Several components of a contract are important in the business world. Contracts are meant to define what each party looks for and how disputes will be cleared up. Parties agree to terms and conditions, and then a contract binds them based on the negotiated terms.

If the content in a contract is vague or lacks clarity, if there are errors discovered, or if wrongdoing is suspected by one or more parties, the court has the ability to nullify the contract. A legally binding contract is one that has an offer, an acceptance, consideration, mutual obligation, competency, and capacity -- and is legal.

Contract Offer

Without an offer, the contract is not binding. The party setting the contract in motion, the offerer, comes forth with a proposal outlining what the offeree will receive. The offeree is the party agreeing to the offer.

  • An offer is a pledge to be sustained, as long as the offeree accepts it.
  • Two common types of offers are service-related offers and goods-related offers.
  • The validity of an offer depends on multiple factors. An offer should aim to include all required material, including price, size, volume, quality, and more, depending on the matter at hand.
  • The parties involved are still negotiating until all required items are agreed upon.
  • If you choose to withdraw your offer, you must communicate that fact to the other party.
  • Likewise, if a party is ready to accept an offer, it must communicate that fact to the offering party.

Offer Consideration

Consideration is what sets the table for what is going on between the offering party and the offeree. It spells out whether you are exchanging services for funds, services for services, goods for funds or goods for goods.

  • The consideration aspect of a contract is what both parties analyze to determine if they will move forward with the contract. It is vital in the process of setting in stone a binding agreement as it pertains to payment.
  • If the proceedings are done correctly, each party will know what it is responsible for and what will come its way in return. Both parties must benefit in some way.
  • Consideration differentiates a contract from a giveaway or gift.
  • One example is if you are selling a boat, the purchaser's consideration is the price of the boat, while the seller's consideration is the boat itself.
  • Parties may also swap items of similar worth, such as a boat for a car, or gardening services for cleaning services. A gift is simply an item going from one party to another, with nothing promised in return.
  • It's important to note that if a party breaks its promise to give a gift, the contract was not breached because there was no consideration.
  • Staying mute or failing to decline an offer does not mean the offer in question has been accepted. But once the terms are formally accepted as outlined, the acceptance has to mirror the offer, otherwise, it is seen as a counteroffer or even a rejection.
  • Only when each party agrees on all parts of the contract can an acceptance take place.
  • If a proposal changes midstream, it's more or less back to square one, as renegotiations start.
  • Renegotiations can go through several rounds before a contract is set in stone.
  • The renegotiated contract does not have to be the same as the original offer for the contract to be valid if the terms involve a sale of goods.
  • Once a party accepts an offer, the party is now bound by what is in the contract.

Mutuality of Obligation

Mutuality of Obligation means that each party agrees and accepts the terms laid out in the contract.

  • A contract is merely an unofficial agreement if the parties do not intend to uphold their part of the agreement.
  • While contracts can prove dubious in a court of law, an agreement is not disputable as long as it can be proven that both parties intended to enter the agreement.
  • There cannot be a proper arrangement if there is a dispute or misunderstanding regarding the contract.
  • If a party has a complaint and can prove that the contract is not binding, that party meets its burden of accomplishing a prima facie case that a contract indeed existed.
  • In addition, if a party's agreement was attained inappropriately, the contract becomes void. This can happen if a party was coerced into an agreement due to the opposing party's fraud or mishandling of the facts.

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