Contract Basics for Small Businesses

Contract Basics for Small Businesses

Most small businesses are familiar with contracts. The owner signs them to purchase products used in their business and, in some cases, require their customers to sign contracts to purchase the owner's product or service. Here is some basic contract information which I hope will be helpful to you.

The main components of a contract under the law are offer, acceptance and consideration. For example, you make an offer to someone to buy 100 units from you. The buyer accepts the offer by agreeing to your price for the units and then pays you for the units when they are delivered. This entire transaction is a contract.

Inherent in this contract is the assumption that the parties will engage in good faith and fair dealing during the transaction. For example, the buyer is expecting that the units he bought meet his required specifications which he supplied to the seller prior to the production of the units. If the units are not produced to the buyer's specifications, then the buyer could claim that the seller acted in bad faith and did not deal fairly with the buyer.

In the event a contract is formed and either party does not follow through with their part of the contract, then the nonperforming party can be sued for specific performance and/or consequential damages. Specific performance is the requirement that one party delivers according to the terms of the contract. Consequential damages are the damages incurred by the party who did not receive the product in a timely manner and, therefore, incurred damages as a result of the actions of the nonperforming party. Note that the damages must be reasonably foreseeable to be awarded.

An example of specific performance would be an agreement between two parties to sell and purchase a work of art. If the seller fails to deliver the work of art to the buyer and the buyer is ready, willing and able to pay the purchase price, the buyer could sue the seller for specific performance and ask a court to order the seller to deliver the work of art as agreed in the contract.

An example of consequential damages would be a situation where a buyer was assembling a product for delivery to its customers and the buyer had ordered a component part from the seller. If the seller fails to deliver the component part on time, as set out in the contract, the buyer could miss deadlines for delivery of the completed product he sells to his customers and therefore suffer a loss of profits along with other related damages.

Note that contracts can be oral or written. A written contract is recommended since it is easier to determine the terms and conditions agreed to by the parties if those terms and conditions are in writing. The terms and conditions of any written contract should be clear and concise so that there is no mistaking the intent of the parties. In addition, if a dispute arises between the parties, a court will interpret the contract within its "four corners". In other words, what terms are actually included in the written contract without considering anything outside the contract such as oral conversations between the parties.

If you should have any questions concerning a contract for your business or a contract you have been asked to sign, please give us a call at Zimmerman & Steber. We are here to help.