Contract primer for small businesses: general rules

As a small business owner you will need to know the basics of contract formation. This is true for your transactions with customers and with vendors. There is a lot of information about contracts floating around out there, and much of it is false or misleading. Relying on false information can cost you money. This will give you a quick primer on the basics of contract formation and for more detailed information, contact a local attorney.

What do you need to form a contract?

In U.S. law you need an offer, acceptance and consideration. Here are some important points to remember about these concepts:

  • If you make an offer to someone it may end up being a binding contract, even if you change your mind about it or think it was a bad deal
  • Unless an offer is accepted and both parties agree to the same terms, there is no contract.
  • A contract does not have to always be in writing! Some laws require certain contracts to be in writing, but as a general rule, an oral contract is legal. The problem arises in proving that a contract existed, but nonetheless, watch your language carefully!
  • Without consideration, which is the exchange of something of value or mutual promises, there is no valid contract.

Contract rules to remember as a small business owner

  • An advertisement is not an offer. Suppose you put an ad online offering “New iPhones, only $200!” but  there is a typo in the ad saying it is only $2.00. Can people come in and accept the offer at $2.00? No. Courts have ruled that an ad is not an offer that people can walk in and accept. It is an invitation to come in and make offers, which the business can accept or reject.
  • The same rule applies to a price tag on an item. If someone switches price tags on your merchandise, or if you accidentally put the wrong price tag on it, you are not required by law to sell it at that price. However, many businesses honor mistaken tags because refusing to do so would damage the relationship with the customer. Keep in mind though, if you intentionally put a lower price on an item, hoping that a buyer will pay a higher price, you may be in violation of bait and switch laws.
  • When a person makes an offer, several things may happen. It may be accepted, making a legal contract; it may be rejected; it may expire before it has been accepted; or, it may be withdrawn before acceptance. A contract may expire by a date mentioned in the offer, or after a reasonable amount of time. What is reasonable is determined on a case-by-case basis. If someone makes you an offer to sell goods, clearly you cannot come back five years later and attempt to accept it. Whether you can accept a month later, or a week later and create a contract, depends on the type of goods and the circumstances.

The above is just a small sample of some of the relevant contract law that a small business owner will encounter. It pays to be knowledgeable in this area, so contact a lawyer or do more research on your own for a more in depth understanding of contract law.[1]

[1] Petrus, Desiree and Warda, Mark, Start a Business in Pennsylvania 61-63 Sphinx Legal (2006) 4th edition