What Every Business Owner Should Know About Contract Law

Contract Law Business Owner Element

Contract Law for Business Owners

It is unrealistic to expect every business owner to have a thorough command of contract law. Running a business is a very demanding job, and so unless they are fortunate to have a formal background in law business owners simply do not have the time required to master all the finer points of contracts. But, though mastery may be unattainable, most – and ideally all – business owners should make it a priority to acquire at least a basic understanding of contract law.

Having a grasp of basic contract principles is beneficial to business owners in myriad ways. Business owners can look forward to negotiating deals with other businesspeople with greater confidence; they can confer with business lawyers with greater ability; they will have a better sense of the implications which can follow from discussions with employees. In short, they will be able to run all areas of their business with an increased level of independence.

Business owners can best serve themselves by gaining a firm understanding of the elements of a contract. The elements of a contract are relatively easy to learn; but, as we have seen in prior installments of Huddleston Tax Weekly, tricky things start to emerge when these seemingly straightforward elements apply to complex factual scenarios.

Contract Elements

There are five elements which must always be met in order for a valid (i.e. enforceable) contract to be formed: these elements are offer, acceptance, consideration, legality and capacity. The sixth element of a contract – writing – need only be met in certain rather than all cases.

The rationale of each of these elements is quite straightforward. In order for a contract to be formed, there must be an offer which discloses clearly what the terms of the agreement will be. These terms must be clearly understood by all parties. The terms must be fully accepted by all parties. There must be adequate consideration between the parties – that is, there must be an exchange of things which are of roughly equal value. The terms of the contract must be legal – in other words, people cannot contract for goods or services which are prohibited by law. And the parties of a contract must have the capacity – meaning they are of sufficient age and mental condition – to accept the terms of the agreement.

In cases involving things which are of high monetary value the parties must also put the terms of the contract in writing. However, if writing is not required, a valid contract has been formed when all of the other five elements have been satisfied.

The Enforceability of Promises

Contract law is concerned with determining which agreements (or promises) are enforceable by courts. The elements listed above are required in order for an agreement to be facially valid; however, though this is the case, in certain instances promises may be enforced despite the fact that not all elements were met. For example, the doctrine of promissory estoppel can be invoked when someone relies on a promise to their detriment even though a facially valid contract may not have been formed.

As mentioned above, complexity arises when these elements are applied to real factual scenarios. The factual details of agreements may yield doubt as to whether specific contractual elements were properly satisfied; courts are designed to step in and settle these disputes. Our entire body of contract case law is a record of how parties can have very disparate views of the same facts which surround the creation of a contract.

It is important for business owners to fully understand the elements of a contract; but they must also be aware of how easily disputes can arise as to whether elements were adequately met.

Image credit: Chris Potter

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johnAbout john
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

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Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.