For all business owners, transactions are a regular and fundamental part of business activity. Commercial transactions typically encompass the selling and purchasing of goods or services. While such transactions can sometimes be informal, most of them are formalized through the creation of contracts.
What Is a Contract?
Contracts are the central documents that govern business transactions. Technically, contracts are legally valid and enforceable agreements between two or more parties that create obligations that are binding on all parties involved. Parties can include any types of entities that are capable of participating in business transactions, including government agencies, individuals, corporations, and other private entities.
What Does It Take for a Contract to Be Enforceable?
Not every agreement to engage in a commercial transaction will be legally enforceable in a court of law if conflicts arise down the road. Instead, contracts must have certain elements in order to be enforced. These are largely legal requirements that have developed over the years.
First, and foremost, contracts require consideration. This element means that each party agrees to provide something of value to the other. This can be an affirmative offering of something, or an agreement not to do something. Thus, for instance, consideration can involve agreeing not to compete with another business. Second, contracts require a clear offer and acceptance. Contracts are not necessarily created just because one party offers something to another. Typically, a clear acceptance is required. In offering and accepting a contract, the parties must also have a “meeting of the minds” as to what the contract entails. Both parties cannot believe that they are agreeing to entirely different contracts.
Elements of an Enforceable Contract
1Valid offer and acceptance
4Capacity to contract
Additionally, in order for a contract to be enforceable, both parties must have the capacity to contract, meaning that they must mentally understand what they are agreeing to. Individuals who are incapacitated are often deemed unable to engage in contractual agreements, and those who are insane or are minors are presumed to lack such capacity. Lastly, contracts can only be enforceable if they have a legal purpose. This means that a contract agreeing to engage in illegal activity is not enforceable in a court of law.
While these requirements for enforceability encompass important concepts that all contracts must include, there are also practical requirements in contract creation. In many states, certain contracts must be in writing, such as contracts for real estate or those will last more than a year. Even if a contract is not required to be in writing, it is often important to do so because oral contracts can be difficult, if not impossible, to prove in court.
Laws Governing Contract Creation
When business owners are developing business contracts, there are two primary sources of law that they can turn to in order to make certain that contracts are enforceable and transactions are valid.
Contracts addressing the sale of goods are governed by the Uniform Commercial Code, which is a set of explicit rules governing commercial sales transactions. Contracts governing all other types of transactions, including real estate transactions and employment agreements, are governed by what is known as the “common law.” These sets of rules vary according to the state in which a business operates, and they are created largely through the decisions of courts and judges. If you are concerned about the laws applicable to a contract you are working on, it is often helpful to consult with a corporate attorney.
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