Contracts are a fundamental part of operating a small business. Selling goods, purchasing materials, leasing premises and employing workers all involve entering into legally binding contracts. It is important to understand the essential elements of a contract so that you can develop solid business arrangements. A solicitor can assist your business develop best practices. It is highly recommended that you consult a solicitor prior to signing any contracts so that you understand both your legal rights and your legal obligations. This is particularly the case with respect to long term agreements or where the contract involves the payment or receipt of large sums of money.
Entering into a legally binding contract involves four key elements. There has to be an offer and acceptance of that offer. There must be “consideration”, meaning that the parties must exchange something of value. Finally, both parties must intend to be bound by the agreement.
1. The Offer
An offer is an expression of willingness to enter into a contract on certain terms. An offer can generally be revoked or changed at any time before it is accepted. Offers can be oral or in writing. However, it is a better practice to make your offer in writing to prevent a dispute as to what the parties really meant.
It is important to know whether a legal offer has been made. Once an offer has been made, you are immediately subject to being bound to a contract if someone else accepts your offer. Offers may include matters such as tender submissions, formal quotations and proposals to lease. However, not everything is a legal offer. In most cases, advertisements, catalogues, price lists and shop displays are not considered to be offers. At law, they are usually classified as “invitations to treat” and are therefore incapable of being accepted by another party.
To create a contract, an offer has to be accepted. Acceptance of an offer can be given verbally, in writing or by an action that clearly indicates acceptance. Acceptance by action or conduct is particularly relevant to online transactions. Online transactions are an increasingly important element of small business. Not only do small businesses use the internet to purchase products and services, many small businesses develop their own websites and offer their own products and services online. The action of acceptance online often involves scrolling through a long agreement and ticking a separate box indicating that you have understood the terms and conditions of the agreement. Websites should be designed with these considerations in mind.
The time of acceptance determines the moment the contract comes into being. In some circumstances, timing may be critical and it may be necessary to determine when an offer was accepted. When an offer is accepted by mail, the relevant time is the time the acceptance was mailed. Acceptance by fax of email is only binding at the time it is received.
Acceptance must also be in response to the offer that was made. There cannot be an discrepancy between what was offered and what is accepted. If the acceptance purports to modify the terms of the offer, then it is a counteroffer. A counteroffer has the effect of ending the original offer. The original offer cannot subsequently be accepted unless the person who made the original offer revives it, for example, by indicating that he or she is still prepared to do business on the original terms. It is a good idea to have legal assistance in a protracted negotiation.
“Consideration” refers to the exchange of something of value. There are rules about what constitutes an exchange and about what constitutes good consideration. There does not have to be an equal or fair trade.
4. Intention to be legally bound
It is normally assumed that a contract will be legally binding. Parties to an agreement can decide to not be legally bound by it, however, this intention must be clearly stated in the contract.