Contracts are self-contained explanations of a relationship between two parties. Contracts are the agreements you should have in place with every person or entity you work with in your business.

Contracts are how we define business. Even if we don’t realize it.

You have a contract with every person or entity with which you do business. It does not matter if the contract is in writing, it is there. The writing simply helps prove what your agreement is. The contract exists, even if it isn’t written down. Even if it is only in an email.

I always get frustrated when I see these commercials that talk about how the company advertising the service doesn’t use contracts. Recently, even saw a commercial where someone claimed that “as a lawyer, my favorite part is that there are no contracts.” This rubbed me the wrong way. As a lawyer (if he was actually a lawyer), he should have known that the statement was not completely correct. You see, “contract” has two different meanings.

1. A contract is an agreement between two parties where the obligations are enforceable by law.
2. A contract is also the writing which sets out the agreement between the parties.

Haven’t you ever heard of an oral contract?

If you have an agreement with anyone worth any amount of money you see as important, you better put it in writing. If you don’t how will you ever enforce it if it goes wrong.

Even in a simple retail exchange, contracts exist, they just aren’t in writing because everything happens immediately. But, that isn’t even quite true is it. Even retail stores (especially online) have terms for payment (cancelled check fees and other issues with returned payment) and return or exchange policies. When you purchase something in a store, your payment of that money is subject to the terms they have. You are agreeing to those contract terms.

This is even more important online or in a service business. The difference is, you need to make your terms much more clear. That is normally handled by a client agreement or some other kind of acceptance of your online contract.

If you don’t put it in writing, it will be difficult to get your money if your client doesn’t pay. You see, it is very difficult to prove what you agreed to if you didn’t put it in writing.

Contracts have four primary elements

For a contract to exist, you must be able to establish each of the four elements of a contract. Think about the different places in your business where contracts exist, whether you have written them down or not. Use these four elements to determine the contracts.

Offer

An offer is any time you present something for acceptance. The offer must be for something of value, but if it is something that can be accepted by another party, it is an offer. This is as simple as: “If you give me your email address, I will send you an email once a week.” In the retail setting, the offer is the price listed on the item to purchase. The retailer is offering to sell you that pair of jeans for $59.99.

Acceptance

This can be done by taking action on the offer (e.g., paying $59.99 for the jeans) or saying you will accept the offer. It can also be signing a written agreement indicating you will pay the amount indicated in the contract for the service offered.

Meeting of the Minds

This simply means that everyone was talking about the same thing. For example, if those jeans that have a tag indicating $59.99 is on the sale table that says 50% off the tag price and you go to the check-out counter and think you are paying $29.99, but the cashier charges your card full-price, you do not have a meeting of the minds. In this case, the issue could be a mistake of fact (the cashier did not know it was on sale) or a mistake made by an employee of the company who had no authority to bind the company (a sales clerk placed the jeans on the sales table, but they were not included in the sale). In that case, you can ask for your money back or simply agree to pay full price. The terms have changed. There was not an offer to sell the jeans for half-price. So, you can either not accept the offer (ask for your money back) or accept the actual offer (pay full price). Either way, it is corrected when you are in agreement over the price and the product being purchased.

In the service industry (and online) this can be slightly more complicated because the meeting of the minds involves scope of work or intellectual property rights, but the concept is identical.

Consideration

Consideration is what is given for the offer. In the example of the jeans, it is $59.99. That is consideration for the jeans. You gave money, which is something of value. Consideration can also be something of value that is not directly correlated to money (e.g., an email address).

Other Considerations

Of course, those four items, must be present, but you have to consider a couple of other things before calling it a contract.

Competence of the Parties

A contract must be between at least two parties who understand what is happening. A two year old cannot give a sales clerk $59.99 for a pair of jeans and know what is happening. Of course, this is different if the two year old is acting as the agent of the parent (parent gives child money to give to clerk at the counter). It is necessary that both parties understand what is legally agree. There are issues when you have a teenager who agrees to something before they can legally enter into contracts. That is why so many places require parental consent before 18.

Legal Purpose

Contracts must be for something that is legal. Contracts to sell drugs are not legal. That is why Heisenberg did everything on oral contracts, he thought it pointless to write it all down :). Technically, you cannot have a contract to do something illegal.

Online Examples

The retail examples are beneficial, but they do not always show the complexity of a contractual relationship. What if I offer to sell you an E-Book for $15 through my website. You pay $15 and I deliver the e-book. That is the end of our transaction, right? Wrong.

You see, it doesn’t stop there. There are rights to the e-book that you want to protect. Your intellectual property rights. You need to let the customer know how they can and cannot use the book. Can they make copies and give it to all of their friends? Can they put it on their website for download. What are the rights that exist with the purchase of the book. That is why we have all of those legal pages on websites now. It is the process that helps the content creators sleep at night. It is the process that lets you know, you can enforce your rights if you need to. Web terms outline the rights that exist with the content freely delivered online. They explain how you can get a refund (if you can at all). You see contracts outline the parts of a deal that are not initially anticipated.

Do you need a law degree to write a contract that will work? No. You do, however, need to think beyond the obvious parts of any transaction:

•      What if the credit card was declined, but you had already delivered the E-Book?
•      What if the purchaser sells your book to another person?
•      What if the purchaser places your book on their website to download?
•      If you sue the person, who will pay for court costs, interest, and attorneys’ fees?

All of these things should be covered by the legal agreements and policies you have with your customers and clients. That is why I have created this contracts basics series. So, keep going to learn more about what should be included in your contract.