What Are the Elements of a Business Contract?

It doesn’t matter if it’s typed or written by hand. Nor does it have to be any particular length. But for a business contract to be legally binding, it must contain six specific elements. As a small-business owner, it’s smart for you to know what these elements are because business contracts will probably be the bane of your existence – streaming from contractors, suppliers, vendors, customers and other interested parties straight to your desk.

At some point, you’ll want to review these contracts, whatever role your business attorney happens to play in the review process. After a few run-throughs, you may understand why small-business owners often become proficient contract writers; they learn how to root out the superfluous, focus on the imperatives and flip the page over to the bottom line.

Business Contracts Require Clarity

The actual contents of a valid contract will vary based on the subject of the contract. But the six elements must be present or else the contract cannot be enforced if it is challenged. As Villanova University says: “Courts can void a contract not only when they suspect deliberate malfeasance by one or more parties, but also when there is a lack of clarity or when errors are found in the stipulations.”

This is tough talk, but you may be relieved to know that if the day comes when you want to start writing your own contracts, you won’t have to enroll in a legal diction class to do so. Enforceable contracts should be written in clear and simple English – devoid of the “legal mumbo-jumbo” that many people associate with the law, Gentry Law Group says.

Start with 3 Essential Elements

Headings, bullet points and boldfaced type help, too – just as they do with a company contractor agreement, a company contractor license or any other company contract. Learning Hub suggests that you start using them right off the bat when you ensure your contracts address:

Capacity, or each party’s ability to understand and therefore enter into the contract. Three groups of people are automatically eliminated: minors, or those under the age of 18; the mentally disabled; and those who are intoxicated. If one of these people forges ahead with a contract anyway, it’s voidable.

Offer, or the terms and conditions that brought the parties together in the first place. This is the “meat” of the contract, and perhaps the one your business attorney can provide the most guidance on until you get the hang of it. But people rarely go wrong with being overly specific; it’s the absence of essential details or vagueness that can cause problems. For example, if you’re entering into a business contract to sell your office copier, you would have to include details such as a description of the equipment, the selling price, the terms of the sale and the date of the transaction.

Acceptance, or a willingness by the parties to live by the terms and conditions of the contract. For this part of the contract to be valid, three things must be present: the offeree must understand the offer; they must be intent on accepting it; and “the acceptance (must be) expressed as an agreement to the conditions of the offer.”

Finish with Legality, Consideration and Mutuality

Legality should be the easiest part of the contract. This means that the terms and conditions must be legal; if they’re not, the contract is invalid. For example, selling a copier is legal; breaking into a closed business in the middle of the night, stealing a copier and selling it on an online shopping site is not.

Consideration is a contract’s legal way of saying that an exchange of some sort must take place between the two parties. Most often, it’s money, as with the office copier. But it can also be the promise of an action or even an inaction. For example, perhaps in exchange for the copier, the other party agrees to design a website. Doing something voluntarily doesn’t count as consideration; neither does something that is part of someone’s regular responsibilities.

Mutuality is a statement that the contract depends on both parties mutually assenting to the terms and conditions of the contract. If one party isn’t bound to the contract, then neither is and the contract is void.

Believe it or not, you’re already going the extra mile by putting your business contract in writing. State laws differ about which agreements must be written (as opposed to verbal) to be valid and enforceable. For example, real estate contracts must be put in writing. Consider your vigilance another way that you’re setting your small business apart – as one that takes nothing for granted before you make your way to the bottom line.