Contract Law – How to Create a Legally Binding Contract
by Caron_Beesley, Community Moderator
- Created: January 2, 2013, 7:56 am
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:
- Setting Up a Client Contract – Must Know Information for Freelancers
- Starting a Freelance Business – How to Take Care of Legal, Tax and Contractual Paperwork
- 5 Legal Myths about StartUps
- How and When to Use Non-Compete Agreements Appropriately
About the Author
Top Rated Articles
About This Blog
Legal terms and rules explained
- August 2014 (1)
- July 2014 (13)
- June 2014 (17)
- May 2014 (23)
- April 2014 (28)
- March 2014 (21)
- February 2014 (16)
- January 2014 (22)
- December 2013 (15)
- November 2013 (26)
- October 2013 (17)
- September 2013 (24)
- August 2013 (21)
- July 2013 (26)
- June 2013 (24)
- May 2013 (29)
- April 2013 (29)
- March 2013 (27)
- February 2013 (26)
- January 2013 (30)