All businesses inherently deal with contracts, even if they are unwritten, as with many transactions involving goods or services. Since a contract is a legally binding agreement, and even an honest contractual mistake can cause serious problems, it is crucial that small business owners have at least a basic understanding of contract law.
An agreement among two or more parties by which rights or acts are exchanged for lawful consideration. Includes a promise or promises by one or both parties to perform or refrain from performing an act or acts.
Elements of a contract:
- Agreement - Must be mutual assent by the parties with an offer by one party and acceptance by another. The mutual assent may be in writing or oral.
- Consideration - Something of value one party gives to another in exchange for a promise or act. Consideration can be in the form of money, commodities or personal services
- Contractual capacity - The parties must be able to enter into a legally binding agreement. Minors, intoxicated individuals and mentally incompetent individuals are among those deemed to lack capacity to enter into a legally binding contract.
- Legality - An agreement to perform an illegal act or contrary to public policy is not an enforceable contract.
- Legal form - The contract must be in a form required by law or acceptable by law. Contracts are not always required to be in writing, but all contracts involving real estate must be in writing.
Types of contracts :
- Express - Parties state the terms of the agreement to which they will be found, usually in writing.
- Implied - Terms of agreement can be reasonably inferred by acts of the parties, even if not expressed in writing or orally.
- Bilateral - All parties exchange promises to perform.
- Unilateral - One party makes a promise in anticipation of some act. There is no reciprocal promise.
- Executed - All parties have completed their promises.
- Executory - Contract only partially performed or totally unperformed by the parties.
Legal validity :
- Valid and enforceable - All elements of legal and binding contract present.
- Void - Contract without legal force or effect.
- Voidable - Contact that can be annulled by either party after signing because it is legally defective or allows one party to rescind the contract.
- Unenforceable - A contract that cannot be verified for legal enforcement or fails to meet certain requirements.