Contracts 101: Make a Legally Valid Contract

All you need is a clear agreement and mutual promises to exchange things of value.

Lots of contracts are filled with mind-bending legal gibberish, but there’s no reason why this has to be true. For most contracts, legalese is not essential or even helpful. On the contrary, the agreements you’ll want to put into a written contract are best expressed in simple, everyday English.

Most contracts only need to contain two elements to be legally valid:

• All parties must be in agreement (after an offer has been made by one party and accepted by the other).
• Something of value must be exchanged — such as cash, services, or goods (or a promise to exchange such an item) — for something else of value.

Does a contract have to be in writing? In a few situations, contracts must be in writing to be valid. State laws often require written contracts for real estate transactions or agreements that will last for more than one year. You’ll need to check your state’s laws to determine exactly which contracts must be in writing. But even if it’s not legally required, it’s always a good idea to put business agreements in writing, because oral contracts can be difficult or impossible to prove.

Let’s take a closer look at the two required contract elements: agreement between the parties, and exchange of things of value.

Agreement Between the Parties

Although it may seem like stating the obvious, an essential element of a valid contract is that all parties must agree on all major issues. In real life, there are plenty of situations that blur the line between a full agreement and a preliminary discussion about the possibility of making an agreement. To help clarify these borderline cases, the law has developed some rules defining when an agreement legally exists.

Offer and Acceptance

The most basic rule of contract law is that a legal contract exists when one party makes an offer and the other party accepts it. For most types of contracts, this can be done either orally or in writing.

Let’s say, for instance, you’re shopping around for a print shop to produce brochures for your business. One printer says (or faxes, or emails) that he’ll print 5,000 of your two-color flyers for $300. This constitutes his offer.

If you tell the printer to go ahead with the job, you’ve accepted his offer. In the eyes of the law, when you tell the printer to go ahead you create a contract, which means you’re liable for your side of the bargain (in this case, the payment of $300). But if you tell the printer you’re not sure and want to continue shopping around (or don’t even respond, for that matter), you haven’t accepted the offer, and no agreement has been reached.

But if you tell the printer the offer sounds great except that you want the printer to use three colors instead of two, no contract has been made. This is because you have not accepted all of the important terms of the offer. You have actually changed one term of the offer. (Depending on your wording, you have probably made a counteroffer, which is discussed below.)

When Acceptance Occurs

In day-to-day business, the seemingly simple steps of offer and acceptance can become quite convoluted. For instance, sometimes an offer isn’t quickly and unequivocally accepted; the other party may want to think about it for a while, or try to get a better deal. And before the other party accepts your offer, you might change your mind and want to withdraw or amend it. Delaying acceptance of an offer and revoking an offer, as well as making a counteroffer, are common situations that may lead to confusion and conflict. To minimize the potential for a dispute, here are some general rules you should understand and follow.

How Long an Offer Stays Open

Unless an offer includes a stated expiration date, it remains open for a “reasonable” time. What’s reasonable, of course, is open to interpretation and will vary depending on the type of business and the particular fact situation.

To leave no room for doubt as to when the other party must make a decision, the best way to make an offer is to include an expiration date.

If you want to accept someone else’s offer, the best approach is to do it as soon as possible, while there’s no doubt that the offer is still open. Keep in mind that until you accept, the person or company who made the offer — called the offeror — may revoke the offer.

Revoking an Offer

Whoever makes an offer can revoke it as long as it hasn’t yet been accepted. This means that if you make an offer and the other party wants some time to think it through, or makes a counteroffer with changed terms, you can revoke your original offer. Once the other party accepts, however, you’ll have a binding agreement. Revocation must happen before acceptance.

An exception to this rule occurs if the parties agree that the offer will remain open for a stated period of time.

Offers With Expiration Dates

An offer with an expiration date is called an option, and it usually doesn’t come for free. Say someone offers to sell you a forklift for $10,000, and you want to think the offer over without worrying that the seller will withdraw the offer or sell to someone else. You and the seller could agree that the offer will stay open for a certain period of time — say, 30 days. Often, however, the seller will ask you to pay for this 30-day option — which is understandable, because during the 30-day option period, the seller can’t sell to anyone else.

Payment or no payment, when an option agreement exists, the offeror cannot revoke the offer until the time period ends.

Counteroffers

Often, when an offer is made, the response will be to start bargaining. Of course, haggling over price is the most common type of negotiating that occurs in business situations. When one party responds to an offer by proposing something different, this proposal is called a “counteroffer.” When a counteroffer is made, the legal responsibility to accept, decline or make another counteroffer shifts to the original offeror.

For instance, suppose your printer (here, the original offeror) offers to print 5,000 brochures for $300, and you respond by saying you’ll pay $250 for the job. You have not accepted his offer (no contract has been formed) but instead have made a counteroffer. If your printer then agrees to do the job exactly as you have specified, for $250, he’s accepted your counteroffer, and a legal agreement has been reached.

Even though a contract is formed only if the accepting party agrees to all substantial terms of an offer, this doesn’t mean you can rely on inconsequential differences to void a contract later. For example, if you offer to buy 100 chicken sandwiches on one-inch-thick sourdough bread, there is no contract if the other party replies that she will provide 100 emu filets on rye bread. But if the other party agrees to provide the chicken sandwiches on one-inch-thick sourdough bread, a valid contract exists, and you can’t later refuse to pay if the bread turns out to be a hair thicker or thinner than one inch.

Exchange of Things of Value

In addition to both parties’ agreement to the terms, a contract isn’t valid unless both parties exchange something of value in anticipation of the completion of the contract.

Consideration Defined

The “thing of value” being exchanged — which every law student who ever lived has been taught to call “consideration” — is most often a promise to do something in the future, such as a promise to perform a certain job, or a promise to pay a fee for a job. For instance, let’s return to the example of the print job. Once you and the printer agree on terms, there is an exchange of things of value (consideration): The printer has promised to print the 5,000 brochures, and you have promised to pay $250 for them.

Gifts vs. Contracts

The main importance of requiring things of value to be exchanged is to differentiate a contract from a generous statement or a one-sided promise, neither of which are enforceable by law.

If a friend offers you a gift without asking anything in return — for instance, offering to stop by to help you move a pile of rocks — the arrangement wouldn’t count as a contract because you didn’t give or promise your friend anything of value. If your friend never followed through with her gift, you would not be able to enforce her promise.

However, if you promise your friend you’ll help her weed her vegetable garden on Sunday in exchange for her helping you move rocks on Saturday, a contract exists.

Promises vs. Action

Although the exchange-of-value requirement is met in most business transactions by an exchange of promises (“I’ll promise to pay money if you promise to paint my building next month”), actually doing the work can also satisfy the rule.

If, for instance, you leave your printer a voicemail message that you’ll pay an extra $100 if your brochures are cut and stapled when you pick them up, the printer can create a binding contract by actually doing the cutting and stapling. And once he does so, you can’t weasel out of the deal by claiming you changed your mind.

How to Avoid Probate

Living trusts are probably the best-known way to avoid subjecting your family to the hassle and expense of probate court proceedings after your death. But there are many other good probate-avoidance techniques, which you can use in addition to or even instead of a living trust. What’s right for you and your family will depend on your unique circumstances.

Avoiding Family Disputes

Inheriting property does not always bring out the best in family members. Many people, of course, handle everything smoothly, following a loved one’s instructions as much as they can and peacefully agreeing on the rest. But a death can raise long-dormant relationships issues and revive old jealousies and resentments.

Probably the one element most likely to provoke bad feelings is surprise. If everyone in the family knows the broad outlines of how you’re planning to leave your property, they may understand your choices. Even if they don’t, they will have had some time to get used to the idea and air their concerns. They are likely to respect your choices, and not try to undermine them informally or through a lawsuit.

If, on the other hand, your estate plan takes everyone by surprise, there could be confusion, argument, and possibly court fights. Say, for example, an elderly man leaves the lion’s share of his estate to a charity or to a caregiver who recently arrived on the scene, or a woman leaves a valuable piece of art not to her children but favors a niece who wasn’t known to be particularly close to her. If the children knew that the niece had a special connection to the artwork, or that the caregiver had performed extraordinary services, they wouldn’t be left to wonder at the fairness of the bequests.

Even more common is the hurt caused by an unequal division of assets among offspring. Most parents leave their property to their children more or less equally, but there can be many good reasons for a different plan–perhaps one child has problems handling money, or already received an “advance” on his inheritance in the form of a gift. As long as the children all understand the reasoning, they are likely to accept your decisions. After all, it’s your money.

Strategies for Heading Off Trouble

We’ve all heard the horror stories of families torn apart by arguments over inheritances. Siblings fighting with each other over parents’ belongings, children fighting with a stepparent over the family home or bank accounts… it’s ugly.

You may assume that your family will behave well—and you may be right. Most families don’t have serious disputes over inherited money, and very few end up battling in court. But a death in the family doesn’t always bring out the best in people. You can encourage family harmony by taking some simple steps now.

Choose Your Executor Carefully

Some parents think that their oldest child should be the executor, even if he or she doesn’t seem very well suited to the task. But you’ll do better to discard any preconceptions about who should be the executor, and instead pick someone who is honest, organized, hardworking, and a good communicator. Inheritors are less likely to become anxious or suspicious if the executor keeps them up to date on what’s happening.

Avoid Surprises

Think about people who are unpleasantly surprised after a loved one’s death: the daughter who doesn’t inherit the family china, the son who gets a smaller share than his siblings, the favorite niece who isn’t even mentioned in the will. Their disappointment doesn’t mean they’re greedy; they’re probably just mostly hurt, confused, and frustrated by the fact that they will never know why they didn’t get what they expected. But hurt feelings can lead to suspicion and anger.

You can avoid all that by making your decisions—as many of them as you wish, anyway—known while you’re alive. You can explain, for example, that the family china is going to your brother’s daughter because her side of the family doesn’t have anything else from your mother; that your son is getting less because you paid for his graduate school education; and that you would like your niece to choose a memento but don’t plan to formalize it in your will. These simple explanations will go a long way toward avoiding bad feelings. Keep in mind that your family members don’t have to agree with you—after all, these are your decisions to make, and they don’t get to vote. But if everyone knows that you made your decisions thoughtfully, not in anger or by mistake, then the arguments will probably go away.

Deal With Your Lawyer Independently

If you consult an attorney for estate planning advice or to draft documents, keep your relationship independent of influence from others. Choose someone who comes recommended by friends or others whose views you respect, not someone who has done work for anyone you plan to leave money to.

Make sure you talk to the attorney alone. If one of your relatives or friends helps you out by driving you to the lawyer’s office, that’s great, but your discussions with the lawyer should be private. You need to feel free to express your wishes, whatever they are and whomever they might displease—and your lawyer needs to know that you are expressing your honest wishes, not altering them because someone else is listening.

Keep Your Estate Planning Documents Up to Date

It’s common advice to update your will, trust, and beneficiary designations every few years or whenever you have a major life change, such as marriage, a new child, divorce, or the death of a major beneficiary. This is good advice, because if you don’t change your documents now and then, they probably won’t reflect your current wishes. There’s another benefit as well: Your continuing involvement can head off suspicions that you didn’t take an active role in your estate planning and were so influenced by someone else that your decisions weren’t really your own.

For example, if you regularly meet privately with your lawyer, banker, or accountant to discuss your estate planning, they could say, if asked, that you were on top of your financial matters and reacted appropriately to changed circumstances. Documents produced in that setting are probably going to be tough to challenge. In contrast, it would be much easier to contest the will of an elderly person who hadn’t made a will in 25 years and was taken to an unfamiliar lawyer’s office by a relative—who turned out to be the main beneficiary.

Don’t Make Someone a Co-Owner If You Intend Something Else

Many people add a son or daughter to their checking account as a co-owner, just so the new account signer can write checks and help out with managing money. But in most cases, adding someone to the account makes that person a full co-owner, with the right to keep the money after the original account holder’s death. It’s an argument waiting to happen: All the children expect to share the money in the account, but the one who is the co-signer on the account legally inherits it all.

There are better alternatives. You can give someone you trust “power of attorney,” giving that person access to the account, or create (in some states) a “convenience account,” which also authorizes the person you choose to write checks for you. Either way, the person has a legal duty to act only in your best interests—and won’t automatically inherit the money in the account after your death.

Give Guidance on Items of Sentimental Value

Many wills contain a clause that leaves personal belongings and household furnishings to several beneficiaries “in equal shares,” but without any instructions on how that’s to be accomplished. Who divvies up the items? Who decides what constitutes “equal” shares when you’re allotting personal items that are all but impossible to put a dollar value on?

Do your beneficiaries a favor and provide some guidance. You might name specific items in your will, give the job of dividing personal effect to the executor, or instruct your offspring on how to conduct an auction for items they just can’t agree on.