It doesn’t matter whether or not you entering into a relationship with a customer, with a vendor or an independent contractor; contracts are a fact of business. Contracts serve as legally valid agreements that protect your interests.
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.
Here’s how your small business can comply with these requirements and ensure your contracts are legally valid:
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.
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.
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 offer or.
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 object to if you change your mind.