A contractual relationship is a legal bond between at least two people who agree to at least one term or promise.

The Legal Meaning of “Contract”

A contract is a written or oral agreement between two or more individuals that is legally enforceable and contains at least one promise for one party to do something for the other.

A contract includes several key elements:

  • Legal enforceability
  • A written or oral agreement
  • A relationship of exchange
  • A minimum of one term or promise

One of the most critical attributes of a legal contract is that both parties enter into the relationship on a voluntary and consensual basis. In order to qualify as a legal contract, two parties must be involved, but no legal limits exist on how many potential parties could enter into the transaction. When both parties, acting on their own intent to be bound and with their own free will, reach an agreement on the terms of a relationship, the resulting agreement is a legal contract.

The fact that both parties agree to the terms is what sets a contractual obligation apart from any other type of legal obligation, such as paying taxes or providing compensation for negligence. These legal obligations arise as the result of some event or act and are enforceable by law, but the involved parties don't have to agree to the terms for the obligations to be enforced.

An Exchange Relationship

When two parties enter into an agreement, they are then bound together for a shared purpose outlined in the contract. A contractual relationship might only require minimal interaction and last for a short time. For example, a hairdresser and a client have a brief contractual agreement. The hairdresser agrees to provide a service, or a haircut, to the client, while the client agrees to pay an agreed upon price for that service.

Other types of contractual agreements last much longer. Examples include contracts for:

  • Long-term employment
  • Leases
  • Construction

These contracts could require frequent interactions between the involved parties and span many years, based on the provisions and terms. A contractual relationship exists to allow two or more parties to be involved in an exchange. By trading services, goods, property, and intangible rights, the society and economy can continue to grow and thrive. However, contracts help to regulate and facilitate these exchanges or trades. The idea of an exchange means that one party gives up something to the other in order to get something, and vice versa. A contractual relationship must be reciprocal.

Contractual Situations

Contracts can be used in all types of situations:

  • A vehicle owner might choose to sell the car or trade it for goods
  • An inventor might exchange the rights to an invention with a manufacturer for mutual profit
  • An aunt might promise a cash reward to her nephew for completing high school
  • A butler serving a celebrity might exchange secrets for cash with a tabloid magazine

The situations that require the use of a contract vary drastically. Some contracts involve intangible rights, while others outline the exchange of tangible items. An agreement may hold economic value. All contracts share the same basic format, which includes a bargain between two or more parties, involving an exchange that benefits both. This benefit may be perceived or actual. Modern contracts may involve less traditional transactions. However, some type of exchange is always the main motivation for entering into a contract, as well as for all contract laws and rules.

A contractual obligation differs from an instantaneous or executed exchange. For example, John Smith decides to sell his canoe. He puts it out on the sidewalk in front of his home, bearing a “For Sale” sign and a price of $400. This sign doesn't include any warranties. Annie Adams walks by the house, sees the canoe, and decides to purchase it. She gives $400 to John and leaves with the canoe.

This example is not a contractual obligation. Instead, it is referred to as an instantaneous exchange. It's not a contract because Annie didn't make any promises to take any further action after paying for the canoe. John didn't make any promises about the condition of the canoe, so his legal obligation ended when he gave the canoe to Annie in exchange for payment.

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