Contract requirements are rules that must be followed for a contract to be legally binding. Nearly every part of our lives includes contracts of some kind, so it's important to understand what's included and how they work.

The Process of Creating a Contract

Contracts are necessary to enforce agreements between two parties. With a contract, if one party doesn't do what they promised, the other party has legal recourse to make sure they either hold up their end of the bargain or reimburse them for damages. There are three phases of contract creation:

  1. Both parties plan the deal; they consider the arrangement and any risks that might be involved, and decide what is fair.
  2. An agreement is reached, including all terms. It is usually written down and signed by both parties.
  3. The terms of the contract are fulfilled. If one does not perform as promised, the other can enforce the contract.

Specific Contract Requirements

For a contract to be legally binding, it has to include details about the agreement. The items or services that are covered need to be thoroughly outlined. For example, if a house is being purchased, the contract must include the property's legal description so there cannot possibly be any dispute about what property is being discussed. If a car is being purchased, the contract needs to include the VIN of the vehicle as well as the make, model, and year. Contracts also should include the parties' names and the role each plays in the transaction, as well as several other parts.

The Offer

An offer is a promise; one party must promise to do some specific action at some point in the future. It can also be a promise to not do something. The offer expresses one party's willingness to create a contract with another party, understanding that it will be legally binding.

There are various ways that the offer can be made. It can be included in a letter or email or may be implied in that party's behavior. A valid offer should include a statement that the offering party wishes to enter into a contract, a specific proposal, and a statement identifying the person to whom the offer is being made. If those three things are not included, there is not a valid offer.

Acceptance

When the offer is accepted, that acceptance may be communicated through words or the performance of the specific actions detailed in the contract. Typically, the acceptance must mirror the offer exactly, or else it is considered either a rejection or a counteroffer.

However, if the contract covers the sale of goods between two merchants, the acceptance does not have to be identical to the offer to present a valid contract. For the contract to be valid, the terms must not be significantly different from the original offer. The offeror also has the opportunity to object to the terms within a reasonable time.

Capacity to Enter Into a Contract

Having capacity means that the party is legally able to enter into a contract. They must be of legal age, which varies according to the state. They must be of sound mind, which means that they may not be under the influence of alcohol or drugs, or mentally handicapped. They must be entering into the agreement of their own free will instead of being coerced.

Mutuality of Obligation

Both parties in a contract must have the same intention regarding the contract's purpose. In other words, they must agree. If one party misunderstands or has been misled about the contract terms, it is not valid. This can be determined in court, if necessary, by reviewing the communications between the parties.

Legality of the Contract

For a contract to be valid, its terms must be legal. This means that you cannot create a legal contract regarding an act that is illegal. If any part of the agreement involves illegal activity, the contract cannot be enforced.

Consideration

No contract is valid without consideration, which is something of value that is given in return for something else. That may be money, but it may also be other items or services. Consideration may also be a promise to refrain from an action. Such consideration must be clearly explained in the contract.

Proper Format

Finally, a contract must have a proper format. This is usually interpreted to mean that the contract must be in writing, but this does not need to be the case. Verbal contracts can be legally binding as well. However, a written contract is best to avoid future disputes.

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