Contracts: The Basics

Understanding contracts is essential for a small business. Contracts are the basic building block of our economy and the legal principles of contract formation and enforcement go back centuries but are still in effect today.

Contracts require a “meeting of the minds” between the contracting parties and are enforceable in our courts. Contracts need to be clear and unambiguous and should be in writing and signed by the parties. In certain cases, oral contracts are enforceable but without a writing the terms are very hard to prove. For this reason, business contracts should always be in writing. The basic principle of contract interpretation by the courts is to determine what is the intention of the parties as determined by the four corners of the written document. Deals may be sealed with a handshake but fade away without a written document.

Contracts also require consideration to be enforceable. Consideration means that the parties exchange mutual promises or that one party agrees to provide a benefit to the other party or agrees to accept a detriment in consideration for the contract. A promise to make a gift is not enforceable because the receiving party has made no promise, payment or other consideration to the gifting party.

Under the Uniform Electronic Transactions Act (UETA), contracts can be signed electronically by using systems such as DocuSign as long as the parties intend to sign and do business electronically and keep a record that can be stored and reproduced as a copy. All states have adopted the UETA, including Missouri (codified at Section 432.200 RS MO 2003). Electronic contracts are just as enforceable as traditional signed contracts. Thus, it is important to note that the same basic principles of contract formation, interpretation and rules of enforcement apply to contracts in electronic or digital form.

Electronically signed contracts are becoming increasingly prevalent and are used in many circumstances when the parties are distant or it is inconvenient to require physical signatures (sometimes referred to as “wet” signatures). Residential real estate transactions are a good example. Some contracts still need to be signed physically such as some Deeds, Trusts, and Powers of Attorney (which required notarization).

Contracts can be in many forms from one-page invoices and purchase orders to lengthy legal documents on printed forms. Be sure to read any contract carefully and do not sign unless you understand and agree with all of its terms. Contracts often come in printed and online forms containing reams of legalese. Often the contract provider requires clicking on the form or otherwise gives you little opportunity to ask questions or make any changes. It is still important to read these and avoid agreeing if you do not understand or agree with the printed terms.

You should seek the advice of an attorney for any questions regarding contract formation or terms if you have any doubt about the terms or legal effect of the contract presented to you. Misreading or misunderstanding a contract can be extremely dangerous to your business. Be sure to understand the contract basics.

Posted by Attorney Michael J. McKitrick. With over 40 years of hands-on commercial litigation and transactional law experience, McKitrick’s practice encompasses business and transactional advice, commercial real estate matters, and regulatory and practice management guidance for health care professionals. Most of his clients are in the medical, financial services, and manufacturing sectors.

Published in the May 2023 St. Louis Small Business Monthly.

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