Contracts are a large part of doing business, and as a small business owner, it's a good idea to have a basic knowledge of the laws related to contracts. The following article provides some frequently asked question about contracts, as they relate to small businesses. If you would like more information and resources related to this topic, you can visit FindLaw's Business Contracts and Forms section.
Q: Is there anything that must be present in every contract?
A: Yes. Regardless of the type of contract or the specific terms, every contract requires an offer, an acceptance, competent parties, and consideration. In this context competent means that all parties to the contract understand the legally binding effect of signing a contract. Consideration is the legal term for an exchange of goods or services between the parties. For example, if you offer to sell shoes to someone for $50, the consideration is shoes by one party and money by the other party.
Q: Do all contracts need to be in writing to be valid?
A: No. Contracts can be written or oral, unless it falls into a specific category of contracts. Most states require the following contracts to be in writing: marriage, real estate, contracts that take longer than 1 year to complete, agreements to pay another person's debts, goods for $500 or more, and contracts involving a person's estate.
Q: What about construction contracts, do they always need to be in writing?
A: Not necessarily. A construction contract may need to be in writing if it falls within one of the categories mentioned above, or if your state specifies that they must be in writing. However, it's generally a good idea to get construction contracts, and any other type of contract, in writing. Remember, whether in writing or not, construction contracts require consideration.
Q: Why is it a good idea to get contracts in writing?
A: A written contract allows each party the chance to fully understand his or her obligations under the contract, and ask any questions about the terms before signing. It also allows each side to seek out guidance from an attorney to see if there are any problems or ambiguity contained in the contract. Finally, if a lawsuit ensues, a written contract provides the court with the exact terms of the contract, instead of each party giving its interpretation of the terms.
Q: Can an international contract be illegal?
A: Yes. A contract is illegal if it requires illegal activities to fulfill the terms or if it specifies prohibited services or goods. An international contract may be illegal if the goods and/or services are legal in one country, but illegal in the other country. Thus, the contract would be unenforceable in the courts of the country in which the bargained for activity or goods are illegal.
Q: What is a breach of contract?
A: A breach of contract is when one party somehow doesn't perform its obligations under the contract. A breach can occur in several ways: if a party doesn't perform on time, performs in a way that is not in accordance with the terms of the contract, or simply doesn't perform at all. The non-breaching party can sue the breaching party in order to receive relief.
Q: What relief is a person entitled to in the event of a breach?
A: The basic relief (called "remedies") for the non-breaching party is: damages, specific performance, or cancellation and restitution. Damages are the most common remedy and consist of payment by the breaching party to the non-breaching party. The amount and type of damages will depend on the circumstances of each case.
Another type of remedy available is specific performance, in which the breaching party is ordered by the court to perform its duties under the contract. Finally, the non-breaching party has the option to cancel the contract and sue for restitution, which puts that party in the position it was in before the other party breached.
Getting Legal Help
If you have any questions or concerns about drafting, entering into, or current contracts with other businesses or individuals, you may want to consult with a local business and commercial attorney.