Understand the Ins and Outs of Contracts Like a Seasoned Executive: Legalize it! Understand the Ins and Outs of Contracts Like a Seasoned Executive, The 7 basic requirements of legally binding contracts
February 7, 2023
4 min read
The rule of law is one of the pillars of western civilization and economic prosperity. It ensures a level of fairness, equity, safety and predictability in our daily lives. This allows us to enter into agreements and transactions with a level of comfort that we will be treated well if we act well. We have a body of laws and institutions that enforce them. These standards are fundamental to economic development. The stability they provide encourages long-term investment of time, effort, ideas, and capital.
If you are involved in business you will deal with lots of lawyers and legal requirements and restrictions. Like financial literacy, it is a good idea to have legal literacy and have a basic understanding of the law and what lawyers do.
There are lots of areas where law impacts business
Labor and Employment
Contracts and Negotiations
Business Formation and Corporate Law
Property law including Intellectual Property
We negotiate, arrive at agreements, and contract all the time in order to collaborate and get things done. It’s a good idea to know the basics of contracts and what makes them legally binding.
Contracts are legally binding agreements. We encounter contracts in our personal and business lives. Every time we download an app or use a digital product we acknowledge a contractual relationship. How many times do you stop and read that contract? If you are like most of us, the answer is never. It’s a pretty scary situation when you stop to think about it.
We need to be more aware of contracts we enter into in our business dealings and at work. We all negotiate and sign contracts. There are employment contracts, banking agreements, and rental leases. You can cramp your hand executing contracts when you close on a house.
Contracts are essential for business dealings because they are binding on the parties. All parties can be confident that there are legal remedies for damages if the other party doesn’t hold up their end of the deal.
I am not a lawyer and the information conveyed here is not intended to give legal advice. This is just information to help understand the basics of business law.
You want your contracts to be enforceable.
A legally binding contract must meet some basic requirements. Here are the elements that must be present in a legally binding contract:
Offer. An offer is a proposal to enter into a contract.
Acceptance. When the other party accepts an offer, a contract is formed.
Consideration. The exchange of value is fundamental to a contract. All parties must provide something of value.
Legal purpose. Your agreement can’t violate the law. You can’t contract for illegal purposes and have it be enforceable.
Competent and Capable parties. The parties must understand what they’re doing. You can’t contract with minors, drunks, or insane people.
Mutual Assent. When an offer is accepted under a “meeting of the minds.”
Written Instrument. Some oral contracts are enforceable but it is a really good idea to have all contracts reduced to writing and signed by all the parties. Its good practice and it makes the terms and obligation clear to all parties involved. Avoid confusion, misinterpretation, and revisionist memories.
Next let’s look at the elements of a written contract.
The Contract as a Document
A typical written agreement includes the following elements and structure:
An introductory section known as recitals or “whereas provisions”
Definitions of key terms so there is no ambiguity or misunderstanding.
A statement of the purpose of the agreement
A section detailing the obligations of each party.
Assurances. These are expressed as warranties, representations, or covenants.
Boilerplate provisions. This is legal language common to contracts that affects how disputes are resolved and how a court enforces the contract.
A signature block. This is where all the parties sign and date the contract.
Exhibits and Attachments.
At the end of the day, contracts are most enforceable if the agreements underlying them are considered fair and equitable by all parties. Check out my book on negotiation to learn how to best create wise and sustainable agreements.
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