What Makes a Contract Legal? A Handshake, Pen or Both?
After negotiations, many business owners, freelancers and other entrepreneurs will immediately jump at the conclusion:
“I need to have a contract.”
For newbie entrepreneurs, it’s likely because they’ve heard that it’s a necessary thing to do. For more seasoned entrepreneurs, it’s a standard procedure they’ve set up for their business.
But regardless of whether they are a newbie or experienced, many will have a hard time answering this simple question:
What is a contract?
If your immediate answer is, “I don’t need to know, that’s what lawyers are for!”, you are in for a rude awakening. As an entrepreneur, it’s incredibly important to understand your contracts since your business will be built upon them, even if you have a lawyer onboard.
Before we dive into what a “contract” actually is, let’s go over why you should care Several reasons:
You’ll be able to make better decisions on how to create them.
You’ll be able to figure out what should be in them, including what you need to negotiate.
You’ll be able to maximize your usage out of them to not only protect your business but grow it.
With that, let’s dive in. A good place to start is to look up the word “contract” in the good ol’ dictionary:
A contract is “a binding agreement between two or more persons or parties”.
That sounds pretty obvious, but the key word here is “binding”. What makes an agreement “binding”?
That’s where a legal definition (vs. a general definition) comes in handy. Similar to a recipe, under the law you need a few essential ingredients to make a binding contract. The recipe can be slightly different from state to state (and depending on who you ask), but generally speaking you need each of these things:
An offer. (I offer to make a website for you for $200.)
An acceptance. (I accept your offer.)
Consideration, i.e., something of value that you exchange. (You give me $200 and I give you a website, vice versa.)
Intention by both sides to make the contract.
Notice that neither of these definitions say that a contract must be in writing. Legally speaking, contracts can be created both orally and in written form.
These definitions also don’t go into what a contract does for a business. Practically speaking, a contract is so much more than just a mutual agreement with the essential ingredients.
For one, it is a communication tool. In fact, it’s probably one of the best communication tools you can have if you use it right. A contract should facilitate conversations. In the process of negotiating and writing it, it should help each side clarify their needs and expectations.
A contract is also a form of insurance. A contract can protect you from unfortunate events like when someone sues or if someone gets hurt.
A contract helps with efficiency. If you do your contracts right, it can save you tons of time, money and efforts in your business. For example, if something goes wrong, a good contract should tell you who will be responsible. This saves you from figuring this out when the situation is tense and emotions are high.
To sum it up: A contract is an agreement between two or more people or businesses. Legally speaking, you just need four ingredients to make one: (1) an offer, (2) an acceptance of that offer, (3) an exchange of value, and (4) intention by everyone involved to enter into the contract. But practically speaking, a contract is SO. MUCH. MORE. It is an incredible tool that you will use to build and protect your business. It’s a communication, insurance, and efficiency tool.
Disclaimer: This article is for informational and educational purposes only, it is not legal advice. It does not create an attorney-client relationship between you and Lawgood, its founders, or the author. If you need legal advice, you should hire a lawyer.