What Does a Contract Do: Everything You Need to Know
What does a contract do? A contract is a voluntary and legally binding agreement between two or more consenting and competent parties.3 min read
What does a contract do? The answer is pretty straightforward. A contract is a voluntary and legally binding agreement between two or more consenting and competent parties.
What Constitutes a Contract?
It is recommended that contracts be in written form, although a contract may be oral or implied. They are usually in regard to areas such as sales, leases, employment, or tenancy. A contractual relationship has three essential components:
- An offer: All parties must agree on all major issues of the contract for it to be valid.
- Offer acceptance: This is a basic rule of contract law. A legal contract exists when an offer is made by one party and accepted by another.
- Valid consideration.
An offer and an acceptance are often referred to as "the meeting of the minds." As an example of an offer and acceptance, say that one party agrees to print 5,000 two-color fliers for $200. This is an offer. If the other party tells the printer to do the job, that is the acceptance.
In the eyes of the law, once the individual told the printer to do the job, a contract was created. This means that person is now liable for their side of the deal, which in this case is the $200 payment.
Parties to a contract can be companies, nonprofits, individuals, or government agencies. Each party acquires the same rights and obligations. While all parties may expect the benefits from the contract to be fairly distributed, it does mean that each party will benefit equally.
Moreover, even though the existence of a contractual relationship is in place, it does not mean the contract is enforceable or that it is not void or voidable. A contract is usually enforceable regardless of whether it is in written form. A written contract is preferable, though, as it protects all parties that are part of it.
Note that some contracts must be in writing to be considered legally binding and enforceable. This would include contracts for installment plans, insurance policies, or the sale of real property. Other contracts, such as implied in fact contracts and implied in law contracts, are assumed and enforced by law regardless of whether the parties involved desired to enter the contract.
Two elements are necessary for a contract to be legally binding. First, the parties are in agreement once an offer is made and accepted. Second, something of value, such as goods, services, or cash, must have been exchanged. Note that state laws often require a written contract for agreements lasting more than one year and for real estate transactions.
Contract Basic Requirements and Similarities
Most adults have or will be involved in a contract, whether it's for car insurance, homeowner's insurance, medical treatment, or an employment contract. Each is different, but they all have similarities.
For example, not everyone is eligible to sign a contract. State laws decide how old a person must be to sign a contract. The standard age is 18 years old for signing, but 16 years old is also possible. In other situations, a minor needs to have a parent co-sign a contract.
Also, all parties signing a contract must be competent and sound of mind. It is expected that the parties involved will have the intellectual capacity to comprehend what they are signing. Finally, if fraud is involved or one of the parties misrepresents themselves, the contract is not binding. If either of these is determined, the contract is void and not enforceable.
Avoiding Disputes and Conflicts
Delaying accepting an offer, revoking an offer, or making a counteroffer are common situations involving contracts. Each can result in confusion or lead to conflict.
- If an offer does not have a stated expiration date, it remains open. This is usually for a time deemed reasonable, although the amount of time is open to interpretation. To avoid conflict, include an expiration date with the offer.
- If you have decided to choose another offer, do it while the offer is still available. Until it is accepted, the offeror can revoke it.
- Revocation of an offer must occur before it is accepted.
- Once the other party accepts the offer, a binding agreement is created.
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