Business Contract Rules

Steve Strauss, founder of www.theselfemployed.com, explains what makes a business contract valid and gives tips for entering into one correctly.

Q: I have been doing business with a guy for a few years. Last month, I found someone who offers what he has been selling me for a lot less and so I severed our relationship. He now informs me that we have a “contract” and that I am obligated to give him 60 days' notice. That cannot be right, can it?

Seth

 

A: No, it sounds like that cannot be right, unless of course he has something in writing that says that, or you have some sort of implied deal where 60 days' notice was the agreement between the two of you. But it does not sound like that is the case.

When you are in business for yourself, entering into contracts is part of the game. Some of these contracts are really nothing more than simple oral agreements like the one above, and some are, of course, far more complicated.

Back when I practiced law on a daily basis, I couldn’t believe how often clients got into trouble signing contracts that they really did not understand. I remember one guy, a restaurant owner, who wanted to get out of his lease. Given that he paid an astronomical rent, was obliged to make all repairs, and paid all taxes and insurance, I certainly understood why. But what I never understood was why he signed the lease in the first place. When I asked him, his answer was, “It looked good to me and I didn't want to pay a lawyer to review it. Dumb, huh?”

You could say that, yes.

So let’s review a few things about business contracts so that you do not ever fall into the same trap:

1. Contracts require formalities.

Contracts essentially require three things:

 

  1. An offer
  2. Acceptance of that offer
  3. Consideration

An offer is just that: “I will sell you this widget for $5.” It is specific and clear. When made an offer, you can accept, reject, or counter-offer. You will only have a contract if you accept the actual offer made. If you say, “Let me think about it for a week,” you cannot come back a month later and say you will take the $5 offer. If you counter-offer – “I’ll pay $3” – then the original offeror has the right to accept or reject. Finally, you must have consideration – a negotiated ‘this for that’ deal. $5 for the widget.

The other important thing to understand is that a contract is also called an Agreement for a reason. Both sides must agree to all material provisions. If you think you are buying a widget for $5 and he thinks you agreed to $6, you have no deal. You both must agree to the deal.

 

2. Not all contracts need to be in writing, but they should be

. Legally, only certain contracts are required to be in writing to be valid: contracts for the sale of real estate, contracts for the sale of goods over $5,000, contracts that cannot be completed in less than a year, and some others.

 

But even though a contract does not have to be in writing, that does not mean that it nevertheless should not be. The rule should be this:

Get it in writing. Get all contracts in writing.

The reasons are self-evident: People remember things differently. People remember things incorrectly. People forget things. People lie. Having your contract in writing avoids all of these possibilities. Ideally, your contract will actually be a piece of paper that spells out all important issues. But even if you don't have that, it is smart to have some sort of physical documentation as to what was agreed to, even if it is a matter of emails going back and forth.

 

3. Don’t forget to consult a lawyer when necessary

: Look, no one likes do-it-yourself law more than me. Many things can be done on your own without the aid of a lawyer. But when the big bucks are at stake, when the contract is full of legalese, when it’s vital, then it is in fact time to get your lawyer involved.

 

After all, if you do, you won't be writing me, trying to figure out how to get yourself out of that pickle.

 

Today’s Tip: The other problem with a lack of writing is that a court can find that you nevertheless had an “implied contract.” The judge will look at the course of action between the parties and try to determine your intent, by your actions. Again, writing obviates the need for that unenviable fate.

 

Steven D. Strauss is a lawyer and writer and is one of the country's leading experts on small business as well as an international business speaker. The best-selling author of 17 books, his latest is the all-new 3rd ed. of The Small Business Bible. You can listen to his weekly podcast, Small Business Success Powered by Greatland, visit his new website for the self-employed, TheSelfEmployed, follow him on Twitter, and "like" TheSelfEmployed on Facebook. You can e-mail Steve at: sstrauss@mrallbiz.com. © Steven D. Strauss