Write a Business Contract: Key Considerations

To write a valid contract, you need to follow a few general rules.

A contract is simply a legally enforceable promise. There's a party who makes an offer, another party who accepts the offer, and as long as something of value (more on this definition, below) is exchanged, a court will enforce the contract. When deciding how to write a business contract, you want to make sure that all of these elements are present, so that if there's any dispute a court will find that there is a valid contract that it can enforce.

Contracts aren't required to be in writing (have you ever signed a contract with a mechanic to fix your car?), but it's always a good idea to get any contract in writing, especially when it comes to business. "My word is my bond"-type deals should remain in the past. Memories are notoriously fickle and people misremember contract terms all the time, and if one party doesn't want to honor a contract, proving to a court the contract terms becomes an exercise in "he said, she said".

Write a Business Contract: Know the Basics

While numerous textbooks and treatises detail the theory behind contract law, when you sit down to write a business contract, keep in mind these basic elements of a valid contract:

• intent to make a contract by both parties
• a legal subject matter (you can't make a valid contract about something that's illegal, like contracting to steal a car)
• an offer made by one party
• acceptance of the offer by the other party (there hasn't been a rejection of the offer or a counteroffer made that hasn't been accepted)
• an exchange of something of value (called "consideration" in legalese)
• for certain subject matter, a contract is required to be in writing

There may be further legal requirements depending on the state you live in and the subject matter of the contract, but if you keep the above requirements in mind when writing a business contract, you'll be on the right track.

Offer and Acceptance

For all contracts there must be at least two parties. One party makes an offer and the other party accepts it. For example, your mechanic calls you and tells you he can replace your muffler for $300. If you say yes, you've accepted his offer. If you tell him you need a day to think about it, there has been no acceptance and therefore no valid contract has been made. A valid contract cannot exist without both offer and acceptance.

In everyday life, offers are made all the time. But acceptance isn't always made immediately after an offer. People need time to think about the offer or search for a better deal. When this happens, you're not rejecting the offer, but then the question arises: how long does an offer last?

Length of Time an Offer Stays Open

When an offer is made, the person making the offer isn't expected to keep it open forever. On the other hand, offers don't expire just because they're not immediately accepted. Offers stay open for as long as the offer states, and in the absence of such a date, they stay open for a "reasonable" amount of time.

A reasonable time takes into account factors such as the industry you're in, the subject of the contract, and past dealings between the parties. "Reasonable" leaves much room for interpretation of course, so the smartest course of action is to include an expiration date on an offer or to accept an offer as soon as possible so that there's little doubt that the offer is still open.

For example, if you're a clothing retailer and a manufacturer offers to send you a shipment of clothes, that offer may stay open for several weeks or even months, according to industry standards. However, waiting a year to accept the offer and then expecting the manufacturer to honor the offer isn't a good idea because the offer will likely be found to have lapsed.

Revoking an Offer You've Made

If you've made an offer to someone but they haven't responded, you have the right to revoke your offer any time before the other person accepts the offer. Once they accept the offer, however, you're bound by the terms of the agreement, even if you've had a change of heart.

If you've agreed to keep an offer open for a certain time, you cannot revoke the offer until that period has ended.

Rejections and Counteroffers

A rejection is simple—one party makes an offer and the other party simply declines it. Another form of rejection is the counteroffer, which is the hallmark of haggling and bargaining for a better deal. When the other party, instead of accepting, replies with a new term (lower price, more product, etc.), this is a rejection of the original offer and new offer for the original offeror. Now, it's up to you whether to accept the offer or not.

In the example from above, if you decline the mechanic's offer to replace your muffler for $300 and instead offer to pay him $250 to do the same service, you've rejected the original offer and created a new one. Now it's up to the mechanic to accept the new offer or not. If he agrees, then you have offer and acceptance, and exchange of something of value (more on this below) and therefore a valid contract.

Accepting an Offer

The act of acceptance is typically very straight forward. Someone makes an offer and you agree or don't agree to the terms. However, depending on the subject matter of the contract, there are different requirements for acceptance. For a contract for the sale of goods (anything tangible, like clothes, books, produce, etc.) a valid contract requires acceptance of every single term—in law, it's called the mirror image rule. For a contract for services (mechanics, landscapers, painters, etc) there may be reasonable, minor differences between what the parties believe to be the terms of the contract (a court will decide what's reasonable).

Following are different methods by which a party can accept an offer:

• clearly stating or writing acceptance
• fully performing based on the offer
• promising to perform
• performing improperly based on the offer (someone orders Vaseline from you, and you mistakenly send them grape juice—you've accepted the offer and formed a valid contract, though your performance is faulty)

You can choose to include language regarding what constitutes acceptance in your business contract.

An Exchange of Something of Value ("Mutual Consideration")

For any contract to be valid, there must be an exchange of something of value. Essentially, there must be an exchange of services or goods in any contract. It can be a promise to pay in the future (which is the usual arrangement), or an immediate payment, or a promise to act (or not to act).

Law students know this exchange of something of value as "consideration", but unless you enjoy speaking legalese, just think of it as getting something in return for your offer. For example, if you offer to sell used books to someone for $40, the consideration is books on one side and money on the other side.

As noted, the exchange doesn't have to involve money. For example, in the above example, instead of receiving money for the books, you could choose to receive a promise that the other party will refrain from buying books from a certain bookstore, or you could just receive the satisfaction of doing a good deed by giving books to someone who needs them. Whatever you choose to accept, as long as it has value, a court will generally try to find reasons validate a contract.

When you write a business contract, more than likely none of the terms will be for anything other than money, goods, or services and you won't need to worry about the absence of an exchange of things of value. Simply be aware that the requirement exists. An alleged absence of such an exchange may be used by one party to try to invalidate a contract they do not wish to honor.

When entering into any contract, be sure to include the basic elements noted above. The absence of any of them may be used to attack the validity of a contract, and could result in the loss of time, money, and business.