Business law contracts and contract law in general are normally governed by state law and not federal. Every state in the U.S., as well as federal districts, unincorporated territories, and Indian reservations, will have their own laws and rules that will govern the creation and contract obligations that are required when drafting.

A contract is legally defined as a legally enforceable promise although they can be classified in many different ways. A contract can be:

  • Unilateral — where it is a promise made by one party to another.
  • Bilateral  — where promises are made by and between more than one party on one or both sides.

While a contract can legally be written or oral, it can be more effective to have a written contract, as oral contracts can be difficult to prove in a court of law in the event of a disagreement. Contracts can also be classified as express — a promise that is made explicitly or implied — which means that the promise can be informed by one's action or conduct.

Another type of contract is referred to as a quasi-contract, which can be a contract that is implied in law and can be created by courts in regards to interests of justice. Contracts are also often referred to as being either:

  • Enforceable — An enforceable contract is legally binding, creating obligations where failure to comply is considered a breach of contract and subject to remedies defined in the contract.
  • Unenforceable — An unenforceable contract may fail to meet certain requirements that make it nonbinding or legally unenforceable.
  • Void — A void contract is a contract that does not legally exist and is therefore unable to be legally enforced.
  • Voidable — If a contract is listed as voidable, it is a contract that can be canceled legally by one of the parties without it being termed a breach of contracts, which will make it unenforceable under law.

Importance of Contracts and Agreements

In the good old days, contracts were often created with a handshake, and business contracts were few and far between. If a dispute did arise from a violation of the contract, the courts would hear the case even in the absence of a written contract. While verbal contacts can still be enforceable, most business contracts involve a written contract.

These contracts are often very specific and include concise legal verbiage to help ensure that the contract will be considered enforceable in a court of law so that it can be proven in court if the contract is violated. Business contracts are created to protect both parties against a lawsuit while helping to define and provide assurances that both parties will agree on and receive the expected products or services.

The legal process that deals with breach of contract is called litigation and the process will help to determine if there has been a breach and whether specific circumstances exist to negate the breach. Many people often use the two terms "agreement" and "contract" in an interchangeable manner but they are not technically the same thing. An "agreement" is defined as a mutual understanding of two parties' rights and responsibilities, while a "contract" is an agreement between parties that creates enforceable obligations.

Contract Formation

When forming a contract, there are a couple of important items that will need to be properly explained and defined to help the contract remain enforceable in a court of law.


When creating a contract, there must be a clear intent by both parties to enter into the agreement and must state a method of enforcement to ensure that both of the parties satisfy their agreed upon obligations. Failing to include specific terms can cause the court to find the contract unreasonable.


Parties to a contract need to be defined and specified as only those named in the contract can be subject to litigation. The primary exception to this rule is if someone has transferred their rights and obligations to another party. Another exception to the rule is if the contract provides benefits to a person that did not sign the contract. This person would be classified as an incidental beneficiary and have no rights to sue.

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