Key Takeaways:

  • Contracts define legal responsibilities and duties for all parties involved and are used widely in business transactions.
  • Essential components of a valid contract include offer, acceptance, consideration, and competency.
  • Written contracts are more enforceable than oral contracts, and express contracts are required for significant transactions.
  • Implied contracts are based on the conduct of the parties, without explicitly stated terms.
  • Common contract types include non-disclosure agreements, bills of sale, promissory notes, employment contracts, and licensing agreements.

What Is a Contract?

When looking for examples of contracts, it's important to know what a contract is used for in the business world. Contracts are agreements between at least two entities or people, which creates legal responsibilities or duties on each side. 

Some of the entities that might enter into a contract could include:

  • Organizations
  • Individuals
  • Corporations
  • Companies

Every contract must meet certain conditions in order to be upheld in court. These specific conditions make the contract enforceable and include:

  • Acceptance and offer
  • Some type of meeting of the minds in regard to the contract's legal subject, such as agreeing on the sale and purchase of a vehicle
  • Consideration
  • Competency, or legal capacity

Contracts must also have specific and defined terms that include all details of the transaction and a clearly defined offer. This information is called the subject of the contract. For example, if a buyer wanted to purchase a used car from a dealership, the sales contract would typically include warranty information, the price of the vehicle, and how ownership or title will be transferred. All parties involved must have valid cause when entering into a contract. The consideration refers to the price, motive, reason, or other objectives that require the use of a contract.

Legal capacity or competency means that all parties must be able to make legal decisions. For example, minors wouldn't be able to enter into legal contracts until they reach the majority age. A person with a severe mental disability cannot sign a contract, and if they did, it would not be enforceable.

Elements of an Enforceable Contract

A valid contract must include several critical elements to ensure enforceability in court. These elements include:

  • Offer and Acceptance: There must be a clear proposal by one party and acceptance by another.
  • Mutual Consent: Both parties should have a "meeting of the minds," agreeing to the terms without coercion.
  • Consideration: Each party must receive some benefit, whether in goods, services, or money.
  • Legal Purpose: Contracts must have a lawful objective.
  • Competency: All involved parties must be legally competent, meaning of sound mind and of legal age.

Without these elements, a contract may be deemed void or unenforceable​.

Written vs. Oral Contracts and Implied vs. Express Contracts

Oral contracts are verbal agreements made between at least two parties. Making some type of agreement in regular conversation could be enforceable, but it's much easier to enforce a contract that is written out in a document. A written contract is considered to be express, which means that all details are outlined and the subject is stated clearly. 

Written, express contracts are required in situations such as:

  • Selling services or goods valued at $500 or more, such as buying a car or hiring a professional to install a new roof on your house
  • Selling or transferring real estate, such as leasing an apartment or office, or purchasing land or a home
  • Making an agreement for services that take at least one year to complete, such as a one-year non-disclosure agreement or a 12-month maintenance service at your office

An implied contract, on the other hand, is an agreement with assumed details. For example, when you order a cappuccino at a coffeehouse, you entered into a verbal contract with the barista. You didn't expressly explain or clearly verbalize that you would pay for the coffee. Instead, your willingness to pay is implied.

Common Mistakes to Avoid in Contracts

When creating or signing contracts, some common mistakes can lead to misunderstandings or disputes:

  1. Unclear Language: Avoid vague terms or ambiguous language. Be specific with obligations, timelines, and payment terms.
  2. Missing Terms: Clearly state all necessary details. For example, for a service agreement, outline specific services and expected outcomes.
  3. No Termination Clause: Always include terms on how parties can terminate the agreement, including notice periods.
  4. Lack of Flexibility: Include provisions for adjustments if needed, especially for long-term agreements.
  5. Failure to Update: Regularly review and update contracts, especially if external circumstances change significantly.

Common Contracts to Know About

Several common types of contracts exist in the business world. For example, a non-disclosure agreement is used by companies who are dealing with potential employees, clients, or vendors and need to protect confidential and private information. If the signer of the non-disclosure agreement shares any of this confidential information, the other party can take legal action. 

A bill of sale is a contract that clearly outlines the basics of a sales agreement, such as the involved parties, the agreed upon price, and the terms of the deal. This type of contract will also prove the legal owner's identity.

A promissory note is the legal version of an IOU and allows someone to borrow money from another person or business entity. The promissory note exists to keep a record of the loan and all of its requirements, including penalties, interest, and terms of repayment. 

An employment contract sets the terms of employment, with details such as termination causes, bonus structure, and compensation.

A licensing agreement allows an inventor to make money on their creation or idea by allowing another person or business to use the idea. The licensing agreement will include details about any restrictions on reproducing the product, which is especially useful if you hold legal protection on your intellectual property but you need help from someone else to produce the item and make money. The agreement would likely include details about exclusivity and payment terms as well.

How to Choose the Right Contract Type

Selecting the right contract type depends on the nature of your agreement and your specific needs. Some questions to consider include:

  • Is confidentiality crucial? Use a Non-Disclosure Agreement (NDA) to protect sensitive information.
  • Are you selling goods or services? A Bill of Sale formalizes the transfer of ownership and terms of sale.
  • Is money being loaned? A Promissory Note outlines repayment terms and conditions for a loan.
  • Hiring employees or contractors? An Employment or Independent Contractor Agreement clarifies responsibilities, compensation, and termination terms.
  • Do you own intellectual property? A Licensing Agreement allows you to grant rights for its use under agreed terms.

Choosing the appropriate contract minimizes risks and ensures that all parties understand their rights and obligations.

FAQ Section:

Q1: What is an implied contract?An implied contract is based on the conduct of the parties rather than written or spoken terms, such as paying for a meal in a restaurant.

Q2: Are oral contracts legally binding?Yes, oral contracts can be legally binding, though written contracts are easier to enforce due to documented terms.

Q3: What happens if a contract lacks consideration?Without consideration, a contract may be deemed unenforceable since all parties must receive something of value.

Q4: Can a minor sign a contract?Typically, contracts signed by minors are not legally binding unless for essential services, like medical care.

Q5: Why is a termination clause important in a contract?A termination clause clarifies how parties can end the agreement, reducing the risk of disputes and providing clear exit terms.

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