Contract Formation in Business Law
When drafting a business contract, it is important to understand the basics of contract law in case a dispute erupts. Under certain situations, a court may determine that no enforceable contract was ever formed despite the existence of a written document. Although state law differs slightly, the basic principles of contract formation are similar.
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Basic Formation Requirements
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The three basic requirements for the formation of any contract are offer, acceptance and consideration. These requirements can cause problems when, for example, a purchase order is confirmed through the exchange of emails whose texts lack any clear statements indicating offer or acceptance. This problem can be avoided by drafting a simple document containing unambiguous statements of offer and acceptance. "Consideration" exists when both sides offer something of value to the other (even a promise)--which is why a contract to provide a gift is not enforceable. If a gift is desired, it is best that the contract specify a token amount of consideration (one dollar, for example) to be provided by the recipient.
Cooling-Off Periods
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The laws of most states allow a buyer of consumer goods to cancel the contract within 72 hours after signing it without stating a reason. These laws are designed to protect consumers from high-pressure sales tactics. In effect, a consumer contract in those states is not formed until 72 hours after it is signed by the buyer. These laws typically do not apply to contracts between merchants.
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Void Contracts
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A contract is considered void if no true agreement ever occurred or if enforcing the contract would be contrary to public policy. An example would be a mutual mistake of fact. In one famous case, two parties contracted for the carriage of goods by a ship called the Peerless. Unknown to both parties, there were two ships by that name and each party intended the goods to be transported by a different Peerless. A contract with an illegal object (such as a contract for prostitution, gambling, or the importation of contraband) will be considered void even if the parties did come to a genuine agreement. Courts will treat a void contract as if no contract ever existed and will award damages accordingly (by requiring the refund of a security deposit, for example).
Voidable Contracts
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Voidable contracts are contracts that may be canceled by one party (but not the other party) at any time. Although a contract is formed, it binds only one party. An example of a voidable contract would be an agreement to lease office space when the landlord actively concealed the existence of hidden defects in the property. The tenant may cancel the lease, but the landlord may not. If the tenant chooses not to cancel the lease, it is still liable for the agreed rental fee. If it chooses to cancel the lease, the tenant may be entitled to a refund of all rent paid up to the date of cancellation (depending ion the specific facts of the case).
Contract Parties
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In many cases, the parties to a business contract are not individuals but limited liability entities such as corporations and LLCs. In this case, company officers and directors are not liable for company debts, and owners are liable only to the extent of their investment. However, if a company officer signs a business contract in his own name instead of the company's name, a court may decide that the officer intended to bind himself instead of the company, and hold the officer personally liable for debts arising from the contract. An example of such a situation would be the owner of a one-man LLC who signs a business contract in his own name but neglects to insert the name of the LLC under his signature.
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