Making a legally valid business contract

If you own a business, you will have to enter into many contracts with vendors, customers and other parties. A business contract is a legally binding agreement between two parties, usually for the provision of goods and services or both. However, in order for a business contract to be legally valid and therefore enforceable in court, certain elements must be present.

Can both written and oral contracts be legally valid?

Contracts do not have to be in writing to be legally valid and oral contracts can be enforceable in court. For example, if you agree by telephone that a service will be provided in return for money, you have created an oral contract. However, oral contracts can often be misinterpreted and unclear, therefore making them difficult to enforce in court as they often involve one person’s word against another.

Consequently, written contracts are advisable in business, so that there is a reference for the agreement and potential for ambiguity and misinterpretation as to the terms of the contract is limited.

Elements of a legally valid business contract

Business contracts must have the following key elements to make it legally valid:

• at least two parties, who are both mentally competent at the time of entering into the agreement;
• an offer made by one party, which stays open until a stated expiration date, or for a ‘reasonable’ amount of time;
• acceptance of the offer by the other party, without any coercion or counter-offers;
• consideration i.e. something of value exchanged between the parties, such as the provision of goods, services or both in exchange for payment;
• an intention on the part of both parties for the contract to be legally binding;
• the business contract must be for a legal purpose; and
• terms and conditions detailing the rights and obligations of each party. These may be express terms stipulated by the parties and written into the contract, or implied terms which are inferred into the contract under specific legislation, such as the Sale of Goods Act 1979. Sometimes exclusion clauses can be incorporated into the contract, which exclude specific implied terms; however, these must comply with the Unfair Contract Terms Act 1977.

When is a legally valid business contract created?

When an offer to provide, for example, goods or services is accepted, then a business contract is created, provided that all the key elements listed above are present. If a dispute arises after this time as a result of one party breaching the contract or failing to fulfil his or her obligations under the contract then you may wish to take the matter to court, where the contract will be enforceable.

If you are unsure about how to draft a business contract or negotiate the best terms for your business; or you are involved in a matter concerning a breach of a business contract, then you may wish to contact a solicitor for legal advice.

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