Subject matter of a contract definition is the terms and conditions covered by this legally binding agreement. When two parties are involved in contract negotiations, the words subject to contract or without prejudice are used to indicate that negotiations are ongoing and the contract is not final.

What Is a Contract?

A contract is a legally binding agreement between two individuals and/or business entities in which each party is required to do or not do something specific. An agreement does not entail what a party understood or believed was the meaning, but only the meaning documented in the contract language. The contract is created by the words and actions of each party that are used to establish an agreement. It may imply certain essential terms.

If both parties have clearly expressed their intent to enter a contract and indicated the terms of this agreement, the contract is legally binding whether it is oral or written. However, issues can arise with oral contracts if one party denies terms that are asserted by the other party.

A common law contract requires:

  • Agreement on the fundamental elements of a contract
  • Consideration, or something of value provided by each party
  • Adherence to statutory or common law, including inclusion of only legal subject matter and the participation of only those who are competent to enter a legally binding agreement

Civil law contracts do not necessarily require consideration.

What Are the Requirements of a Contract?

Contracts are not enforceable unless both parties have the legal capacity to consent, which means they are older than age 18 and can understand the contract's terms and significance. In most states, a minor can enter a contract but he or she may void it at any time. This is called a voidable contract.

A contract is also voidable if one individual does not have the mental capacity to understand its terms. A contract is void if one party knew the other party was unable to consent. Mental illness alone does not constitute incapacity. A void contract cannot be enforced by anyone while a voidable contract can only be enforced by the protected party.

Contracts must deal only with legal subject matter. This means terms and conditions may not go against public policy, be immoral, or violate statutory law.

An offer must be communicated to the other entity and include the intent to enter into a contract. It must include certainties as far as the parties' identities, price, time, and subject matter.

Only the party that receives the contractual offer can accept it. This acceptance is effective as soon as it is en route to the offerer, a provision known as the mailbox rule. This rule is interpreted broadly and does not refer only to acceptance sent through the postal system.

The offeree can also make a counteroffer with revised terms, which terminates the original offer and creates a new one. If the person accepts but also complains about the agreement without alteration, this is known as a grudging acceptance, which can create confusion about whether acceptance actually exists.

Consideration must be an item of value, including but not limited to work, money, a promise to act or not act, or specific goods in exchange for a promise or specific performance. Both parties must offer consideration or no contract exists.

Types of Contracts

  • An express contract contains written or oral terms that are specifically stated.
  • A bilateral contract includes promises on behalf of both parties.
  • A unilateral contract includes a promise by one party only and can be accepted when the other party performs an act. For example, an advertisement of a reward to find a lost cat constitutes a unilateral contract. The person who finds the cat enters the contract by his or her actions.
  • An implied contract has terms that are inferred from conduct, actions, and circumstances. It can be implied in fact, in which the actions of both parties make it reasonable to assume an agreement exists, or implied by law, in which one person has a responsibility and the other has a right. The latter is created by the court as a remedy in a dispute.

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