Small businesses typically enter into contracts when they sell goods or services to customers, purchase supplies from vendors, or hire employees. While there are many types of business contracts, a legally binding contract must have 6 essential elements to hold up in court, including:

• Offer
• Acceptance
• Meeting of the Minds
• Consideration
• Capacity
• Legality

In short, a contract is made when one party offers something to another and the offer is accepted. However, if a business contract is lacking one of the essential elements, it may not be enforceable. This makes it essential to have an experienced business attorney draft the contract or at least review it before you sign it. Let’s take a look at the essential elements of a business contract.

Contract Offer

A business contract starts when one party extends an offer to another party. The offer basically identifies what the first party is willing to do or give to the other party. An offer may involve:

• Providing a product
• Performing a service
• Agreeing not to take a specific action

For a contract to be enforceable, the offer must be legal and specify the goods or services being offered, otherwise the contract will be invalid.

Contract Acceptance

Once the offer is made, it must be accepted by the other party for the contract to be valid. While the courts may enforce a verbal acceptance, it is best for both parties to sign a written contract that includes a clear statement of each party’s willingness to enter into the agreement.

Meeting of the Minds

For a contract to be valid, there must be a “meeting of the mind” or “consensus ad idem,”  which means that the parties are aware that they are entering into a contract and are freely agreeing to be bound by its terms. This is also referred to as:

• Genuine agreement
• Mutual agreement
• Mutual assent

Notably, a business contract may be voided if awareness is not established. If one of the parties signed under duress, for example, or either party can prove undue influence, fraud, or misrepresentation, the contract will be invalidated by the court. As such, all parties entering into a contract must clearly and decisively establish that the agreement is genuine and consent to its terms.

Consideration

Basically, a contract is an agreement between two or more parties to exchange things that one party wants from the others. For the contract to be valid, there must be an exchange of consideration, whether in the form of cash for the purchase of products or services or something else of value. While there need not be a financial component for consideration to be valid, the consideration must have an agreed-upon value. Without consideration, a business contract is invalid.

Capacity

All the parties to a contract must have legal capacity, which means that they understand the obligations, terms, and consequences of the agreement before signing it. Generally, the following individuals may not have the legal capacity to enter into a contract:

• Minors
• Someone with a mental impairment (e.g. dementia)
• Someone under the influence of drugs or alcohol

Ultimately, to have legal capacity, the parties must fully understand the words and meaning of the contract and enter into the agreement free from coercion.

Legality

All contracts are subject to the laws of the jurisdiction under which they operate, which is typically specified in the governing law clause. Moreover, the purpose of the contract must not be illegal. For example, you cannot enter into a valid contract to sell counterfeit goods.

Why You Need a Business Attorney

It is common for business owners to enter into contracts. If one of the essential elements is missing, however, or if one party fails to fails to abide by its terms or makes a misrepresentation, the contract has been breached. The best way to protect your interests and ensure that your agreement is valid is to work with an experienced business attorney.