Fundamentals of a Contract

Years ago, many personal and business deals were made and transacted with a simple handshake. If disagreements ensued, the parties could go to court and ask a judge to resolve the dispute, hopefully, in their favor. These days written contracts are the norm and, if prepared properly, they can protect the parties’ rights and help insure performance. Let’s look at what makes up a valid contract between two parties.

For a contract to be valid and enforceable in a court of law, six required elements must be met.

The first three elements are Offer, Acceptance, and Mutual Consent. That is, there must be a specific offer; each party must accept and agree to the same terms; and each must consent to the offer of their own free will. These three conditions imply that the parties intend to create a binding agreement.

Next, there must be something of value (Consideration) to be exchanged between the parties. Consideration may be money, a promise to perform a service, or to supply a product. However, BOTH parties must receive consideration for the exchange to be considered more than merely a gift.

Both parties must also be of “sound mind” to understand and fully comprehend what is required of them and be judged as competent, otherwise the non-competent party can chose to ignore the contract. The definition of Competence as it relates to a contract means that neither party is/was a minor; neither is under the influence of drugs or alcohol when the contract is/was signed; and neither is mentally deficient.

Lastly, the contract must be for a Legal Purpose and not to do something illegal like selling drugs or any other illegal act. (It is not illegal to enter into a contract that does not have all of these elements; it just means that if one of them is missing, the contract cannot be enforced by a court of law.)

Some verbal contacts can also carry the force of law, however, most types of contracts must be in writing to be both valid and enforceable. Some examples are long-term contracts, pre-nuptials, and contracts to transfer real estate. There is also such a thing as an implied contract where you can unknowingly enter into a contract with someone and be held to its terms.

Be cautious and speak with a member of our staff before you enter into any contracts.