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Three things all business owners should know about contracts

A written contract is a legal tool that can protect both parties in the event something goes wrong. Business leaders can use these legal tools to establish a range of agreements including employment, distribution, production, service and noncompete. When tailored to the parties’ needs, these agreements are beneficial to all involved. But when a party makes a mistake or attempts to abuse a provision, a legal battle can result that can cost millions. Knowing the basics can help you prepare your side of the agreement and understand how it works. This can mitigate the risk you are responsible for the million-dollar bill if something goes wrong.

Take, for example, the recent contract dispute between Pabst Brewing Company and MillerCoors. The two beer producers were in a dispute over Miller’s agreement to brew Pabst beer. Experts behind the scenes estimated the dispute to cost the producers over $400M. The two were arguing over the provisions guiding their production agreement. One side, Miller, believed they could stop production of Pabst products while Pabst stated the contract did not support Miller’s actions.

Ultimately, the two chose to settle the dispute instead of litigating the matter — but the example and the millions at stake remind business leaders the importance of knowing how these legal tools work, and how they can make sure they are working in their favor.

#1: Make sure the contract is valid

Although state law will impact the exact requirements, the basics are generally ubiquitous. One of the first things a court will look at is whether or not the parties had the mental capacity to enter the contract. This can include a review of the party’s age and mental abilities. A court is unlikely to find a contract valid if, for example, the other party was under the age of 18 or mentally incapacitated.

A court may lump the next four elements together: offer, acceptance, consideration, and mutual consent. The offer portion outlines the terms and conditions of the contract. This could include the bulk of the provisions for both parties. Both parties will likely acknowledge the acceptance with a signature. The consideration is the explanation of what the parties exchange. In an employment contract, for example, the employee gives their time in exchange for a salary. Finally, the mutual consent portion states that both parties are bound by the contract, it cannot be one-sided.

#2: Keep organized

A contract is no good without a copy. Keep organized, have a copy available and keep records to support the arrangement. In the event of a breach, these copies will serve to help better ensure your business interests are protected.

#3: Be prepared to defend the contract

Legal remedies are available if a party breaches the contract. Having the information prepared, as noted above, will help to ease this process. Remedies can include damages or monetary funds to help cover the expenses that result from the breach as well as a demand that the other party meet their obligations, referred to as specific performance. In other instances, cancellation of the contract is also an option.