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Fundamentals of Making Contracts



“Gentlemen, this is a football.”  After losing the 1961 NFL Championship to the Philadelphia Eagles, this is how Vince Lombardi, one of the winningest football coaches in NFL history, began the following year’s training camp.[1]  He went back to fundamentals.

It is in that spirit that I want to share a few thoughts on making contracts, which are all over the place for most small business owners. Whether those contracts involve advertising, purchasing or any other aspect of the business, there are at least three things that every contract must have in order to be legally binding.  In legal parlance, we call them: (1) offer, (2) acceptance, and (3) consideration.

Offer

An offer is the first stage of forming a contract.  It has been defined as “a display of willingness to enter into a contract on specified terms, made in a way that would lead a reasonable person to understand that an acceptance, having been sought, will result in a binding contract.”[2]   By way of example, let’s say that Wilton, Inc. (“Wilton”) wants to redesign some of its product labeling and trademark images. They have read reviews and recommendations and are hoping that Menace Design Studio (“Menace”) will do the work.  Wilton contacts Menace to explain which services they need and Menace offers to take Wilton on as a client.  Menace emails an offer to create a new logo for Wilton for $500 and to create art for its company packaging for $2000. Because Menace is a highly sought after design company they require that the offer must be accepted by email within 14 days.

Acceptance

Once an offer is made the power to accept the offer lies with the offeree (i.e., the person to whom the offer has been made).  Acceptance has been defined as “[a]n offeree’s assent, either by express act or by implication from conduct, to the terms of an offer in a manner authorized or requested by the offeror, so that a binding contract is formed.”[3]  As a general rule, the acceptance must comply exactly with the terms laid out in the initial offer. If any terms are changed, the acceptance will be considered a counteroffer.[4]

Going back to our example, Wilton likes Menace’s offer but they want to contract for the new logo design first and then decide if they are satisfied with that before purchasing any package designs. Wilton emails Menace to explain as much. Has Wilton accepted Menace’s offer?  Probably not. It looks like Wilton revised the terms of Menace’s original offer and, by so doing, created a counteroffer.  Thus, only if Menace accepts Wilton’s new terms will a contract be formed.

Consideration

The third element of a legal contract is consideration. Consideration refers to “[s]omething (such as an act, a forbearance, or a return promise)” which is “bargained for and received by a promisor from a promisee.”[5]  In other words, each party must give up something of value in order to form a binding contract.  In our hypothetical, Wilton has offered to pay $500 to Menace for a new logo for Wilton.  If Menace accepts the offer, Wilton will be giving up $500 dollars, Menace will be performing design services, and there will be consideration on both sides of the deal.

Wrapping It All Up

So there you have it.  Offer, acceptance and consideration.  Three fundamental ideas about contracts that every small business owner should understand.[6]

 

© 2017 The Worthy Law Group, PLLC. All rights reserved.

References:

[1] http://jamesclear.com/vince-lombardi-fundamentals

[2] OFFER, Black’s Law Dictionary (10th ed. 2014).

[3] ACCEPTANCE, Black’s Law Dictionary (10th ed. 2014).

[4] Id. (“If an acceptance modifies the terms or adds new ones, it generally operates as a counteroffer.”).

[5] CONSIDERATION, Black’s Law Dictionary (10th ed. 2014).

[6] If you would like to know more about these fundamental concepts, or have other questions about a contract that you are a party to, please feel free to contact The Worthy Law Group, PLLC for a free consultation.

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