Contracts for Business
Contracts are like business people. Some work smart and deliver; others are doomed to fail from the start because they lack that certain essential element. So, what makes a good contract? Aside from legally trained professionals and the certifiably insane, few decent folk take the time to contemplate this question. But if such decent folk are also business people, they may be remiss not to.
In free societies, men are not bound by enforceable obligations toward one another, except to abstain from causing harm. A contract is an instrument that allows two parties to artificially create rights and obligations between themselves in the name of some mutually beneficial end. In this article, we will discuss the elements of a solid standard contract before turning to specific types of contracts that may and should be used in the context of business.
Contract Law 101:
A binding and enforceable contract consists of three essential elements: offer, acceptance, and consideration. Offer and acceptance may seem obvious concepts to some, but the law is a fickle mistress. Consider Toby and Bobby. Toby offers to give Bobby an apple in exchange for $1. Bobby replies that he will trade his $1 only for an apple and a half. When Toby refuses, Bobby states ‘alright then, I’ll take your initial offer’. Is this a valid contract? The answer is no. Bobby’s counter-offer was rejected by Toby, and Toby has not made another offer for Bobby to accept. Bobby’s agreement to exchange his $1 for Toby’s apple may constitute an offer, but such offer is now subject to acceptance by Toby before a valid contract is created.
It gets even more complicated from here on out. In a nutshell, consideration is the value of goods and/or services being exchanged. In the example above, if Bobby had immediately agreed to Toby’s offer, the exchange of the value of the apple for the value of the $1 would serve as consideration. If Toby had instead offered to give his apple to Bobby for free, and Bobby accepted, Bobby could not force Toby to make good on his promise in a court of law. Such a contract would be void for lack of consideration.
Finally, contracts must be voluntary. If Toby put a gun to Bobby’s head, gave Bobby the apple, and forced Bobby to promise to give him his $1, and Bobby agreed because he didn’t want a hole in his head, such agreement would not be enforceable in a court of law even though all three requirements of a valid contract have been met. Duress and fraud are natural defenses to the enforcement of contractual obligations.
Specific Types of Contracts
Now that you are aware of the glories and pitfalls of basic contracting, you may be ready to rush out into the world, buy stuff, start companies, hire employees, wheel and deal with the best of them. Not so fast. While most contracts pertain to transactions, business contracts typically govern relationships. The underlying relationship typically serves as sufficient consideration for most business contracts. Because business relationships can be unstable and dysfunctional, business contracts tend to address specific issues of security of business interests and proprietary ideas. So, let’s take a look at some common business contracts.
An Operating Agreement
An operating agreement or its equivalent is a contract that sets forth the terms of your business venture, the manner of operation of the business, the percentages of interests owned by individual partners, your obligation to your partners, the distribution of profits and losses, and much more. In undertaking any business venture, an operating agreement or its equivalent is most likely essential, and not simply for the reasons listed above. Consider the fact that there is no magical database out there that lists you as the owner of any interest in your business. Your interest in your company may exist in the pages of its operating agreement and nowhere else.
A Buy-Sell Agreement
A buy-sell agreement or its equivalent is another business contract that will be essential in most instances where a business is owned and operated by more than one individual. A buy-sell agreement may be incorporated into the operating agreement of your company, or drafted as a stand-alone instrument. This type of contract sets forth specific mechanisms for the transfer of interests in the company upon the death, disability, divorce, or bankruptcy of you or your business partners. In general terms, a buy-sell agreement may be used to keep your company from falling into untrustworthy or hostile hands, or to prevent hostile partner buy-outs of your interest in your company. So, when Toby’s business partner Bobby dies, and Bobby’s wife, Cruella, inherits everything, including Bobby’s business interest, Toby may rely on a carefully drafted buy-sell agreement to allow him to buy out Bobby’s interest at a reasonable price over any objection by Cruella. In addition to preventing the likes of Cruella from getting a piece of your company, a buy-sell agreement may also govern the induction of new members into your company.
In addition to operating and buy-sell agreements, you may protect yourself and your business interest through a variety of clauses or stand-alone agreements tailored for specific purposes. One very common business contract is a confidentiality agreement, which can protect your trade secrets from unwanted dissemination. This type of contract can be useful even before you start your business, and you can have prospective investors or partners sign confidentiality agreements prior to pitching your business ideas to them. Other valuable business contracts include non-compete and non-solicitation agreements. The former may prevent your former partners or employees from working for the competition for a period of time after they’ve left your company; the latter, from drawing away your customers. Such agreements cannot remain in effect indefinitely, but reasonable terms are typically enforced.
Business owners face many challenges on a daily basis. Security of business interests and proprietary ideas should be tackled early on. Fear not. Whatever your security issue, chances are there’s a contract for that.
By Grigaltchik & Galustov, P.A., 6144 Gazebo Park Place South, Suite 215, Jacksonville, FL 32257 — Tel: (904) 738-8398