The creation of a contract allows two parties to enter a legally binding agreement for goods or services. As a business owner, it's important to understand the different types of contracts and the required elements they must include.

What Are the Elements of a Contract?

In the case of a contract dispute, the judge will first determine whether a contract existed between the two parties. If a party does not hold up his or her end of the agreement, breach of the contract has occurred. The party who did not breach the contract can seek legal damages through arbitration, mediation, and lawsuits. However, to be legally binding, a contract must contain:

  • An offer and acceptance
  • Consideration
  • Mutual obligation
  • Competence and capacity to enter a contract
  • A written instrument

The judge must be able to determine that the person who accepted the contract offer intended to enter the contract, accepted the terms as proposed, and communicated this acceptance to the party that made the offer.

The offer is a promise by one party to do or not do an action in the future. Once the other party accepts the offer, it becomes legally binding. The offer must be clearly stated and all expectations outlined so that each party understands the terms of the agreement.

"Consideration" means that each party must offer something of value, which may include an interest, right, benefit, loss, forbearance, detriment, or responsibility. It could be effort, money, service, or promise. If consideration does not exist, one party is offering the other a gift rather than a legally binding agreement.

"Offer acceptance" occurs when the contract is signed by both parties voluntarily. They may not be influenced by outside factors. Performance of the contract terms can also be considered acceptance. If the other party requests a change in terms before signing, he or she is negotiating with a counteroffer.

With some contracts, the offer must be accepted by a specific deadline. Acceptance may occur instantly through an in-person meeting, online chat, or on the phone, or it can be non-instantaneous if sent by mail.

"Mutuality" means that both parties are on the same page regarding the terms of the agreement. This means that the terms must be fairly represented and that neither party was misled.

"Legal intent" means that the contract was not created to promote an illegal purpose. Contracts that require illegal actions to be fulfilled are not legally binding.

Both parties must be competent to sign a contract, which means they have the mental capacity to understand the terms, are at or older than the legal age of consent, and that they are not under the influence of drugs or alcohol when signing.

Though minors can legally enter a contract, they can also opt to void it at any time before turning 18. A diagnosis of mental illness alone is not sufficient to deem a party incompetent to sign a contract. It must impair the individual's ability to understand the terms of the contract for the agreement to be determined legally invalid.

Does a Contract Have to Be Written to Be Valid?

Only certain types of contracts have to be in writing to be legally enforceable. In most states, these include:

  • Real estate agreements
  • Contracts with a term lasting longer than 12 months
  • Agreements to marry
  • Promises to pay debt

Many states also add insurance contracts, contracts for the sale of goods above a specific cost, securities sales agreements, and long-term leases.

How Are Contracts Interpreted by the Court?

When the court interprets a legal contract, they look at the ordinary meaning of the language and consider the parties' intentions for entering the agreement. If the intention is unclear, the court will consider usage and custom in the business and region in question. A specific manner of expression is not required for a party to enter an agreement.

Unilateral contracts have no defined second party or are offered to many parties at once, while bilateral contracts have two distinct parties, each with specific duties and rights. A party to a unilateral contract is not obligated to act but is bound by the terms of the agreement if he or she does act.

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