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What is a Contract?

Most simply, a contract is a legally enforceable promise, an agreement between or among two or more persons that includes the legally required β€œelements.”  Not all contracts must be written (though some have to be). But, all business contracts should be in writing, even if not required to be. Not every document that appears to be a business contract is enforceable. Not only must a contract include all necessary contract elements, but, depending on the nature of the agreement, other terms might be required. Contact an experienced contract lawyer before negotiating, preparing or signing a business contract. Schedule an appointment now for a free consultation.

This short article introduces the following key elements that must be satisfied for a business agreement to be an enforceable contract: 

1.  Meeting of the Minds

2.  Mutual Exchange

3.  Legal Capacity

4.  Lawful Purpose

Another article, linked below, addresses some common Traps for the Unwary which businesses and business lawyers should carefully consider in preparing business contracts.

Mutual Assent

A contract is a two-way street. A mere promise by one person made unilaterally to another will not (with some exceptions) be enforced. Mutual assent means the parties must have come to a β€œmeeting of the minds.” One party must have made an offer, and the other must have accepted the offer. The offer must be clear and the acceptance must indicate that the second party understood the offer. There can be no material vagueness. Terms must be specific and understandable. Sometimes a party can make an offer and, rather than accepting the offer, the second party suggests different terms. In this case, there is no acceptance; instead, the second party has made a counteroffer that terminates the original offer, and must be accepted or rejected by the first party. In some cases, a conditional acceptance is satisfactory, and in other cases it is not.

Although all business contracts should be written, the writing need not be formal. Email exchanges might be enough. Or an exchange of letters, or even terms written on a cocktail napkin, as long as all contract elements are present. But, confusion can arise without a formally written contract; it may not be clear to a third party (e.g., judge, jury, arbitrator) that an offer and acceptance were present. Or, one party might think they have come to an agreement, but the other party believes they did not. Trouble can follow.

A properly written business contract can set to rest confusion about whether an offer was made and accepted. It will incorporate language that not only clearly specifies the terms on which the parties agree, but that also expresses that the contract is the final and entire agreement on the matter, superseding all prior and contemporaneous discussions.

Consideration

An enforceable agreement must include β€œconsideration” ... that is, some thing of value given (or given up) by either party to or for the benefit of the other. Each party must have given and received consideration. Consideration distinguishes the contractual exchange from a gift. A gift is one-way; contractual consideration is reciprocal.

There are limited circumstances where, even though consideration is absent, an accepted offer might still be enforced.  That is, there is a legally sufficient substitute for consideration. (For example, if Denny, a subcontractor, submits a bid to Penny, a general contractor, and Penny reasonably relies on this to prepare her overall price and stops taking other bids for the same work, but then Denny backs out, then Penny's detrimental reliance on the bid can be substituted for her receipt of value.

Consideration is a complex topic. There are different theories of consideration beyond the scope of this article. Many examples of substitutes for consideration exist. But, for our purposes here, consideration can be understood as either an β€œexchange of value” between parties, or some form of substitute that avoids an unjust result if a promise were not enforced.

Legal Capacity

An agreement is not enforceable as a contract unless each party is legally and functionally capable of voluntarily and knowingly entering into the agreement. β€œCapacity” is the quality to make an independent and rational decision. It requires the person to be of legal age; of sound mind; not acting under force, threat or other duress or coercion; and otherwise to be capable of satisfying the elements of a contract.

Lawful Purpose

Of course, to be legally enforceable, the subject matter must be legal. An agreement to hire a hitman for a certain fee would not be legally enforceable. Less perniciously, a promissory note must not demand interest that exceeds the rate the law allows. An insurance policy may not be written for a policyholder without an insurable interest in the insured.  

 

TRAPS FOR THE UNWARY

Contract law in the United States has developed over centuries. Much American law has come from England. Contract law is precise, but can also be arcane. Each state has its own laws, some created by States' legislatures and some devised by their courts. Even an agreement that includes all needed elements for an enforceable contract may still be missing, or may include, clauses and other language that can inadvertently create problems. Click here to read about 7 Common Contract Pitfalls.


DO IT RIGHT

Business contracts are critical elements of business success. This is true of executive employment agreements, assignment agreements for startup founders, investment contracts, sales orders, purchase orders, website terms of use, merger agreements, asset purchase agreements, stock purchase agreements, intellectual property licenses, and other business contracts. Each includes its own potential pitfalls. Contact an experienced business contract lawyer before negotiating, preparing or signing a business contract. Make an appointment now for a free consultation.


This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read our Legal Notices.

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