Procurement experts and business managers are not expected to be lawyers or any legal professional. However, it can be very challenging to create and manage contracts unless you have a basic understanding of the essential elements of contracts and the meaning of various legal terms and clauses.
Many business people across the country are risk-averse. So, what does this mean for contract managers? Every entrepreneur takes risks, but no one wants to take risks that could break their businesses. Therefore, it’s important to have an expert who understands various laws that regulate the creation and enforcement of business contracts. Alternatively, you can get ContractSafe (from contractsafe.com) or any other trusted contract management software.
How contracts work
A legal business contract is an enforceable agreement between two or more businesses. It could be a set of promises between two or more parties, and these promises are enforceable by the local and national laws. Usually, one party promises to do something for the other business in exchange for money or other benefits. If this contract is breached, the harmed party can take legal action.
For a business contract to be considered legal or enforceable by the law, it must have the following elements.
1. Legal purpose
A business contract must have a lawful purpose for it to become enforceable. For instance, if a business person hires a contract killer to eliminate a competitor, this contract can never be enforced no matter how well it is drafted. A contract involving murder is illegal, and there’s nothing you can do if someone breaches it.
Assuming you signed a contract with an electronics supplier to help procure computers for your new office and the supplier breaches the contract, you can take legal action against them.
2. Mutual agreement
This is another important element of a business contract. All the parties involved in the contract should have reached a mutual agreement. That means one of the parties should have extended an offer to the other party who accepted the offer.
For example, assume that Rand signs a contract with Joe’s business to collect garbage. The contract must outline the scope of the duties to be performed in Joe’s property. That means Rand and Joe have a mutual agreement regarding garbage collection and other activities to be performed.
Every party involved in the contract, she agreed to give up an asset or anything of value in exchange for a certain benefit. For instance, if you hire a construction contractor to repair your home’s floor, you and the contractor sign a contract in which you promise to pay a certain amount of money in exchange for the flooring installation work.
In this case, both you and the construction contractor have agreed to exchange something of value. The contractor has agreed to reinstall your floor, and you have agreed to pay them a certain amount of money.
4. Competent parties
Each party to a business contract should be competent. They must be of legal age, sound mind, and unencumbered alcohol or other intoxicating substances. If your business enters into a contract with someone who is incompetent, that contract cannot be enforced by the law.
5. Genuine assent
Every party to the business contract must engage in the relevant agreement freely. A contract cannot be legally enforced if any of the parties have made mistakes. Similarly, a contract can be avoided if any of the parties has exerted undue influence over another party or has committed a fraud.
Assume that you signed a contract in which you consented to sell your property to your neighbor for $5. But you signed the contract under duress because your neighbor was threatening to kill you if you don’t sign it. In this case, you agreed to sell the property under duress, and that contract isn’t legally enforceable.
Breach of a business contract
If you or the other parties involved in a contract fail to fulfill their roles under the agreement, that party is perceived to have breached the contract. Suppose you have hired a construction contractor to inspect and fix a leaking roof on your business premises. You pay half of the cost agreed-upon upfront as agreed in the contract. Unfortunately, the contractor keeps on promising that they will come and complete the task, but they never do. Failure to fulfill this promise means that the contractor has breached the agreement.
Breach of contract often results in a financial loss for the other entity. In the example given above, your business would have lost the money you have paid to the contractor and the damage caused by the leaking roof for the period the contractor failed to execute their duties. In this case, you have several options to get compensated. These include:
Sue for damages
Your business can file a case against the construction contractor for damages. For instance, you can demand compensation for the costs of hiring another construction contractor to repair a leaking roof and other costs that you incurred due to the previous contractor’s delay.
The law allows you to compel the construction contractor to complete the necessary tasks in accordance with the contract they signed.
Other relevant remedies
In case the construction contractor forced you or tricked into signing the contract, it is possible to convince a court to amend the contract terms or terminate it.
Depending on the nature and size of your business, the chances are that you enter into many contracts with your customers, suppliers, business stakeholders, and more. And this is why you need a contract management system that can help centralize your business, maintain compliance, facilitate transparency, and improve efficiency. Breaching a contract is something you cannot afford to do unless you are ready to deal with lengthy lawsuits that will end up costing you a lot of money. Therefore, it is in your best interest to acquire a reliable contract management software and maintain every contract as expected.