Contracts are an integral part of any business relationship. For those of us who are entrepreneurs and business owners, they are what define the deal. Unfortunately, even the most conscientious of business owners can sometimes face problems regarding contracts. Before you find yourself in this position, there are several contract law basics to consider when solidifying your business arrangement.
Today, we’ll explore the basics of contract law, common breaches of contract, contract clauses, and other things you need to know about this crucial component of business law.
Contract Law Basics: An Introduction
To be legally binding, a contract must have:
- An offer to the other party
- That party’s unequivocal acceptance of the offer
- An exchange of value (consideration) for a contract
An agreement cannot be considered valid without one of these three elements. Both parties must also have the legal capacity to enter into a contract. They must, therefore, be of legal age and have the mental capacity to understand the terms of the agreement.
An offer is an outward manifestation of an intent to contract. In other words, it is a proposal made by one party (the offeror) to another (the offeree), indicating their willingness to enter into a contract with the offeree. The offer must be definite and communicate the terms of the agreement.
Acceptance is the act of the offeree unconditionally accepting the terms of the offer made by the offeror. An acceptance must be given without altering or changing the terms of the offer for it to be considered valid. Any such alterations or revisions will be regarded as a counteroffer, which will subsequently be made to the original offeror for approval.
Consideration is the bargained-for exchange of value by each party in the contract. For an agreement to be enforceable, each party must receive something of value from the other party or suffer some other detriment in exchange for their performance under the contract.
The agreement must also be enforceable. This implies it cannot be against the law, public policy, or otherwise unlawful.
This all boils down to a mutual agreement or inducement to contract. Simply put, two people want to make a deal together. That is their intent. That is their action. They have the proverbial “meeting of the minds.” Before signing a contract, business owners must carefully analyze its terms. In doing so, business owners should understand and become familiar with the following legal terms:
Breach of Contract
Breaches of contract are often at the center of contract disputes. While the term “breach of contract” may seem self-explanatory, the nature of the action makes it an important legal issue that a lawyer should determine. This happens when one party cannot meet the terms of a contract or agreement to an extent it causes the other party damage. Contracts must be legal and valid to move forward with a legal case regarding a breach of contract.
Visit this blog post next to read about four types of breaches of contract.
Accord and Satisfaction
“Accord and satisfaction” are legal business terms that refer to contracts and claims. Releases from debts and related negotiations often have it applied to them—for instance, a revision of payback terms for a loan. The purpose of this type of clause is for the two parties to agree to move forward with terms different from the original contract where the original agreement would no longer be valid.
However, this would only suspend the original contract, not cancel it, and the old contract terms will be reinstated if one party does not meet the new contract terms.
In this instance, most prior claims or agreements become suspended or irrelevant. “Satisfaction” refers to both parties agreeing that the new terms are appropriate. For example, instead of one party pursuing legal action for a breached agreement, both parties can agree to a compromise called accord and satisfaction.
An implied contract is precisely what it sounds like: a business agreement that both parties assume but is not documented in such a way that it is legally binding.
Implied contracts can be legally binding even without any written agreement. An implied contract could be considered a one-time, short-term, or long-term agreement and apply to almost any aspect of the business.
For instance, one party who completes a service receives any payment for services rendered. This type of contract may be challenging to prove in court. However, a party can prove a violation of the implied contract with sufficient documentation or evidence of action.
Force Majeure Clause
“Force majeure” is an important legal business term that refers to a situation where an event out of the control of individual parties affects the terms of a contract regarding a given party’s ability to meet terms.
A pandemic, a war, fire, or flood are examples of this, as would any other situation that might be considered an “act of God.” Labor disputes, strikes, terrorism, embargos, and such actions are also considered force majeure if they cause damage and impede a party’s ability to fulfill the obligations of a contract.
Force Majeure clauses protect all parties in an agreement from damage caused by these unexpected events. Do not use force majeure clauses to justify poor or illegal behavior.
To learn more about contract breaches, head here next: Common Examples of a Breach of Contract.
Other Contract Clauses
Along with the force majeure clause, many other clauses can be included in a contract to protect both parties.
Some other common clauses:
An indemnification clause protects one party from liability if the other party is sued or held responsible for a loss.
A governing law clause specifies which state’s laws will govern the interpretation and enforcement of the contract.
A termination clause outlines the conditions under which either party can terminate the contract.
A confidentiality clause requires one party to keep certain information confidential, such as trade secrets or financial data.
A dispute resolution clause outlines the process for resolving disputes that may arise during the contract.
For instance, a contract with a supplier might include terms and conditions outlining the responsibilities of both parties, delivery terms outlining when and how the supplier will deliver the goods or services, payment terms specifying how and when payment will be made, and warranty terms specifying the terms of any warranties provided by the supplier.
Similarly, a contract with a distributor might include:
- Terms and conditions outlining the responsibilities of both parties.
- Delivery terms outlining when and how the distributor will receive and deliver the goods.
- Payment terms outlining how and when payment will be made.
- Warranty terms outlining any warranties provided by the distributor.
A contract with a logistics provider may have similar terms and conditions defining the specific logistical services for which the provider would be responsible, such as transportation, warehousing, and distribution.
A contract with a customer may also include terms and conditions outlining each party’s responsibilities, delivery terms outlining how and when the customer will receive the goods or services, payment terms outlining how and when payment will be made, and warranty terms outlining any warranties the business may provide.
Final Words: Contract Law Basics
Clear and specific terms must be included in contracts with suppliers, distributors, logistics providers, and clients to protect the company’s interests and ensure everyone understands their obligations. A business lawyer should always review a contract before signing to ensure all relevant clauses are present and the agreement is valid under the law.
If you have specific questions about business contracts and their legality, contact the Denver business lawyers at Contiguglia Law today. We are dedicated to helping businesses thrive, and that includes yours. Call today.
And remember: My book “Don’t Skip the Legal: The Startup Guide for Entrepreneurs and Business Owners” covers contract law basics and other legal topics in great detail. It’s available on Amazon—buy your copy today!
Did you learn a lot from these contract law basics?
Here are three more to read next:
- Choosing a Business Name: Legal Considerations
- Acquiring and Protecting Intellectual Property Rights
- Founders’ Agreement: Essential For the Success of Your Business