Monday, December 2, 2013

Contract Law 101: What every business person should know

You don't have to go to law school to learn how to create a contract. But there are some things every ag professional should know about contract drafting. A contract only needs three things to be enforceable: an offer, acceptance, and consideration. These are the basics every law student learns in their first semester:

1. Offer. Formation of a contract begins with an offer. One person offers to do something in exchange for something else. Offers are “revocable” until such time that they are accepted or changed. But you cannot revoke an offer after it has already been accepted. That’s why it’s always good to put a time-frame on how long an offer remains open. You also want to be sure an offer is clearly communicated, whether verbally or in writing.

2. Acceptance. Acceptance of the offer must be absolute to form a contract. One of the more common questions I get on this subject goes like this:
Seller: “I’ll sell you my farmstead for $100,000.”
Buyer: “I accept your offer, but you have to throw in the antique tractor in the barn.”
Seller: “I’ll include the tractor and sell you both for $125,000.”
Buyer: “I don’t want the tractor for that price, but I still want to purchase the farmstead for $100,000.”
Seller: “I no longer want to sell you my farmstead.”Does the Seller have to sell the farmstead for $100,000? 
The answer is most likely not, and here’s why: whenever someone attaches another term or condition onto their acceptance, a new “counteroffer” is formed requiring new acceptance. The exchange above included one offer and three counteroffers, but never did one party accept the offer of the other.

3. Consideration. Consideration is the value given by both parties to a contract that induces them to enter into the agreement. You need to know two things about how courts view consideration. First, courts treat even a small amount of consideration as sufficient. Second, courts are reluctant to inquire into the adequacy of consideration. If you are foolish enough to sell something worth $100 for $1, courts will still enforce the contract, absent duress, incapacity, or other special circumstance.  Courts will generally not protect someone from a bad deal.

You don't need an attorney for every contract, but you should understand the basics. In my next post, I’ll address when you need to pick up the phone and ask an attorney for help.


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