The Point of Contracts

The Point of Contracts

There’s a pervasive wistfulness amongst business-folk for the time before contracts – a time when a negotiation, a nod, and a handshake were enough to seal a deal. However, as is true in most cases of nostalgia, this time never really existed. The first evidence of contract law dates to the Roman Republic; in fact, nearly every Western civilization has used some form of written contract, throughout the medieval period and into the modern day. The only business deals that lack associated contracts are made in the backroom, and those are hardly legitimate and never enforceable.

Instead of wasting time wishing away the contract process, you should be embracing it. Contracts keep your business safe; they ensure you benefit from a relationship, and they provide useful data on your business’s performance. Before you swear off contracts, you should know more about them – and how to optimize them for your business.

Why Contracts Exist

A contract isn’t merely an agreement; it is a special type of legal agreement that ensures parties are competent and understand the terms and benefits. In truth, though contracts have their roots in Roman and medieval law, modern formal contracts arose primarily in the 19th century during the 3rd Industrial Revolution. It was during this period courts recognized that the validity of an agreement rests not in the inherent fairness of the exchange but rather that both parties understand the terms and desire them. Because everyone has the same amount of free will, that will can be used to form a contract.

Contracts come in many shapes and forms, but not all types of contracts are enforceable in all situations. Express written contracts are by far the most popular because they plainly state the terms of the agreement, and the document can be saved and reviewed by all parties at any time. Other options include oral contracts, which are spoken, and implied contracts, which are agreements that are neither written nor spoken but understood by the parties involved. These are much more difficult to enforce legally because there tends to be less evidence of the agreement.

Ultimately, business could be done without contracts, but you would be incurring significantly greater risk. Whether you would rather devote time to improving your contracts or avoid contracts and chance unprofitable relationships and unwinnable lawsuits is your choice.

Business contact signing

How to Build a Contract

If you have decided that accepting the challenges of the contract process is more advantageous, congratulations! You chose correctly. Now, here are the essential elements of the typical enforceable contract, which you need to know to build contracts that both benefit you and protect you from risk:

  • The consideration is an explanation of what each party adds to the agreement. Each party must provide something of value, be it a requested behavior or a financial payment. Legally, a consideration cannot strip a party of their rights.
  • The mutuality of obligation doctrine states that both parties must be bound to the agreement. Therefore, if an agreement is one-sided – i.e., if only one party is compelled to deliver on the contract – then the contract is not valid.
  • Competency and capacity must be established. Only competent and capable parties can form contracts – which means you cannot enter into a contract with anyone who is not of legal age or sound mind, or someone who is under duress.
  • The offer is a promise made in exchange for a return promise. For example, an employment contract’s offer includes your promise to pay your employee, and in return the employee promises to perform work.
  • The acceptance is an expression of assent. The contract should explain how parties accept. Most often, acceptance is marked by a signature, but sometimes it requires an oral statement (as with marriages) or a ceremony (as with peace treaties).

Though not legally necessary, you should strongly consider taking advantage of contract software. Digital contract tools can assist in every step of contract management, from generation to termination. Plus, contract management tools integrate seamlessly with your existing management system, optimizing several critical functions. Just be careful about the type of tools you use, as not all work well together, like Salesforce contract management software.

There is no golden past of contract law – but there could be a golden future. Automated contract management tools are making it incredibly easy for businesses to develop strong, data-driven agreements and maintain them with minimal effort. Even better, blockchain technology could make enforcement of contracts mandatory, essentially eliminating the risk of agreements. However, before you can take advantage of contract law’s future, you need to understand its present and perfect your contract process today.

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