Effective Contracts Can Help You Build and Maintain Healthy Business Relationships

Monday, April 8, 2002

Agreement Builder, http://www.digitalriver.com/dr/v2/ec_main.entry17c?sp=10007&cid=0&sid=1320&pn=5&pid=242404

Whether you are a small business owner or a deal-making entrepreneur, you need legally binding contracts to protect relationships with the people and companies who contribute to the success of your business. The following information will help you understand several important aspects of a contract. A good contract can help you structure legal deals with people and companies vital to your success.

A contract is a legally binding agreement between two or more parties who make one or more promises to each other. A good contract clearly lists the terms of the agreement, stating exactly what promises the parties are making to each other.


Knowing the different types of contracts will help you build solid, legally binding deals.

Verbal vs. Written Agreements

· Contracts can be either verbal or written, although to be enforceable most contracts must be in writing. Since the content of verbal agreements can't necessarily be proven to exit (with certainty), it’s always better to have a written contract.

Bilateral vs. Unilateral Agreements

· Regardless of whether agreements are verbal or written, contracts are either bilateral (the contract affects or is undertaken by both parties equally, and is binding on both parties) or unilateral (the contract affects or obligates only one of the parties involved). A bilateral contract is created when both parties promise to do something. Because both parties undertake a promise, a bilateral contract has two rights, and two duties.
· A unilateral contract is created when one party promises to do something if the other party also does something, and the other party accepts by doing that which was requested. Because only one party makes a promise, a unilateral contract has only one right and one duty for the party who makes the promise.

In order to be enforceable and valid, contracts must meet criteria such as:

· There is mutual assent.
· Each party involved in the contract either gets or gives up something (referred to as consideration).
· There are no defenses to the contract's creation.

Contracts that are unenforceable (and not valid) include

· Contracts where the promise is illegal in nature, for example, a contract to steal a car. These are considered void (or voidable) contracts, and have no legal effect -- ever.
· Contracts that are impacted or superseded by defenses (or laws) not discussed in the contract itself, for example, a statute of limitations that sets a maximum time period for the enforceability of certain agreements.
· Contracts that appear to be valid may in fact be invalid if they can be found to be voidable. A voidable contract, such as a contract entered into by a minor, or by a mentally ill person, can either be avoided or ratified, depending on the circumstances of the contract.

You can avoid costly legal problems by understanding how to build, customize and use contracts to negotiate and complete profitable deals for your business.

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