Basic Contract Info


Just as a businessperson scans the corporate environment for
potential legal pitfalls within the organization, so too, he or she
must similarly judge the potential liability of decisions involving
outside individuals or businesses. While a written contract is not
necessary for every action and decision taken by a businessperson, it
can prove invaluable when:

*  Disputes arise over delivery dates or option terms;
*  Clear, precise written proof is required to resolve litigation;
*  Complex details are anticipated and dealt with on paper instead of
   in the courtroom.

There are several instances when it is in an executive's own best
interests to have a simple written agreement on file. First, a
boilerplate model of a basic agreement should be kept on file and
used when a company hires a consultant or independent contractor.
Second, a letter of agreement should be used when an executive wants
to create a "written handshake" which states the essntials of the
agreement without becoming mired in details.  Such an agreement
states the simple facts in writing, and is confirmed and accepted
when signed and returned to the sender.

This simple document should:

*  Identify both parties and the role of each in the agreement;
*  Describe the nature of the agreement;
*  State payment terms, time expectations and other elements of the

An early warning system of liability sensitivity requires prudence
rather than panic. It isn't necessary to call an attorney before
making every decision. Such hesitation affects the spontaneity of
business agreements. Yet it is wise to have boilerplate documents
reviewed by counsel prior to being used for the first time. When in
doubt regarding a simple agreement, it is worth the peace of mind to
consult an attorney. Counsel should be sought when complex situations
are involved, such as incorporation, partnership, lease agreements,
real estate agreements, debt collection, litigation, and
labor/management relations.

The Small Business Administration (SBA) provides useful information
through Business Development Specialists who can provide useful
information and direction in response to telephone queries. To find a
nearby District Office call (800) 827-5722.

Contract Overview

A contract is an agreement that is enforceable by law. Modern
business could not exist without such contracts. Most business
transactions involve commitments to furnish goods, services, or real
property; these commitments are usually in the form of contracts.

Use of the contract in business affairs ensures, to some extent, the
performance of an agreement, for a party that breaks a contract may
be sued in court for the damages caused by the breach. Sometimes,
however, a party that breaks a contract may be persuaded to make an
out-of-court settlement, thus saving the expense of legal

A contract arises when an offer to make a contract is accepted.  An
offer contains a promise (for example, "I will pay $1,000") and a
request for something in return (a person's car). The acceptance
consists of an assent by the party to whom the offer is made, showing
that the person agrees to the terms offered.

The offer may be terminated in a number of ways. For example,the
party making the offer may cancel it (a revocation), or the party to
whom the offer is made may reject it. When the party to whom the
offer is made responds with a different offer, called a counteroffer,
the original offer is terminated. Then the counteroffer may be
accepted by the party making the original offer.


For a contract to be valid, both parties must give their assent. They
must act in such a way that the other people involved believe their
intention is to make a contract. Thus a person who is clearly not
sincere in saying that he or she accepts an offer usually is not held
to a contract by the courts.

On the other hand, a person who secretly has no intention of making a
contract but who acts in a manner that leads people to believe he or
she had, may be held to a contract. Legally, it is the external
appearance that determines whether one is held to a contract


A contract results from a bargain. This implies that each party to
the contract gives up something, or promises to, in exchange for
something given up or promised by the other party. This is called
consideration. In the example given above, the consideration on one
side is the promise to pay $1,000, and on the other, the promise to
deliver a car.

With rare exceptions, a promise by one party, without some form of
consideration being extended by the other party, does not result in a
contract or other enforceable obligation, regardless of the sincerity
of the promise. Although each party must extend consideration to the
other in order to form a contract, the value of the consideration
need not be equal.

Determining how good a bargain is becomes the responsibility of the
parties involved. Otherwise, the courts would be in the impossible
position of having to appraise the relative value of millions of
promises made every year


For a contract to be enforceable it must be between competent
parties. A contract with a person who has been adjudicated insane is
likely to be declared void. A contract involving a minor--in most
states of the United States a minor is now a person under 18--may be
enforced or voided by the minor, unless the contract is for
necessities such as food, lodging, or medical services, in which case
he or she may be held responsible for the reasonable value of what
was purchased.

Persons suffering from a disability such as intoxication from drugs
or liquor, or insane persons not adjudicated insane, usually may void
a contract if the other party knows or should have known of the
disability and if the consideration received is returnable


The last requirement of a valid contract is that its provisions be
legal. If a purported contract requires an illegal act, the result is
a void contract. Parties to an illegal contract have no standing in
court. If one party receives money or property under an illegal
contract, the other may not sue to recover what was paid under the
contract. Not only are contracts requiring criminal acts illegal, so
are contracts requiring commission of a TORT (a breach of civil law
such as misrepresentation or trespass) or those in breach of public
policy. Although public policy is difficult to define, it includes
some serious breaches of conventional morality or ethics.

It is commonly assumed that an enforceable contract must be in
writing. This is usually untrue. Most oral contracts are enforceable,
but written contracts are easier to prove.

Some types of contracts must be in writing, for example, contracts
for the purchase or sale of any interest in real property, contrats
to pay debts of others, and contracts that require more than a year
to perform. Contracts for the sale of personal property--that is,
movable property--as distinguished from land, at a price above a
specified sum set by law must be in writing unless payment or
delivery has been made or unless the goods were specially

Although only a few types of contract must be in writing, the terms
of a written contract ordinarily may not be contradicted in court by
oral testimony.


In the event of a breach of contract, the injured party usually sues
for money damages (the award of a sum of money designed to compensate
for losses stemming from the breach). Damages are measured by what
may reasonably be foreseen as financial losses; unforeseeable losses
may not be collected. If an award of money is not compensatory
because something about the promised performance was unique, the
party who breaks a contract may be ordered by the court to perform as
agreed. This is called specific performance. For example, real estate
is always considered unique. Therefore, when a party has contracted
to sell real estate but changes his or her mind, the court may grant
specific performance and order that the deed for the real estate be
delivered to the agreed buyer.  Most contracts are formed with an
implicit understanding that neither party need perform unless the
other has completed his or her promised performance. Anexception to
this understanding occurs when a party has performed most of his or
her obligation and the part not performed is relatively immaterial.
The doctrine of substantial performance provides that in such a case,
the opposite party must perform, although he or she may secure money
damages to the extent that he or she was damaged by lack of complete

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