When we think of contracts we often think of formal documents with language like “whereas,” “notwithstanding,” and “now, therefore.” But not all contracts contain this type of language**, or any written language for that matter.
Under the law of all states, including Florida and California, a contract is formed when there is an offer by one party, acceptance by the other party, and consideration. Consideration is “a bargained for exchange.”
Illustrations help more than definitions in understanding consideration. Let’s look at one: If Mary’s Sugar Supplies tells Jane’s Donut Shop that she will give her 10 pounds of sugar – that is a statement of an intent to make a gift, there is no consideration, there is no contract. In contrast, if Mary’s Sugar Supplies tells Jane’s Donut Shop that she will give Jane’s 10 pounds of sugar in exchange for $10 and Jane’s agrees, consideration exists (exchange of money for sugar) and a contract is formed.
As long as the three basic contract requirements, offer, acceptance, and consideration, are met and there are no legal defenses, a contract exists. This is true even if the contract was verbal and not written. This is the first type of contract that your business might be unwittingly a party to: a verbal contract. Be careful with your words when speaking to potential customers, suppliers, and business partners, you don’t want to accidentally end up in a binding legal contract subject to the legal liabilities that come with it.
Disputes over verbal contracts become a mess quickly because it is difficult to prove the existence of a verbal contract let alone the exact terms. Disputes become a “he said, she said” war of credibility. Recognizing this and other downfalls of verbal contracts, states, including Florida and California, have passed laws called “Statutes of Frauds” which restrict the type of contracts that can be verbal. Statutes of Frauds require that certain contracts like those for leases of over one year or the sale of goods over a certain dollar amount be in writing to be enforceable.
The other less formal type of contract your business might be a party to is the “napkin contract.” The napkin contract idea comes from that age old tale about two businesswomen that enter into an agreement on a napkin which they both sign. I use the term to refer to any contract that doesn’t feel formal. Of course, you are aware you are entering into an agreement when you receive a 10 page tome from a prospective business affiliate but it’s less clear when you sign a purchase order with only a few sentences of text.
Being aware of less formal contracts will help you avoid inadvertently entering into one on behalf of your business.
Other contract questions? E-mail Larissa Bodniowycz at firstname.lastname@example.org and you might see the answer posted here, for free, in the future.
**Side note: there’s also a trend away from the use of “legalese” in drafting contracts. A trend that I think its good for parties entering into contracts.