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Understanding consideration in contracts

No matter what type of business you run, you need to know something about contract law in order to survive.

At its most basic form, a contract is any agreement that's legally enforceable -- unlike a simple agreement between friends, there are certain rules that have to be met in order to make a contract legal:

1. Someone has to make an offer to someone else. The offer has to be clearly defined. For example, if you go to rent a place of business, the owner of the building you want to use will, assuming you decide to do business together, eventually offer you a contract for the use of the business space for your store, restaurant or office. The terms of the rental agreement will be fairly clearly laid out, including how long the rental term will last and so on.

2. Someone else has to accept the offer. Using the same example, if you find all the terms of the contract to your liking, you can accept the offer to rent the place for your business.

3. There has to be some sort of consideration given to seal the deal. Consideration is the legal word for whatever it is of value that's being exchanged between the two parties as a result of the contract. Ultimately, it's what makes the agreement a legally binding contract. In the case of the rental, your consideration is your monthly rent and the consideration you receive in return is the space to do business.

Consideration doesn't always have to be of significant monetary value, but it does have to be current in order to make a contract enforceable. For example, if you want to bind your software developer to a confidentiality agreement you can't simply hand him the contract and have him or her sign it and expect it to be valid without some form of consideration. The consideration could come in the form of stock options, a raise, a new office or a change in his or her title. Otherwise, there's no reason for your developer to sign away his or her freedoms -- which makes the contract difficult or impossible to enforce.

For more information on what makes a contract viable, an attorney's guidance can prove very helpful.

Source: FindLaw, "What is 'Consideration' and How Much is Required?," accessed June 20, 2017

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