Where there's dealing with vendors, suppliers, other third parties contracts are going to be a big part of your business. In this lesson, we're going to talk about contracts and how to be successful at negotiating contracts. A contract is a voluntary agreement between two or more parties that's legally enforceable. Now, note that we said a voluntary agreement. There's nothing in that definition of a contract that requires it to be in writing. We go back to our definition there. It's voluntary agreement. That will make you be in writing. It can be orally. Just so you are aware, oral agreements for the most part are just as enforceable as written agreements and there are some exceptions to this rule for certain types of agreements. But a contract can very well be an oral contract. It could also be a written contract, and so you want to keep the general idea of a contract in mind when you take it about what constitutes an agreement. Any voluntary agreement between two or more parties would constitute a contract. We're going to go through what the elements of what a contract is. First, the contract has to have a legal purpose. For example, if you pay someone to kill your spouse, while that seems like an agreement, it's not a contract because it's not a legal purpose that underlies the agreement between those two parties. Other than the idea that the contract has to be for legal purpose, the other elements of a contract include offer, acceptance, consideration, and capacity. We're going to walk through each of those individually here starting with offer. An offer is a proposal to enter into an agreement. It's not a contract. It's just an offer to do X for you, that's an offer. But it must include the essential terms of the agreement. It must include the subject matter, the price, when the products or services should be delivered, etc. Whatever the central terms of the agreement are, must be communicated in the offer and the offer actually must be communicated by the person who's making the offer, and the next step is acceptance. Now, in order for there to be acceptance there must be what we call a meeting of the minds. Both parties must understand that they are agreeing on the essential terms of the agreement. The acceptance must reflect the exact terms and the exact conditions of the offer. For example, if the offeree, the person that's receiving the offer, if they aren't ready, "I need more time", or the offeree adds additional terms, "Well, I'll do X if you pay me more," or otherwise add conditions to the offer, then that's not an acceptance. It may actually be what we call a counter offer. If the offeree, the person who's receiving the offer, adds additional terms then the acceptance does not mirror the offer. You don't have an acceptance. That's what we call a counteroffer and the counter offer actually destroys the original offer. Let's underline that point. A counteroffer destroys the original offer. At the moment, the offeree makes a counteroffer, the original offer is no longer on the table. It's gone. In order for there to be a contract, in that instance, the person making the counteroffer now is the offeror, and the original person who made the offer must now accept the counteroffer on its exact terms in order for there to be an acceptance. Let's give an example of this. Let's say that Abigail offers to pay Billy $1,000 to build a website for her business. Billy responds, "Hey, I'll build your website, but it's going to cost you $2,500." There's no acceptance here because what Billy's response did, it was essentially changed the terms of Abigail's offer and that by changing the terms, Billy essentially destroyed Abigail's offer and now he's making a counteroffer at $2,500. Now Abigail can accept the $2,500 counteroffer, and then we may have a contract, but something short of that means that this will not be a meeting of the minds. Now we do have an area of law that we call acceptance by action. For example, in our website example, Abigail offers to pay Billy $1,000 to build a website. Billy doesn't respond, he just goes right at work and build a website. By performing that act in response to the offer that the law may imply is acceptance through Billy's action, which will form a contract for the building on the website at the $1,000 price. I should put a note here about option contracts, which is a separate contract that gives the offer weigh additional options and that option is a separate agreement that must be supported separately from the underlying offer. For example, you can offer someone the option to buy before another vendor purchases your products or offerings. Not only do you have the underlying agreement to purchase, but you have the option of doing that before another vendor of yours makes that purchase. That option contract is a separate contract from the underlying agreement. The third aspect of a contract is what we call consideration. The purpose of consideration is to make sure that there's a bargain for exchange, making sure that both parties are giving up something of value for purposes of the contract. That's something of value can be money, it could be property, it can be the exchange of promises, pretty much anything, and the value of a can be small. In terms of the value being small, let's say in our previous example, Abigail offered Billy one dollar to build her website. If Billy accepts for one dollar, that one dollar is probably sufficient, is sufficient consideration for there to be a contract. Now, exchange of promises gets a little tricky. When you're exchanging promises as consideration for a contract, a promise is to either do something that you are not required to do or to refrain from doing something that you otherwise would be free to do. That's what you're giving up in terms of the exchange for promises. Let's say Abigail and Billy now are siblings, they don't have a good relationship. Billy just got out of prison at a neighboring state in his own parole. The terms of his parole prohibits him from traveling across state lines. Abigail, who's in a neighboring state, is getting married this Saturday, and she doesn't want her brother Billy to show up and ruin her wedding. So she calls Billy and she says, "Hey Billy, I'll pay you $100 not to come to my wedding on Saturday." Billy agrees. Is there a contract here? Probably not. This agreement probably fails for lack of consideration because while Billy agreed to Abigail's terms, Billy is not giving up anything because under the terms of his parole, he's prohibited from traveling across state lines, so agreeing not to pass state lines is not something of value that he's giving up in exchange for Abigail's payment of $100. That wouldn't be a contract. Now let's talk about capacity. In order to enter into a contract, even if there's offer and acceptance and consideration, the parties must have the capacity to enter into a contract. This typically comes up when you're dealing with minors like selling products or services to someone underage, that person may not have capacity to enter into that agreement and can thus void the agreement. The same with disabilities. Another place where it comes up is authority, particularly when you're dealing with corporate forms. If you dealing with a partnership or an LLC, who has authority to actually bind the entity? If it's an LLC, it has to be a member of the LLC or officer of the company, if it's a partnership, it probably needs to be a general partner or a limited partner, depending on the type of partnership it is. Those are the questions that you want to keep in mind when you're thinking about whether the parties who you are negotiating with have the capacity to enter into an agreement. In terms of wrapping up, contracts are very important to your business; they bring predictability, they bring clarity, and they bring accountability. Without contracts, you're just relying on hope, you hope that your vendor will pay you at some unspecified time. Contracts allows you to pin down some of these key elements to bring predictability to your business. In order for there to be a contract, there must be a meeting of the minds supported by bargain for exchange, so they must be offer, acceptance, and consideration. Keep in mind that contracts can be oral, written, or even implied, so be very careful about agreements that you're making with third parties in connection with your business.
