Whether you are a tech startup or an established enterprise, contracts are an essential part of doing business. But what happens when a party fails to meet their obligations? Contracts determine how business deals are interpreted and enforced. 

Contract law is a large and complex subject, and today we are going to help you understand some fundamentals. Let's get started. 

What is a Contract?

A contract is a legally binding agreement used to document the benefits, obligations and responsibilities of two or more entities or individuals entering a business arrangement. In some cases, parties may agree to enter into a contract verbally, however verbal contracts can be difficult to enforce. We always recommend having a written instrument in place to provide clarity, enforceability, and protection for each party.

Contracts can address an almost infinite number of subjects, such as those for provisions of goods or services, partnerships, employment, and intellectual property just to name a few. Whenever businesses or individuals decide to work together, a contract is needed to ensure each party agrees to and understands their obligations and benefits.

What is Contract Law?

Contract law is a subset of law that addresses how contracts are formed, interpreted and enforced, including defining consequences for violating or “breaching” obligations.

Under business contract law, three components are required to form a contract: an offer, acceptance of the offer, and an exchange of value, called “consideration.”

Let's break each down:

Offer

All contracts begin with an offer. An offer is a formal declaration of an opportunity issued by the initiating party, called the offeror. The offer clearly states the details of the proposed transaction, including the terms of what must be done, and what is to be received, the agreed upon price, the quantity of goods, and any other details relevant to the transaction.

It's essential that these details be clearly stated in the terms of the contract, so that there is no possibility of confusion in performance for either party. 

Acceptance

When presented with an offer, the second party, known as the offeree, can either accept or reject the offer. If they choose to accept the offer, the acceptance must be clear and unconditional. 

Should the offeree wish to change any of the terms of the offer, they must make a counter offer. To achieve acceptance, both parties must unequivocally accept the terms of the contract. 

Consideration

There must be value exchanged between the parties. This is called consideration. Without it, there is no contract formed. Only a “grain of sand” is required to be exchanged by each party, i.e. there is no minimum value.

Example of a Contract in Action

Let's look at a hypothetical example.

A fintech startup is launching a new product, a mobile app that tracks a user's spending. They send a signed draft agreement to a cybersecurity company. It includes terms for creating a security protocol that can keep user's data safe and secure. It includes a set of specific software requirements that the start up needs to achieve to meet their goal, along with a proposed payment of $2.5 million dollars in exchange for the service. 

In this case the offeror is the fintech startup, and the offeree is the cyber security company. 

After reviewing the offer, the cyber security firm accepts the offer and agrees to create the security protocol for the startup. An officer of the security firm counter-signs the agreement. This constitutes acceptance of the contract. 

The consideration from the cyber security firm is the security protocol they create and implement for the startup. The consideration from the startup is the $2.5 million that they pay to the cyber security firm.

How Does a Contract Become Legally Binding?

In order for a contract to become legally binding, the language used must be clear in its definition of the offer and consideration that each party agrees to. 

Specific requirements that the offeror needs to be met must be clearly stipulated within the offer, so that the offeree can make an informed decision regarding acceptance of the contract. 

If a contract stipulates activity that is considered to be illegal, or violates public policy in any way, the contract would not be considered binding. 

Similarly, all parties involved in the contract must be able to understand and legally consent to the terms without undue pressure or duress. 

Common Costly Contract Mistakes

Whenever two entities enter a contract, it is vitally important to have an attorney experienced in business contract law help with negotiations and draft/review the document. Some examples of common mistakes include:

• Vagueness - Leaving details open-ended or ambiguous increases the likelihood of a breach of contract or misunderstanding of obligations and expectations.

• Inconsistent Terms - This can cause confusion and dispute about obligations.

• Unrealistic Expectations - Unrealistic deadlines or expectations can cause contract breaches that would otherwise be avoidable.

• Missing Clauses - Failure to address key business terms or “standard” terms like limitations of liability, or omitting a dispute resolution process, can lead to unintended results. 

Because contracts are legally binding, you should always seek professional legal counsel before entering into one. Mistakes can cause delays at best, or severe financial consequences and ruined relationships at worst. 

Conclusion

Understanding the intricacies of business contract law is essential for business. While this article provides a foundation for understanding contract law, complex contracts should always be reviewed with the help of an experienced attorney who understands their important nuances. 

Whether you are entering into a new contract, have been the victim of a breach of contract, or have been in breach yourself, it's imperative to get help from an expert in the law of contracts. 

For more than 25 years, SVTech Advisors has helped many businesses in the tech industry navigate through negotiation of contracts to ensure that they enter into fair agreements that protect their business interests. 

Contact SVT Law Advisors today, and let us help you enter into contracts that protect your interests.