Was a Contract Formed in the Sale of a Business?
Understanding whether a valid contract exists, and what its terms are, are essential when traversing the sale of your business. Often buyers and sellers may have a different understanding of where the parties are in negotiations, and failing to formally document all agreements may lead to litigation down the road. If you are involved in a dispute over the sale of a business, the first issue you will want to consider is whether a valid contract was ever formed.
Whether the contract at issue is oral or written, several elements are necessary for there to be a valid binding contract. Those elements are: (1) mutual assent, (2) the capacity to contract, (3) a lawful object of the contract, and (4) consideration. While a contract may be invalid if a party has some incapacity or if the object of the contract is illegal, the two main issues of contention in contract formation are generally mutual assent and consideration.
Mutual assent requires that the contracting parties reach an agreement on all material terms of the contract. Failure to reach an agreement, or a “meeting of the minds” on all material terms will prevent contract formation even if some of the terms are agreed on or the parties have taken some action related to the contract. A material term is one that concerns significant issues such as the subject matter of the contract, the price, terms of payment, etc.
Consideration is some act, promise, or thing of value that is bargained for and given in exchange for the promise that forms the basis of the contract. Even if both parties agree on all material terms of a contract, without consideration the contract will be unenforceable. Examples of situations where consideration is lacking include where the promises are one sided, i.e. where on party makes a promise to another for nothing in return, and where an agreed upon purchase price is never paid.
Common Contract Formation Issues in the Sale of a Business
One scenario that can lead to a dispute is when two parties orally negotiate the sale of a business, but do not execute a written agreement. Unless your contract falls within the statute of frauds, oral contracts for the sale of a business are binding. When contracts are not committed to writing, it can create disputes over whether a contract was formed, and what the exact terms of that contract are.
Another such scenario is where a written contract is negotiated, but never signed. On the one hand, an unsigned contract can be evidence that the parties never came to an agreement on all material terms. On the other hand, if the contracting parties intended that the written agreement be binding, then it will be enforceable notwithstanding the lack of signatures. Whether the parties intended an unsigned agreement to be binding is a factual inquiry that a Court will determine based on all of the facts and circumstances presented in the case, including performance of the terms of the written contract.
To avoid disputes over contract formation in the sale of a business, it is good practice to avoid oral agreements, commit everything to writing, and to wait until a written contract is executed before starting performance. Taking these steps can prevent future disputes and litigation.
If you have a contract dispute regarding the sale of a business, it is smart to speak with a top-rated SoCal business attorney. In many cases, these disputes can be settled harmoniously without litigation. If litigation is your only option, our Irvine based team of experienced business litigation attorneys and trial specialists are here to help.
Getting Legal Help
If you are involved in a dispute concerning unlawful, unfair or fraudulent business practices, it is smart to speak with a top-rated Irvine litigation attorney. Our team of experienced business litigation attorneys and trial specialists are here to help. Contact Brown & Charbonneau, LLP today by calling 714-505-3000 to schedule your appointment or email us at firstname.lastname@example.org.
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