Contracts, which define most business relationships, are written or verbal agreements that carry the weight of law. While certain contractual agreements are best reviewed by a qualified business attorney, it is important for small business owners and top-level managers to acquire at least a basic understanding of contract law. This section provides an overview of contract law and the different types of contracts and forms commonly used by businesses, including the basics of breach of contract lawsuits, which contracts must be in writing, the legality of international contracts, contracts and forms by industry, and more.
Contract Law Overview
Nearly all business dealings involve contracts, sometimes even when the terms are not written. Whenever a company agrees to an exchange of anything with value, it is generally bound by contract law. Common business contracts include employment agreement, purchase orders, bills of sale, and partnerships with other businesses. In order to be considered valid, and thus legally enforceable, a contract must include the following elements:
- Parties to a contract must be competent; while minors may enter into most contracts, they also may void them (in most cases) before reaching the age of minority
- There must be mutual agreement among the parties to a contract, without duress
Some verbal contracts are enforceable, but most must be in writing and signed by all parties. In any event, a written contract will better protect the interests of the parties than a verbal agreement (even if it is technically enforceable). While an attorney is not required for all contracts, the potential headaches caused by a poorly drafted contract can end up costing much more than a lawyer's services.
Enforcement of Business Contracts
If there is a disagreement over the terms of a contract, or if one of the parties is simply delinquent in his contractual obligations, the parties may seek a remedy through the court system. When a party fails to fulfill his end of the deal, he is said to have "breached" the contract. Disputes involving an amount of money below a statutory limit (roughly in the $5,000 range, but varying by state) typically are handled in small claims court.
Parties to a contractual dispute often are encouraged to resolve their issues through mediation or binding arbitration prior to filing lawsuits.
Writing a Business Contract
If you choose to draft your own contracts, you'll want to pay attention to the details; seemingly minor things can create big problems. They don't have to be written in "legalese" as long as the terms are used correctly from a legal perspective. In fact, it's always best to use relatively simple and easy-to-understand language. But contracts should be as detailed as possible, with the rights and obligations of each party spelled out clearly and unambiguously.
Important contractual terms include (but are not limited to):
- Duties and rights of each party
- Relevant dates
- Relevant prices, dollar amounts, etc.
- Payment terms
- Disclaimers
- Limits on liability
- Governing law (where applicable)
Click on a link below to learn more about small business contracts and contract law in general.
