What Is A Contract In Business Law?

When it comes to all areas of the law, it’s imperative to understand what your role, rights, and responsibilities are. Business law is certainly no exception, with its multitudes of areas that require contracts to establish different situations, needs, and purposes. While all business contracts ultimately serve to obligate parties to fulfill their duties, business contracts may differ in many other ways. 

This article explains what a contract is in business law and what makes it legally enforceable. For personalized advice, contact our team at J Mishkin Law today.

What Is A Business Contract? 

A contract is an agreement between two or more parties that creates an obligation to perform, or refrain from performing, a specific task or duty. A party can be a singular person, business organization, or government agency. 

While many contracts are typically between two parties, they can include additional parties. In any case, only the parties that enter into the contract have a legal obligation to the duties and rights stated in the contract. 

A business contract can relate to almost any type of transaction. This is often regarding a sale or service, but can also extend to the transfer of property or business ownership or a combination of other kinds of transactions. 

As long as all parties are of age, fully understand the contract, and are not misinformed, under undue influence, or under duress, they may enter into a contract. 

If the contract is fraudulent, the parties are no longer legally obliged to fulfill its terms. This does not apply if the contract is valid despite being seen as shortsighted, irresponsible, or a ‘bad bargain’.

The Five Elements Of A Business Contract 

A contract is a binding agreement that is legally enforceable, provided that it meets the five elements explained below. 

1.   Offer

An offer is where one party extends a proposal to the other. This can also be called a ‘meeting of the minds’. The offer can be as simple as “I will mow your lawn” or “I will purchase this item from you”, or much more complex. 

A valid offer must include specific and definite terms, such as the parties being capable of understanding the terms. If a contract goes to court, the following four elements will be considered to determine its validity: 

•     The parties;
•     The length of time for performance (term or service schedule);
•     The price/value; and
•     The subject matter or scope of service.

As long as the offer is clearly communicated, the receiving party understands it, and the receiving party has the ability to accept or reject it, it is a legally binding contract. This includes if the receiving party does not fully read the contract. If somebody decides to enter into a contract without reading it, they do so at their own risk. 

2.   Acceptance

Acceptance of the offer must be unequivocal and unqualified, meaning that it conforms to the exact terms of the offer. This is known as the ‘mirror image’ rule. 

If acceptance of the offer is conditional (depends upon) another stipulation or event, this is known as a counter-offer. In this case, conditional acceptance forms a new offer where the parties become reversed. 

3.   Mutual Consideration

During mutual consideration, each party deliberates on the value received and given. This means that all parties have offered something for the other/s to consider, whether this is money, a service, goods, property, and so on. All parties will ultimately be exchanging something for something else, regardless of whether or not they’re the receiving party. 

4.   Legal Parties

When the above three terms have been met, it is only a legally enforceable contract if all parties are above 18 years old (in most states). In states where a person is considered contractually incapable due to reasons such as age, the contract is void. 

5.   Legal Purpose

Any contract must be legally fit for purpose. Again, if the above stipulations are met but the contract is for an illegal purchase or trade such as a contract to sell/purchase illicit drugs, the contract is void.

Types Of Business Contracts 

Contracts can be based on four classifications: 

1.   Contracts Based On Formation

This can be further broken down into: 

•     Express contracts— A contract resulting from a conversation or expression.
•     Implied contracts— Occurs without an expression and can be implied in fact or implied in law, also known as a quasi-contract.
•     Quasi-contracts— Exists regardless of consent.

2.   Contracts Based On The Nature Of Consideration

These can also be broken down into types: 

•     Unilateral— Only one party makes a promise, such as a contract established with just an acceptance of an offer
•     Bilateral— All parties promise to perform or refrain from performing an act. This contract is also known as a two-sided contract.

3.   Contracts Based On Execution

Contracts based on execution can be either: 

•     Executed— A contract in which performance has already been completed.
•     Executory— A contract that obliges the parties to perform their obligations (or refrain from performing specific duties) in the future.

4.   Contracts Based On Validity

These can come in five forms: 

•     Valid contracts— A legally enforceable contract.
•     Void contracts— An unenforceable contract that imposes no obligations on the involved parties.
•     Voidable contracts— A contract that was established under physical and/or mental pressure that will render it invalid or void in the future.
•     Illegal contracts—A contract with an unlawful object.
•     Unenforceable contracts— A contract that hasn’t fulfilled certain legal formalities.

Need Help With Your Business Contract? 

If you need help understanding or navigating a business contract, J Mishkin Law is here to help. Our experienced business attorneys have a thorough understanding and experience in all areas of business law including contracts and agreements, acquisitions and mergers, securities and regulations, and more. To speak to our highly professional and knowledgeable team, contact us at J Mishkin Law today.

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