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In the normal course of business, all business entities must interact with other parties or institutions. Each of these is a legal relationship that your newly formed business entity will create as it grows, and each legal relationship should have a written contract in place to formalize it. Depending on the industry and entity type, the number, scope, and even names of these contracts can change. This can make it very difficult to know which contracts your business needs and which it doesn’t.
In order for you to protect yourself, your employees, your company and its assets, you must create legally binding, written contracts. Without properly drafted and executed contracts, you, your business, and your business’ assets are vulnerable.
The degree to which contracts permeate every corner of the business world is astounding. Think about it: No services are rendered, no goods delivered, no companies bought or sold without some sort of agreement in place.
Therefore, as a business owner, it’s important that you understand some basic points about contract law—i.e. what a contract is—so that you can ensure your contractual relationships are an asset to your company and not a liability.
As every first-year law student learns, formation of a valid contract requires three basic things elements:
The offer is usually a proposal to do something for or sell something to another person. The price, quantity, and description of the offer should be clear and specific enough so both parties understand the nature of the agreement. This is vital for a court to be able to enforce the terms.
An acceptance of an offer can only come from the person to whom the offer was made. It’s important to be clear in the offer exactly how the acceptance will occur, whether by promise or performance.
Finally, both parties to give up something of value. This exchange of benefit is called consideration. The value can be in the form of something tangible like money or property, intangible like legal rights, or a service like a haircut.
Without these three things (offer-acceptance-consideration), you don’t have a contract. In fact, a number of prominent company’s online Terms of Service and User Agreements have come under fire in recent years because they weren’t “accepted” by the users.
Meeting these necessary legal requirements is a must, but your contracts can’t only have the most basic offer-acceptance-consideration structure. If they do, they will fit your business like an off-the-rack suit: The jacket’s sleeve length might be perfect, but the shoulders are too constricting, and it only has a single vent when you really prefer two. To be maximally effective your contracts should fit your business like a tailored suit.
Here are some hallmarks of a properly written and valuable contract. A contract will protect your business only when it:
Despite the obvious harms that improperly drafted contracts can wreak on a business in the form of lawsuits, liabilities, or partner disputes, contract issues are still one of the most common small business nightmares. Why?
Contracts often get a bad rap because too many business owners make these three easily-avoidable mistakes:
1. Equating length and quality. It’s a mistake to judge any contract by its length or to limit what goes into a contract just to maintain an arbitrary page count. Limiting the language of the contract from the outset will lead to improperly written provisions that can hurt you in the long run. Contract writing requires a higher level of specificity and comprehensiveness than most prose.
2. Choosing the path of least resistance. Many business owners will download a fill-in-the-blank form from the internet or buy a standard contract from an office supply store. By design these forms have to be as generic as possible, which means they won’t be specific to your deal and may include ambiguous language like “top-quality” or “to customer’s satisfaction.” Ambiguity in contracts is never good.
3. Failing to include key defensive provisions. Having the right defensive provisions in your contract will protect you in the case of litigation, can ensure that, if a lawsuit does arise, the dispute happens in your home county or state, and can even deter litigation entirely.
Whenever a new contract is needed for a business, many business owner’s first impulse is to go online and search for a “____ contract template.” As I said above, a fill-in-the-blank form downloaded from the internet or bought at an office supply store will inevitably leave you and your business unprotected.
You and your business are unique, and your contracts must be tailor-made to your business and your goals, not the other way around. In order to do this, you need a trusted business attorney with real-world business experience to draft them.
Here at Alexander Abramson we focus exclusively on business-related legal matters. We have been helping business owners start, buy, grow, and sell business for 25 years. In particular, we are passionate about crafting and analyzing business contracts of all sorts, from partnership agreements and buy-sell agreements, to employment agreements and user agreements, to franchise agreements and franchise disclosure documents.
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