Sharmil McKee of the Small Business Blog out of Philadephia recently made (on April 12) an interesting and concise post on the bare essentials of making a contract entitled “What should be included in a contract?”  (Because this blog doesn’t allow you to bookmark precise calendar posts, you may have to scroll down to get to this post.)  She suggests dividing a piece of paper into four squares:

> What are you promising to do?                      

> What happens if you break your promise?

> What is the other person promising to do?

> What happens if he/she breaks that promise? 

Sharmil also gives a useful example of how this would work.  While there are indeed many parts of making a contract, this does get to the essence of what is being agreed and may be a helpful shorthand way of thinking about contracting.

Contracts are, however complex, in the end nothing more than promises that law will enforce.  They include the things everyone thinks about like an employment agreement, or a contract for the sale of goods or services,  or a confidentiality agreement.  However, contracts also include loan documents, the lease for your store or office, and agreements between owners of the same company such as Operating Agreements for limited liability companies or close corporation agreements for corporations with a limited number of owners.

When courts have to decide whether a particular contract should be enforced one way or another, there are several important considerations.  At the most basic level, both parties to the contract must be adults, have full mental capacity (e.g. not be drunk or have a mental illness), and, if signing for a business entity such as a coporation or LLC, be authorized to execute the contract on behalf of that company.  There is also the “reasonable man” with whom all law school students quickly become acquainted - he is a hypothetical objective person and courts are always asking what he would do or think in the facts and circumstances before them to reach appropriate decisions in contract cases.

Offer and Acceptance.  Key to any valid contract is an “offer and acceptance” or what did each party promise to do.  Often this consists of one party agreeing to pay a certain sum of money either immediately or over some period of time in exchange for the other party delivering certain specific equipment, goods, or services.  At a minimum, for there to be a contract, a court must be able to determine:

  • The identity of the parties to the contract (and in complex transactions, there may be multiple parties with different obligations)
  • The subject matter of the offer, i.e. what is being sold
  • Quantity of what is being sold, both how many and what measurement unit is being used (e.g. hours, currency, feet, meters, pounds, etc) - this is often where things can become ambiguous
  • “Meeting of the Minds” which is legal speak for saying that everyone was on the same page about what each was promising to do

I’ve previously posted about the “battle of the forms” which arises when the contract is made through a series of correspondence or the exchange of pre-printed forms with lots of extra “Terms and Conditions” which don’t match.  Suffice it to say that when this happens, things can get a lot more complicated than anyone expected.  There can also be various counteroffers exchanged before final agreement is reached which can also make it more difficult to determine what was in fact agreed or whether there was a “meeting of minds” at all.   

Consideration.  Another critical part to a valid contract is the exchange of “consideration” among the parties.  This simply means that each party must get something of value from the contract, which may or may not be monetary.  Thus either a bargained-for benefit or a bargained-for detriment will work.  This distinguishes contracts from gifts and also from situations in which someone is already obligated to do something.  This is also often an area of dispute, particularly if there have been various modifications of the contractual relationship along the way.

More Information on Contracts.  For more information about contract basics, you can visit Findlaw’s “Contract Law-The Basics” page.   In addition to general information about contracts, it also has several tips for making (and keeping) contracts, including:

I’ve previously posted about not relying too much on form contracts because they are generally slanted towards one side of the other, which may or may not coincide with yours in your particular deal.  In addition, they may be either too simple or too complex for your transaction.  And of course, there really is no such thing as “fine print” which you can just ignore - make sure you understand what every paragraph of the contract is saying.