Business Contract Basics

A contract is a legally binding promise between two or more parties. If you violate the terms of the contract, you are legally liable for a breach of contract. This may require paying damages to the non-breaching party. Courts will uphold binding contracts unless they are against public policy or otherwise illegal.

This article provides an overview of business contracts. However, contract laws are different depending on where you live. If you’re entering into a new business contract and need legal advice, contact a local business contract lawyer. 

Essential Elements of a Business Contract

A business contract is a legally binding agreement between two or more parties. These agreements outline the terms and conditions for a specific business relationship. A business contract defines each party’s rights, duties, and obligations. 

Business contracts can involve any aspect of business. This includes employment law, real estate law, the sale of goods, partnership agreements, providing services, and business dispute resolution.

For all of these contract issues, the contract must contain certain elements to be legally binding. Essential contract elements include:

• Mutuality of obligation: This is “a meeting of the minds.” A mutual obligation refers to the agreement between the parties. For example, two business owners agree to sell each other’s products. 
• Offer: This demonstrates one party’s willingness to enter into a bargain with the other party. An offer is a proposed exchange to another party to do something in return. For example, your business may offer an employment agreement to a potential employee. You will then hire them if they accept the offer. 
• Acceptance: Acceptance is the other party agreeing to the offer terms. You can show acceptance in several ways, including signing an offer, sending payment, or performing the terms of the contract. 
• Definite terms: A legally binding contract must spell out certain definite terms. This helps avoid contract disputes about mistakes or misunderstandings.
• Consideration: This is the exchange between the parties of something of value. It isn’t restricted to money. Consideration can include profits, benefits, responsibilities, or assumed debt. Generally, past consideration is not enough to form a contract.

Types of Contracts for Businesses

There are several types of contracts that you and your business can enter into, depending on the circumstances:

• Unilateral contract: The offeree has to accept an offer based on the performance of the contract. If there is no performance, the contract doesn’t exist.
• Bilateral contract: The offeree accepts the offer with a promise to fulfill a specific obligation at a later date. A breach of contract occurs if they don’t meet those obligations.
• Fixed-price contract: This specifies the amount owed when the terms are met. An example is the payment price for completing a project. The price can be firm or adjustable with a specific range of prices.
• Cost reimbursement contract: This differs from a fixed-price contract. It is commonly used by people, businesses, and governments for construction projects that require buying materials with fluctuating prices. Its terms specify that the party performing the work gets compensated for their costs. These costs are unknown when signing the contract, and they can change over time.
• Adhesion contracts: These make up the bulk of contracts you may be familiar with. They’re considered a “take it or leave it” proposal. One side retains all the bargaining power, and the other can either sign it or walk away. These include things like mobile phone contracts and rental agreements. 

Breach of Business Contracts

A breach of business contract happens when a party to a contract fails to meet their obligations.  

A “material breach” is a failure that strikes at the heart of the contract. This allows the non-breaching party to end the contract and seek compensation. A minor breach generally isn’t enough to alter the contract’s purpose. You may be able to sue for damages for a minor breach, but this isn’t enough to terminate the contract. 

An “anticipatory breach” happens when one party makes it clear that they won’t meet the contract’s deadline. This allows the other party to seek a remedy before the breach occurs. An “actual breach” is when a party fails to perform their obligations by the due date.

Certain remedies are available when you file a breach of contract lawsuit, including:

• Monetary damages
• Specific performance (requiring the breaching party to fulfill their contractual duties)
• Canceling the contract, known as recision
• Restitution (returning the non-breaching party to their original position)

Your contract may also spell out how to resolve any disputes, including whether you are required to use arbitration or mediation.

You should seek legal advice to determine the appropriate remedy based on the contract terms and the nature of the breach.

Find a Business Contract Law Attorney 

Business contracts often involve many complex legal issues. Before you enter into a business contract, consult with a business law attorney who understands your needs as a small business owner. Legal professionals understand contract law and can help you decide what to do if there’s a breach of contract.