Posted: June 15th, 2022

Contract Law – How to Create a Legally Binding Contract By Caron_Beesley, Contributor

Contract Law – How to Create a Legally
Binding Contract

By Caron_Beesley, Contributor

Published: January 2, 2013

Updated: August 22, 2014

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

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