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Contract Law – How to Create a Legally Binding Contract

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Contract Law – How to Create a Legally Binding Contract

By Caron_Beesley, Contributor
Published: January 2, 2013 Updated: August 22, 2014

Whether you are entering into a relationship with a customer, a vendor or an independent contractor, contracts are a fact of business. You need them because they serve as legally valid agreements protecting your interests.

But aren’t contracts laden with legalese? Don’t they have to be blessed by an attorney to ensure their validity? Not always.

In fact, I’ve seen contracts come across my table that are less than one page in length, in plain English, and still legally binding. How?

Generally, to be legally valid, most contracts must contain two elements:

  • All parties must agree about an offer made by one party and accepted by the other.
  • Something of value must be exchanged for something else of value. This can include goods, cash, services, or a pledge to exchange these items.

In addition, certain contracts are required by state law to be in writing (real estate transactions, for example), while others are not. Check with your state or with an attorney if you are unclear, but it’s always good business practice to put every binding agreement in writing.

Here’s how your small business can comply with these requirements and ensure your contracts are legally valid:  

1) The Ins and Outs of Reaching an Agreement

The point when two parties come to an agreement can be a little fuzzy. For example, many businesses will put a standard contract template before an independent contractor and expect it to be signed without any discussion. At that point – and the law is clear on this – a legal contract exists only when one party makes an offer and the other accepts all terms of that offer. So in this example, the contractor is still free to rebut any of the points in the contract and make a counter offer, until an agreement has been reached.

How Long Should an Offer Stay Open?

Offers are rarely accepted immediately and further discussions or amendments may be required. Unless the offer has a deadline for acceptance, it can remain open. It’s good practice to include an expiration date to ensure you have room to maneuver should you wish to change the terms or revoke the offer before a certain date.

Offers that are subject to an expiration date – known as option agreements – are typically price-driven or give the buyer the opportunity to mull the decision without fear of losing out to a competing buyer. It’s important to understand that a seller can place a fee on option agreements. For example, if you decide to give a buyer 30 days to think over a purchase, you can charge him for that. This typically occurs when the product or service is of high value or when the seller pledges not to sell that product to another customer during that 30-day option period. Likewise, a seller can’t revoke the offer until that 30-day period ends.

What about Counteroffers?

Bargaining or negotiating can often lead to a counteroffer. Once made, the legal responsibility to accept, decline, or make another counteroffer then shifts to the original offeror.

2) The Importance of Exchanging Something of Value

In addition to ensuring both parties are in agreement on the terms of an offer, the second element that ensures a contract is legally valid is that both parties exchange something of value.  This is important since it differentiates a contract from being a one-sided statement or even a gift. “Something of value” might be a promise to perform certain services by one party while the other party agrees to pay a fee for the work performed.

Most business transactions are based on this exchange of promises. However, the act of doing the work can also satisfy the exchange of value rule. For example, if you contract with a vendor to provide you X and Y, but you decide you need to add Z to the final deliverable, the vendor can create a binding contract by actually doing Z – something which you can’t quibble or get out of if you change your mind.

More Information and Resources

For more information about the legality of any agreements, consult a lawyer or attorney.  

For insights into what a contract should look like, check out available contract templates from SCORE. Use the search field to find “contract agreements” or other keywords for the type of contract you are looking to create. Also check out these blogs for additional tips:

 

 

 

 

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

Thanks for sharing this, its a great piece of information, im using it in my college law studies. Reading contracts thoughtfully seems like the biggest and best piece of advice everyone is giving me.
This is excellent information for small businesses owners as well as for those that are thinking about becoming a business owners. I wish more universities covered important issues such as this. Thanks
Hi Caron, As an international Moving company we use contracts for our clients, Contract Drivers, as well as third party service providers. Wording is very important for any contract so nobody is confused when it comes to the terms of the contract. These are some great tips Thanks for the post!
When creating search engine optimization service contracts I use a local attorney. Luckily one of my SEO clients is an attorney, so I get discounted rates. I only charge $50 an hour, so attorneys normally at $300 an hour are steep.
Totally agree with the comment above . A lot of people don't read the T's & C's (or small print) . This can cause long term implications or make things very difficult
I think before entering into a contract one must know little about laws. It helps them understand contracts better without any help from attorney. I agree that contracts are not that much difficult to understand but they are made look one. Thanks for the tips you have mentioned in the post. Tips sound really useful.
Thank you Caron for this article. Awesome. Excellent tips. Cheers, Philip
I've heard nightmare stories of business owners who neglected to take the time to fully understand everything that was included in a business contract. So many sign without knowing all the conditions. I recommend having someone who's available on short notice to do a quick read through on important contracts.
Hello Caron, As an international Moving company we use contracts for our clients, Contract Drivers, as well as third party service providers. Wording is very important for any contract so nobody is confused when it comes to the terms of the contract. These are some great tips Caron, again thanks for the post!
As someone who deals with contracts on a daily basis. I can't tell you how important it is to read contracts thoroughlly. Most people will sign without knowing the terms and conditions.

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