Business agreements are often referred to as contracts, but they are not exactly the same thing. An agreement is defined as a mutual understanding whereas a contract is defined as an agreement between two or more parties.

Overview of Contracts and Agreements

A contract has six elements that make it valid and enforceable in court. The first three relate to the agreement itself. The other three relate to the parties who create the contract.

Offer, Mutual Consent, and Acceptance

  • Contracts must have a specific offer and an acceptance of that offer.
  • The parties to the contract must give their consent freely.
  • Parties cannot be forced or coerced to sign the contract.
  • Parties must agree to the same terms.
  • An intent of the parties to create a binding agreement is implied in these three conditions.
  • If either or both parties are not serious, there is no contract.

Consideration

  • Something of value must be exchanged between parties.
  • The thing of value may be services, goods, or money. Each must give something for it not to be considered a gift instead of a contract. 

Competence

  • Both parties must be able to comprehend and understand what is required. In other words, the parties must be of sound mind.
  • Neither party may be a minor, neither can be under the influence of drugs or alcohol, and neither can be mentally deficient. If one party isn't competent, there is no valid contract. In this case, the noncompetent party does not have to honor the contract.

Legal Purpose

  • The purpose of the contract must be legal. It cannot be for an illegal activity such as selling drugs or prostitution.
  • It is not illegal to enter into a contract missing any of these essential elements, but courts cannot enforce such a contract.

Making Agreements and Contracts

There are several things to consider when creating an agreement or contract.

Get It in Writing

An oral agreement is legal and binding in many situations, but such agreements are often difficult to enforce in court. In some situations, an oral agreement isn't enforceable at all.

Most agreements should be in writing even if not legally required. With a written agreement, there is less risk than an oral agreement because the document clearly states the rights and obligations of each party.

Keep It Simple

Keep the legalese to a minimum. It is not necessary when creating an enforceable contract. Keep the verbiage clear and concise. Use numbered paragraph headings to alert the reader to each section's content.

Dealing With Appropriate People

When negotiating a business agreement, do not waste time with a person who does not have the authority to make a binding decision. The person should have a vested interest in making sure you will meet the obligations of the agreement.

Proper Identification

Identify each party in the contract using correct legal names to identify who has the responsibility for performing the obligations specified in the agreement. Correct identification also clarifies who you have legal rights against if there is a dispute. If a business is operating as a corporation or a limited liability company, use the correct legal name, including suffixes such as "Inc." or "LLC."

Clear Details

The body of the agreement should spell out clearly and in detail each party's rights and obligations.

Include everything. If it is not in the contract, it will difficult or impossible to enforce. In court, judges cannot, for the most part, interpret a contract using only what the parties said to each other. If something is left out, it can always be added with a written amendment. 

Payment Obligations

Specify the payment obligations of who pays whom, when payments are due, the conditions for making payments, and payment methods. 

Dispute Resolution

Parties need to agree about how potential disputes will be resolved. This information should be included in the agreement. Decide if the dispute will be resolved through mediation or arbitration versus going to court.

Choose a State

Select a state to govern the contract. If the parties reside in different states, choose one and apply the laws of that state to the contract. Include in the contract where any mediation, legal actions, or arbitration will occur.

Contract Termination

Agree on the circumstances that will result in the termination of the contract. Include those circumstances in the contract.

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