The
Importance of a Contract
As a business owner,
contracts play a vital part in the growth and success of your business. The transactions you make with others as
clients and/or vendors should be properly recorded in sufficient agreements. Contracts for the sale of goods for $500 or
more, contracts for real estate, and contracts that cannot be performed within
one year must be in writing in order to be enforceable.
To make sure your
contracts are valid they must have the basic six components:
- All
parties must have the capacity to enter the contract.
- Consideration
must be exchanged.
- The
parties must be in mutual agreement.
- The
objective of the contract must be legal.
- The
overall form of the contract must meet the necessary legal requirements.
For a more thorough
understanding of these concepts, let’s discuss each component separately:
The
Capacity to Contract
The ability to know and
understand the terms of the contract are the key elements of capacity. All parties must have the capacity to
understand and consent to the contractual agreement. Common entities and persons having capacity
are:
- Corporations
by and through their agents; and
- Adults.
Those who do not have
capacity are:
- Minors;
- The
mentally incompetent; and
- Persons
who are intoxicated.
Keep in mind that most states consider persons under the age of 18 to be minors. If a minor enters into a contract, the contract is considered to be voidable. The minor will have the right to cancel the contract at any time before reaching the age of 18. However, if the minor cancels the contract, the benefits of the contract must be returned.
Consider
the Consideration
In order to have a valid
contract, there must be valid consideration.
This means that something of real value must be exchanged. Types of consideration are:
- Cash
(definitely the most popular);
- Performance
of an act;
- Agreement
not to perform an act.
The
Mutual Agreement
For a mutual agreement to
occur, both parties must understand the agreement and make sure there are no
misunderstandings or mistakes exist between them. This “meeting of the minds” usually occurs after
an offer has been made and the offer is accepted.
The
Legal Purpose of the Contract
The purpose of the
contract must be legal in order for the contract to be legal. If the overall formation or the performance of
the contract is illegal and/or is considered criminal, opposing public policy
or interest, the contract will be considered void.
Once your contract has
met all the necessary legal requirements, it is considered valid and fully
enforceable. As you seek to form and/or
grow your business, make sure to pay special attention to the contractual
agreements that you will become a party to.
Your contracts will provide the basis of your relationships with other
companies and individuals in the business world. Your understanding of what is needed to form
a valid contract will assist you in having a better business experience in
current and future business deals.
