you’d like to think about it without fear that the seller will revoke his offer or sell the tractor to someone else. In this situation, you and the offeror might agree that the offer will remain open for specific time period- maybe two weeks. In many cases though, you may be asked to pay for an option like this, which makes sense since the seller can’t sell the item while he’s waiting for you to either accept or reject his offer. With or without payment, if there’s an option agreement, the offeror can’t withdraw the offer until the end of the specified period.

Counteroffers

Often, the response to an offer will be bargaining. After all, haggling is the most common kind of negotiating, and occurs in the business setting as it would anywhere else. When one party proposes a different offer in response to the other party’s offer, the first party has made a counteroffer. When this happens, it functions as a brand new offer, and the party who made the first offer is then responsible for either accepting or rejecting the counteroffer (or even making another counteroffer).

Although a contract only arises when the accepting party consents to all the substantive terms of the offeror’s offer, this does not necessarily mean you should rely on small differences to later void a contract. For instance, say you offer to buy 100 hamburgers on sesame buns. There will not be a contract if the other party says they’ll provide 100 chicken sandwiches on sourdough. However, if the party does agree that they’ll provide hamburgers on sesame buns, then a contract will be created, and you will not be able to back out later and not pay for the hamburgers.

The Exchange of Things of Value

Along with offer and acceptance leading to an agreement between the parties on the terms of the contract, a valid contract must include an exchange of value, or in anticipation of receiving something of value. This is called “consideration.”

Consideration Defined

The term “thing of value” can be misleading. Usually, the thing of value will be good or services, but it can also simply be a promise to do something in the future, like complete a particular job or to pay a certain amount of money. For example, let’s go back to the printer and your business flyers. When you both agree on the terms of the transaction, you are exchanging things of value. You are promising to pay the printer, and the printer is in turn promising to print flyers for you.

Gift or Contract?

The primary purpose of requiring that there be an exchange of things of value is to distinguish a contract from a simple promise which benefits only one person, which is not legally enforceable. For example, if a relative offers to give you a gift and does not ask for anything in exchange, there would be no contract because you did not make a promise in return. Thus, if your relative didn’t deliver the gift as promised, you’d have no legal recourse. However, if you responded to the offer of the gift by promising to help your relative paint her house on Saturday in exchange for the gift, you’ve created an enforceable contract.

Promise or Action?

Even though most business agreements satisfy the exchange of value requirement by an exchange of promises, simply performing the promised action can also give rise to a contract. If, for example, you leave the print shop owner a message indicating that you are willing to pay an extra one hundred dollars if he will staple and cut the flyers, then a contract for this deal will be created if the printer simply does the stapling and cutting. Then, you’ll owe the extra hundred even if you changed your mind after leaving the message but before picking up your flyers.