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
Those who do not have capacity are:
-- 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.