What is an Enforceable Business Contract?
An enforceable business business contract is essential to conducting a business. Done right, they provide peace of mind and clarity to both parties. When rushed through without consideration to probable outcomes that may disadvantage you, the business contract may not be worth the paper it’s written on. There are many types of business contracts, including sales contracts, services agreements, distribution agreements, licensing agreements, manufacturing and supply agreements, employment contracts, commercial lending agreements, lease agreements and purchase and sale agreements of real or capital property.
This article will look at the basics: from the essential elements of a contract to what to do when one party is in breach of a contract.
What is a business contract?
Business contracts are agreements between two or more parties that is enforceable by law. Under operation of law, it can be written or oral; however, should you be forced to demonstrate the contract’s existence as a matter of evidence, it’s best for a contract to be written with all its terms and details included with utmost clarity. A contract is, essentially, a promise, whereby one party agrees to do something in exchange for a benefit.
Making Business Contracts Valid and Enforceable
In order for a business contract to be considered valid, there must be:
- Offer and acceptance
- Lawful Purpose
Offer, Acceptance, and Consideration
In every valid contract, offer, acceptance and consideration are vital aspects. First an offer is made that contains all the important and relevant terms of the contract in a clear and precise manner. Then the offer is accepted, after which something of value, either an object or service is exchanged between the parties as consideration.
The actual value or amount exchanged between the two parties does not matter under law. It has been long held that consideration can be as small as a ‘peppercorn’ – in other words, a small grain of spice is enough to constitute valuable consideration. As long as there is some degree of exchange involved, it is considered to be valid. For example, you hire a landscape company to lay grass in your backyard in exchange for a sum of money. The landscape company has agreed to lay grass and you have agreed to pay for it in return.
Those terms that are not clearly defined are deemed to be implied. If the offer is not accepted within a period of time, the offer expires and there is no contract. The offerer may also revoke or cancel the offer before it is accepted. As for the party presented with the offer, also known as the offeree, he may decide to make a counteroffer or new offer as an amendment to the original offer.
It is important to note that once an offer is accepted, it forms a binding contract. Therefore, be cautious as to your offers because if accepted by the other party, you will be legally bound by those terms.
In every valid business contract, both parties must have the ability or capacity to understand the terms and nature of the contract. Therefore, anyone with a developmental disability, impaired judgement or who is not the age of majority in Canada (18 or 19 years) does not have the capacity to enter into a valid and enforceable contract.
A minor may enter into a valid business contract if it is considered necessary to ensure his or her health and welfare as in an employment contract. If it is not in the minor’s best interests, the contract is declared void.
Each party involved in the business contract must freely consent or agree to the terms of the contract. For example, Candace has signed a contract with Roberta’s Flowers. The contract outlines what kind of flowers, how many, where they will be displayed, and at what cost, to which Candace has freely provided, as there has been no undue influence or pressure exerted on Candace.
Mitigating Consent: Misrepresentation, Mistakes, and Undue Influence
Genuine consent may be prevented through misrepresentation, either innocent or fraudulent, of a material fact so significant that it causes the other person to enter into a contract. An innocent misrepresentation occurs when the person making a representation about an service or item innocently believes something to be true, as when a salesclerk repeats a manufacturer’s claim that a cream will make you look 10 years younger. A fraudulent misrepresentation occurs when one party attempts to deceive another person deliberately. Both types of misrepresentation will allow the buyer or offeree to back out of contract.
Certain types of mistakes can make a business contract unenforceable by law. For example if a clerk mistakenly sells a product that is out of stock or if a product is sold for a purpose outside of its intended use.
Undue influence occurs when one party uses a great deal of pressure, as might happen with an aggressive salesperson, while duress occurs when one party uses threats, intimidation, blackmail, or violence to force the other party into forming a contract.
Canadian law requires that business contracts are lawful in their intent. In other words, no contract can be negotiated for a service or exchange that violates the law. For example a contract where one party hires another person to kill another person is not valid and therefore, unenforceable.
Types of Business Contracts
Express and Implied
An express business contract is a legal agreement in which terms are transparent and known to all the parties involved, such as when you sign a contract with a real estate agent. An implied business contract is one that is inferred by the parties’ conduct, such as when you eat in a restaurant, it is implied that you will pay the bill after you eat.
Under Seal and Simple
Business contracts under seal are otherwise known as formal contracts, meaning that they are signed, witnessed and marked with a seal, and carry an irrefutable presumption of consideration, which means that one party can expect the other party to fulfill his/her obligations without argument.
A simple contract—verbal, written, or implied—that is not marked with a seal requires consideration to support it in order to be legally binding. This means that each contracting party must exchange something of value. Under common law, all contracts must require consideration, along with an offer and agreement, in order to be valid.
Discharging a Business Contract:
Performance and Mutual Agreement
There are several ways to discharge or end a business contract. Performance occurs when the contract has been fulfilled through the performance of both parties. Mutual agreement takes place when both parties agree to terminate the original contract, perhaps in order to enter a new contract with different terms.
Impossibility of Performance and Breach
Impossibility of performance occurs when it is impossible to fulfill the business contract such as when a music producer has to call off of a concert because of weather, while breach of contract takes place when one party fails to fulfill an essential or substantial part of the contract. However, a judge may decide that a party is not in breach if he/she has fulfilled most of the terms of a contract, thereby fulfilling substantial performance.
Remedies to Breach of Contract
Sue for Damages
If a breach of contract occurs, you have the right to sue for damages, which may result in a judge awarding you damages to compensate you as the injured party.
Specific Performance occurs when a judge orders the party in breach to fulfil the terms of the contract when damages or compensation are deemed insufficient. For example, you enter into a valid legal contract with an art dealer whereby you agree to purchase a copy of a Picasso for a specified sum of money. It is then discovered to be an authentic Picasso and worth much more than was originally thought. The art dealer backs out of the contract. The court can decide that compensation is not sufficient as it could never be enough to purchase a real Picasso. The court may decide to order the art dealer to fulfill the terms of the contract. This is specific performance.
As with Specific Performance, an injunction takes places when damages are not considered to be sufficient. An injunction can be ordered, which means that one party to the contract is ordered not to carry out an action. In the context of contracts, this most often occurs when one party is in breach of a non-compete agreement, a type of contract where one party agrees not to conduct business similar to the other party’s for a specified period of time, usually within a prescribed geographical radius.
For example, Tony sells his garden business to Steve. Tony signs a non-compete not to sell flowers for the next three years with a 10 mile radius. If Tony continues to do business, he is in breach of the contract and Steve can seek remedy by asking for an injunction, which prohibits Tony from continuing his garden business on the side.
A judge my order a rescission, whereby the contract at issue in the dispute is terminated or the terms are amended. Rescission is an equitable remedy which allows a contractual party to cancel the contract. Parties may rescind if they are the victims of a vitiating factor, such as misrepresentation, mistake, duress, or undue influence.
The viability and success of your business depends on an ironclad contract, one that is legal, valid, and enforceable. At the heart of writing a contract is anticipating the possible scenarios that may occur in the future and including provisions that address these. It is imperative that you consult an experienced lawyer in contract law to make sure that your business is protected.
Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.