Legal Information for Entrepreneurs

Understanding a Contract

Written by Samuel Muriithi for Gaebler Ventures

Contracts and agreements are sort of a daily staple for entrepreneurs regardless of whether they are formal or informal. It is the complexity and variety of these contracts that makes it prudent for entrepreneurs to at least understand the basics by which they operate.

The basic definition of a contract is that legally enforceable agreement that is negotiated or entered into by two or more 'persons'.

The term 'persons', in this case, represents a human being or a juristic person. Legally enforceable contracts are so because they have fulfilled the five requirements of agreement, legality, consideration, contractual capacity and contractual form.

Agreement i.e. an offer and acceptance – A contract must essentially provide for an offer by one party and an acceptance from the other. Such an offer must be legally binding and is determined to be so if a reasonable person finds it sufficient to be legally binding. Once made it exists for a period of time before it expires by being ended. The ending can be done as follows:

  • The offering party retracts it before its accepted
  • The receiving party rejects it whereby this party cannot demand its honoring thereafter
  • The receiving party makes a counteroffer thereby ending the first offer and creating a new one
  • Once a reasonable period of time has expired
  • In the event that either party becomes mentally incapacitated or dies
  • In the event that a legislation is passed and in so doing makes the offer illegal

Contract acceptance must be positive and unconditionally clear. All the terms of the offer must have been agreed to before a communication to that effect by the receiving party is submitted to the offering party. It is advisable that this contract agreement be communicated in a manner similar or better than how the offer was made.

Legality – Any contract that is to be legally enforceable must include a lawful objective. This means that whatever the contract terms are their fulfillment must not involve actions tantamount to breaking the law.

Consideration – All the parties entering into the contract agreement must receive value. It is this value that is termed as 'consideration'. Such value does not have to be equal for the concerned parties and the worth attached to it is measured in the present or the future but not the past.

Contractual capacity – All the parties involved in the contract must have attained the requirements for capacity as defined by the law. Those that don't meet these requirements include minors i.e. persons under age 21, persons who were under the influence of drugs or alcohol during the drawing up of the agreement, and mentally deficient persons.

Contractual forms – These may be written or verbal and will still be legally enforceable regardless. However, some contractual form contracts must be written as they are under the regulation of the Statute of Frauds. Some of these contract agreements include:

  • Sale Of Land
  • Sale Of Goods Exceeding $500
  • Contract For Services That Cannot Be Performed Within One Year
  • Promise To Assume The Debt Or Legal Responsibility Of Another
  • Promise By The Administrator Or Executor Of An Estate To Assume Responsibility

Samuel Muriithi is a business owner in Nairobi, Kenya. He has extensive international business experience in the United States and India.

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