Understanding Contract Law: Key Elements and Common Pitfalls
Do you want to avoid paying thousands of dollars in legal fees over unnecessary contract disputes?
Every year, 12 million small companies file contract lawsuits. Seriously. That’s not a typo.
Millions of small businesses are hauled into court every year over contract disputes.
The problem is that few people understand the fundamentals of contract law in the first place. So, they trust that the contracts they sign are legit.
But when they aren’t, business owners are left scrambling to figure out why they now owe someone thousands of dollars.
The good news is that you don’t need to be a lawyer to understand contract law fundamentals. Knowing a few key elements and common contract pitfalls can help you avoid major legal headaches and protect your business. And if you have expert business law solutions like Chicago Business Attorneys, you are in good hands.
What you’ll discover:
- Contract elements every valid contract must have
- Contract law fundamentals that invalidate agreements
- How to identify red flags before signing a deal
What Makes a Contract Valid?
Before we talk about what makes a contract legally valid, it’s important to know that not all agreements are contracts. In order for a contract to be legally enforceable, it has to include some specific elements.
If one or more of the following elements is missing, then the agreement is not a valid contract.
Offer and Acceptance
The offeror must present an offer and the offeree must accept. Simple, right? However, it is important to note that the acceptance must be exact. For example, if a seller offers 100 widgets for $5 each to a buyer and the buyer accepts but changes the delivery date, it is not an acceptance. It is now a counteroffer.
Consideration
This simply means that something of value must be given in exchange for something of value. In a contract, both parties have to provide some sort of consideration in order for it to be enforceable.
Capacity to Contract
This is self-explanatory. Both parties must have the legal capacity to enter into a contract. They must be of legal age (usually 18), of sound mind, and not under the influence.
Illegal Purpose
This is another no-brainer, but contracts cannot be used for an illegal purpose. You cannot contract someone to do an illegal job.
Mutual Assent
Last but not least, both parties must understand what they are getting into and agree to the contract’s terms.
Contract elements like those listed above must be present in a contract for it to be considered valid and enforceable.
The Biggest Contract Pitfalls that Cost Businesses Money
Now that you know the contract law fundamentals, it’s time to talk about the worst contract pitfalls that can lead to court and cost you your hard-earned money.
Vague or Ambiguous Contract Language
If a contract uses unclear, ambiguous, or vague language that can be subject to multiple interpretations, then you have a recipe for a contract pitfall.
Disputes occur when two parties have different interpretations of what was agreed to in a contract.
For example, what does “deliver promptly” really mean? 24 hours? One week? By the end of the month? Breach of contract disputes increased 15% in 2023, and vague contract language is a major culprit.
When there is a lack of clarity in contract terms, that is when problems start to happen.
Avoid being too ambiguous with terms such as dates, dollar amounts, expectations, deliverables, etc.
Verbal or Oral Contracts
Handshake deals may sound great because it means that two people are based on trust and honor.
However, this is not the reality. When it comes to a contract, an oral one is hard to prove.
When a dispute arises, a verbal contract falls in the “he said she said” category. No court is going to take sides on this one.
The easiest way to avoid this is to ensure that all contracts are in writing.
Failure to Read Contract Before Signing
Believe it or not, some people sign contracts before they actually read them.
While this might seem like no-brainer, you would be surprised with the number of times this pitfall crops up.
Signing a contract without actually reading it can expose you to unreasonable payment terms and conditions, huge penalties, liability for damages that you have no control over, unfair dispute resolution clauses, and automatic renewal.
You do not have to be a legal expert to read a contract. You just need to be a bit more diligent before signing one.
Failure to Consider State-Specific Contract Requirements
Contract law is state-specific and what is enforceable in one state may not be in another state.
Businesses that operate in more than one state need to consider which state’s contract laws are going to apply to their contract.
In addition, some states have specific requirements for certain contract clauses to be bolded or a particular font size.
Failure to Include Dispute Resolution Terms
When entering a contract, the last thing on the mind of a business is the dispute resolution clause.
However, businesses spend $870 billion annually on dispute resolution every year. So it’s always a good idea to include dispute resolution terms and conditions.
Your contract needs to clearly stipulate the method for resolving disputes, state law that will apply in the event of a dispute, where legal action will be heard in the event of a dispute, and who is responsible for attorneys’ fees.
Failure to Understand Termination Clauses
Termination clauses need to be included in every contract.
Termination clauses are there to state how and when the contract can be terminated by either party. Failure to include a termination clause can land you into problems.
If for some reason, you no longer want to be in business with someone or someone is no longer delivering the way that was agreed upon, you will have a problem.
Termination clauses should have notice requirements and include a termination fee, deposits, obligations that survive the termination of a contract, and many more.
Relying on Templates
The internet is awash with free contract templates.
While these can be great, using them as-is can be risky. Templates are usually generic and as such do not consider your state’s specific requirements, your needs as a business, and details specific to your contract.
The only way around this is to have a lawyer draft the contract for you.
The Bottom Line on Contract Elements
Contract law is not as difficult as most people assume. The key is to know the fundamentals of contract law and watch out for some of the pitfalls listed above.
A contract needs offer, acceptance, consideration, capacity, and purpose. Without any of these, a contract may not be valid.
In addition, ensure you are not being vague or ambiguous when drafting or reviewing contracts, get everything in writing, and actually read the contract before signing.
The major pitfalls that lead to litigation and the courts are avoidable. Learn the elements of a contract, and know what you are getting yourself into before signing.
