07/ 23/ 2004
by Jeffrey Moses
A small-business owner entering into important contracts should consult with an attorney. The varied, and often subtle, legal ramifications of contracts can be confusing, even to experts. But a general understanding of contracts -- of what makes them legally enforceable -- can benefit every small-business owner. It's important to realize that a contract does not have to be written in obtuse "legalese." Contracts can be completely binding -- and beneficial to both parties involved -- and still be written in simple, understandable language.
A contract should be in writing. No matter how friendly or seemingly agreeable two parties are, misunderstandings can creep into any agreement unless all terms are written down and accepted by all involved.
For a contract to be legal and binding, all parties must be in complete agreement. In other words, they must sign the document to prove that the terms of the contract have been read, understood and agreed upon.
Usually, a contract involves an offer put forth by one party and an acceptance of the offer by the second party. A contract normally cannot be considered valid unless something of value has been offered and accepted (a thing of value is usually called a "consideration.") The consideration does not have to be cash or property. It can be services, promises for items or services of future value, or even the promise for future exchange of valuable items or services.
A contract must contain the date upon which the agreement was signed. This is to avoid the possibility that one of the parties will continue to "shop around," and then say that an agreement was not actually made.
Many contracts include in the text of the document the time limit for acceptance of the initial offer. If a party does not accept the terms of the contract by the end of the time limit, the contract becomes invalid, even if the offer is accepted afterward.
The validity of contracts becomes most questionable during the phase of negotiation, before a final agreement is reached. The continual exchange of offers and counter-offers can be tricky. Consult an experienced attorney or agent during this stage of contract formation because it is possible for one party to mistakenly enter an agreement or to unknowingly agree to disadvantageous terms.
For instance, say that a small-business owner is negotiating to have her place of business painted. The painter says he will do the job for $1,200, but the owner says she will agree if the price is dropped to $900. If this agreement is put into writing and dated, the contract is legal and presumably fully understood by both parties. Suppose, however, that the owner merely calls on the phone and leaves a voice message saying that she will agree to have the work done if the painter does it for $900. If the owner comes to work on Monday morning and finds that the job has been completed over the weekend, she will owe the painter the verbally agreed-upon $900, even if the contract was not put into writing. She will not be able to get out of the agreement by saying, "I really was just shopping and didn't want the work done."
An excellent way to approach the creation of a contract is for all parties to create a basic initial agreement and to write the details of the agreement in simple words (taking into consideration all points made previously in this article). This initial agreement can then be given to the attorneys of both parties so the final contract can be written for review by all involved. When everyone is in agreement, both parties can sign the contract.
