Handshakes often seal agreements, but any deal for goods and services should be in writing. Memories are often unreliable regarding details, and disputes can come down to a “he said, she said” duel. It can leave little accountability in the agreement, particularly when one side does not want to honor the original price, deadline or scope of services.
In addition to the fact that certain agreements must be in writing to be enforceable (such as for the sale of real property and sale of goods in excess of $500.00), contracts are also used for such essential business arrangements as business formation, business dissolution, business disputes, and other agreements that are a vital part of conducting business. Once signed, the contract creates the rights and obligations of the parties.
The details of every business contract will be different, but there are standard terms, conditions and/or provisions which should be part of every agreement. The Restatement 2d of Contracts defines a contract as “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Formation of a contract requires “a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.” Restatement 2d of Contracts, § 17 (2nd ed. 1981).
To be valid and binding, a contract must include an offer, an acceptance, and exchange of consideration. (Consideration is a promise to do something you are not obligated to do. Each side in a contract gives something in exchange for getting something. In Pennsylvania, using the words “intending to be legally bound” can be a substitute for consideration.) The basic process to reach an enforceable contract includes:
- The agreement’s details may start as a conversation, but an offer should be in writing.
- The offer states length of time for which it is valid.
- The offer can be revoked before the agreement is accepted.
- There may be rejections and counteroffers as the two sides negotiate.
- If or once the two sides agree and the offer is accepted, both parties should sign the contract.
The subject matter of the contract must be legal for it to be enforceable – this means there is no illegal activity, and the agreement follows all applicable regulations. The two sides must also voluntarily sign the agreement, which means that coercion would invalidate it.
Addressing future disputes
Some contracts are quite complex. After finalizing, the terms should be sufficiently definite to be able to be enforced. Ideally, this protects both parties by spelling out their respective rights and obligations. To avoid future disputes, the two sides should clearly outline all essential details of the agreement. It should appear to reflect a meeting of the minds or an intention to be bound by the agreement, and avoid the appearance of an unfair deal, which the courts could later invalidate.
The contract can also stipulate protocols for resolving disputes, regardless of whether it involves unforeseen circumstances or actions by one or both parties. It may include arbitration, mediation, litigation or a combination of them.
The needs of each business are unique, so relying on contracts drafted by non-lawyers can be disastrous. It is best to work with an attorney who can draft an agreement or review a potential contract before signing on the dotted line.