Contracts and Agreements 101

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The more that you are actively working in your field — whether that means writing for magazines, playing music at clubs, hosting gallery events or building furniture for a hotel — the more you’ll find yourself needing to execute contracts with other businesses and people.

If you find contracts intimidating, you’re not alone. But when you boil them down to their essentials, most contracts are nothing more than detailed descriptions of what you and the other party are promising to each other. For most contracts, legalese is not essential or even helpful. On the contrary, the agreements you’ll want to put into a written contract are best expressed in simple, everyday English.

Don’t be afraid to redraft contract language. When reading a contract that has been presented to you, your first task is to make sure you understand all of its terms. It is just plain foolish to sign a contract if you’re unclear on the meaning of any of its language. If a clause is poorly written, hard to understand, or doesn’t accomplish your key goals, rewrite it to be clear. By waiting to sign at the “X” until your goals are clearly met, you’ll be less likely to find yourself in a breach-of-contract lawsuit later on. A breach of contract occurs when one party fails to live up to the terms or promises in the contract. (For more on changing contract language, see “Reading and Revising a Contract,” below.)

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Elements of a Valid Contract

A contract will be valid if all of the following are true:

  • All parties are in agreement (after an offer has been made by one party and accepted by the other).
  • Something of value has been exchanged, such as cash, services, or goods, for something else of value (or there is a promise to exchange an item for something else of value).
  • In a few situations, such as the sale of real estate, the agreement must be in writing. Of course, because oral contracts can be difficult or impossible to prove, it is wise to write out most agreements.

Each of these elements is described below in more detail.

Agreement Between Parties

Although it may seem like stating the obvious, an essential element of a valid contract is that all parties really do agree on all major issues. In real life there are plenty of situations that blur the line between a full agreement and a preliminary discussion about the possibility of making an agreement. To help clarify these borderline cases, legal rules have developed to define when an agreement exists.

The most basic rule of contract law is the “offer and acceptance” rule: A legal contract exists when one party makes an offer and the other party accepts it. For most types of contracts, this can be done either orally or in writing. (For a few, discussed in “Oral Versus Written Contracts,” below, the offer and acceptance must be made in writing.)

Let’s say, for instance, you’re shopping around for a print shop to produce full-color, custom die-cut postcards for your art opening. One printer confirms, either orally or in writing, that it will print 1,000 postcards for $250. This constitutes an offer. If you tell the printer to go ahead with the job, you’ve accepted the offer. In the eyes of the law, when you tell the printer to go ahead, you create a contract, which means you’re liable for your side of the bargain — in this case, payment of $250.

But if you tell the printer you’re not sure and want to continue shopping around (or don’t even respond, for that matter), you clearly haven’t accepted the offer, and no agreement has been reached. Or, if you say the offer sounds great, except that you want embossing added, no contract has been made, since you have not accepted all of the important terms of the offer — you’ve changed one. (Depending on your wording, you may have made a “counteroffer,” which is discussed below.)

Advertisements as Offers

Generally speaking, an advertisement to the public does not count as an offer in the legal sense. In other words, if you advertised your guitar lessons in your local weekly newspaper, and included a price quote of $300 for your standard semester of 10 lessons, you would not be legally bound to provide those lessons at that price if someone called you and said, “I accept!” If, for instance, you were too busy with other students and unable to do the job for the eager caller, you could decline. Because your ad wasn’t, legally speaking, an offer, the caller couldn’t claim a legal acceptance of it to create a binding contract.

Despite this, however, you do need to watch what you say in your advertisements. Some states require retailers to stock enough of an advertised item to meet reasonably expected demand, or else your ad must state that stock is limited.

Of course, false or misleading advertising is always a bad idea. Federal laws regulating trade and state consumer protection laws prohibit deceptive advertising, even if no one was actually misled. And check your ad’s facts; false advertising is illegal, even if you believed the ad to be truthful when you ran it.

In real, day-to-day transactions, the seemingly simple steps of offer and acceptance can become quite convoluted. For instance, sometimes when you make an offer, it isn’t quickly and unequivocally accepted; the other party may want to think about it for a while or try to get a better deal. And before your offer is accepted by anyone, you might change your mind and want to withdraw or amend it. Delaying acceptance of an offer, revoking an offer, and making a counteroffer are common situations in business transactions that often lead to confusion and conflict. To cut down on the potential for disputes, make sure you understand the following issues and rules.

  • How long an offer stays open. Unless an offer includes a stated expiration date, it remains open for a “reasonable” period of time. What’s “reasonable,” of course, is open to interpretation and will depend on the type of business and the particular situation. Because the law in this area is so vague, if you want to accept someone else’s offer, the best approach is to do it as soon as possible, while there’s little doubt that the offer is still open. Keep in mind that until you accept, the person or company who made the offer — called the offeror — may revoke it.
    If you are the offeror, it’s best to be very clear about how long your offer will remain open. The best way to do this is to include an expiration date in the offer. But to leave yourself room to revoke the offer, avoid wording such as, “This offer will remain open until October 31, 20xx.” Instead, use language such as, “This offer will expire on October 31, 20xx.”
  • Revoking an offer. Whoever makes an offer can revoke it as long as it hasn’t yet been accepted. This means if you make an offer and the other party wants some time to think it through, you can revoke your original offer. If your offer is accepted while it is still open, however, you’ll have a binding agreement. In other words, revocation must happen before acceptance.
  • Options. Sometimes the offeror promises that an offer will remain open for a stated period of time — and that it cannot and will not be revoked during that time. This type of agreement is called an option, and options don’t usually come for free. Say someone offers to sell you a kiln for $5,000, and you want to think the offer over without having to worry that the seller will revoke the offer or sell to someone else. You and the seller could agree that the offer will stay open for a certain period of time, say, 30 days. Often, however, the offeror will ask you to pay for this 30-day option — which is understandable because he or she can’t sell to anyone else during the 30-day option period. But payment or no payment, when an option agreement exists, the offeror cannot revoke the offer until the time period ends.
  • Counteroffers. Often when an offer is made, the other party will not accept the terms of the offer right off, but will start bargaining. When one party responds to an offer by proposing something different, this proposal is called a “counteroffer.” When a counteroffer is made, the legal responsibility to accept or decline the offer or make another counteroffer shifts to the original offeror. For instance, if your printer (here, the original offeror) offers to print 1,000 brochures for you for $250, and you respond by saying you’ll pay $200 for the job, you have not accepted the printer’s offer (no contract has been formed), but instead have made a counteroffer. It is then up to your printer to accept, decline, or make another counteroffer. If your printer agrees to do the job exactly as you have specified for $200, the printer has accepted your counteroffer and a legal contract has been formed.

Exchange of Things of Value

Even if both parties agree to the terms, a contract isn’t valid unless the parties exchange something of value in anticipation of the completion of the contract. The “thing of value” being exchanged — called “consideration” in legal terms — is most often a promise to do something in the future, such as a promise to perform a certain job or a promise to pay a fee for that job. Returning to the example of the print job, once you and the printer agree on terms, there is an exchange of things of value (consideration): The printer has promised to print the 1,000 brochures, and you have promised to pay $200 for them.

This requirement helps differentiate a contract from generous statements and one-sided promises that are not enforceable by law. If your friend offers you a favor — for instance, to help you move a pile of rocks without asking anything in return — that arrangement wouldn’t count as a contract, because you didn’t give or promise anything of value. If your friend never followed through with the favor, you would not be able to force her to keep that promise. If, however, in exchange for helping you move rocks on Saturday, you promise to help your friend weed a vegetable garden on Sunday, the two of you have a contract.

Although the exchange-of-value requirement is met in most business transactions by an exchange of promises (“I’ll promise to pay money if you promise to paint my building next month”), actually doing the work or paying the money can also satisfy the rule. If, for instance, you leave your printer a voicemail message that you’ll pay an extra $100 to use a more expensive color palette, the printer doesn’t have to respond; the printer can create a binding contract by actually upgrading your color palette. And, once it’s done, you can’t weasel out of the deal by claiming you changed your mind.

Oral Versus Written Contracts

Before you learn more about which contracts have to be in writing to be legally enforceable, here’s some advice: Put all of your contracts in writing. For compelling practical reasons, all contracts of more than a trivial nature should be written out and signed by both parties. Here is why:

  • Writing down terms tends to make both parties review them more carefully, eliminating misunderstandings and incorrect assumptions right from the start.
  • An oral agreement — no matter how honestly made — is hard to remember accurately.
  • Oral agreements are subject to willful misinterpretation by a not-so-innocent party who wants to get out of the deal.
  • Oral contracts are sometimes difficult, and often impossible, to prove, making them hard to enforce in court.

Example: After renting shop space for many years, Scott is finally ready build and equip his own woodworking shop in a shed on his property. He needs an electrician to install four new circuits in the shed, including two 220-volt circuits. Scott gets quotes from several electrical contractors. The lowest quote, from Arroyo Electric, says four circuits will cost $2,500 to install, plus materials. Scott tells Chantal at Arroyo Electric he’ll accept the offer, but only with a written contract.

When Chantal sends Scott a contract, he notices that it doesn’t mention the two 220-volt circuits he needs. Scott calls Chantal to point this out, leading them to discuss Scott’s needs in much greater detail. Chantal then drafts a new contract that includes the two 220-volt circuits, many more detailed specifications for the job, and an adjusted fee that Scott and Chantal agreed to. The well-drafted contract results in a smoother project and an end result that meets Scott’s expectations.

About Peri Pakroo

Peri Pakroo is the founder, Publisher and Editor of Pyragraph. Outside her work with Pyragraph, Peri is a business author and coach, specializing in creative and smart strategies for self-employment and small business. She has started, participated in, and consulted with businesses and nonprofits for more than 20 years. Her focus is on helping people build structure for their passions to find success on their own terms. Her blog is at www.peripakroo.com.

Peri received her law degree from the University of New Mexico School of Law in 1995, and a year later began editing and writing for Nolo, specializing in business and intellectual property issues. She is the author of several top-selling Nolo titles on small business and nonprofit start-ups including The Small Business Start-Up Kit, The Women’s Small Business Start-Up Kit and Starting & Building a Nonprofit

Peri accidentally started her first band The Moist Towelettes at the age of 40 with her husband Turtle O’Toole. Since then she has played in a number of bands including the blurts and her own downer-country project, Peri & the FAQs.

In 2012, Peri saw the need for a resource featuring the voices of a wide range of creative workers and the many different career paths they take. She founded Pyragraph to fill this need. Here’s the Pyragraph start-up story.

1 Comment

  1. New Jacked City - Pyragraph on February 11, 2013 at 10:25 am

    […] out there. One way of not getting screwed is being the most diligent businessperson you can be. Use a contract and be sure you understand it. Ask questions and be persistent. If something is unresolved or a concern for you, send that extra […]

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