Fundamentals of a Contract: What You Don’t Know Could Hurt You

Fundamentals of a Contract: What You Don’t Know Could Hurt You

Robert T. Yokl, President, SVAH Solutions

For those who didn’t take contract law in a business school, I thought it was important to go over the fundaments of a contract to help you avoid pitfalls such as: (i) contracts never intended to be contracts, (II) agreements that fail as contracts where the opposite was intended, (iii) contracts so unclear as to be interpreted contrary to what one side intended, (iv) contracts neglecting to cover one or more of the main points, and (v) contracts impossible of performance because of external impediments…(such as) regulations.1 Now let’s review the basic elements of any contract:

Offer: An offer may be considered a promise in return for a promise to perform a service or an act by the other party. An offer isn’t an invitation to negotiate or a letter of intent since they can be withdrawn at any time. An offer must be specific (preferably in writing) such as a detailed proposal to maintain your six elevators for one year at a cost of $10,923.00 annually. However, if the so-called offer states that “other terms will be negotiated at a later date” this isn’t an offer.

Acceptance: An acceptance of an offer (again, hopefully in writing) can’t be assumed by the other parties’ silence or by accepting some terms and rejecting others. For example, if you make an offer and don’t hear from the other party or the time runs out on your offer, you don’t have an agreement. This is also the case if the party accepts your offer, but wants to further negotiate price, credit terms, and deliverables. This isn’t an acceptance either. It can be considered a counteroffer that must be renegotiated. However, if the offer invites shipment of commodities with fixed terms, and the shipment is made, it is a good probability that your offer has been accepted. The point here is that you can’t decide on what terms and conditions you will accept. You must accept all of them as is or you don’t have an enforceable contract.

Consideration: All contracts have a third component called “consideration” or doing something (e.g., money, trade, barter, etc.) you were not bound to do, even if it is only giving $1.00 for services rendered. Otherwise, your offer is an unenforceable promise, such as, offering to give $10,000 to your favorite charity. As Richard Wincor says, “A contract in one sense is an actionable promise, or an agreement which the law will enforce or for whose breach it will afford a remedy.”

These are the three fundamentals of a contract that are required to be considered an agreement. There are also exceptions to these rules called Reliance and Waivers, but these are outside the scope of this article. Finally, verbal contracts that fit the above form can be enforceable, but hard to prove. Therefore, make sure all of your terms and conditions are in writing to prove any claims or disputes.

1 Contracts In Plain English, Richard Wincor, McGraw Hill

Disclaimer: The information provided in this article is not to be considered a legal opinion. Its purpose is informational only. Please contact an attorney for specific guidance on any legal matter.