Contracts govern how modern businesses interact with everyone from partners to customers. Learn the four elements of every business contract in this article.
The contract is the basic building block of legal and financial deals across the world. People and businesses of all kinds enter contracts to trade goods and services. The terms these contracts lay out set the rules for how businesses work with each other and how they interact with people, from customers to employees. Knowing the basics of how business contracts work is a vital part of not just managing a business, but also of getting by in the world.
The details of how any specific contract works can get really complicated, and every contract is unique. Contract law also varies in its enforcement from one jurisdiction to another. Only a contract law expert who is familiar with your local rules can give you legal advice, so it is always a good idea to speak with a professional before writing or signing a contract.
In most places, there is a major difference between documents that can be enforced as legal contracts and those that can not. Sometimes certain parts of a contract are enforced while other parts are not. While details vary, enforceable contracts in the Western world generally have these four elements.
The Offer, Acceptance, and Mutual Assent
The heart of every contract is mutual assent, which is sometimes called the meeting of minds. This is how the parties agree to an exchange, or to perform a service for each other. A contract meets these requirements when one party offers to provide something, the other party accepts the offer and they agree to the terms, often after a period of negotiation.
To understand how this works, imagine shopping at the grocery store. In contract terms, taking your selections up to the cash register is your offer to buy the items for the price listed on the items’ tags (the offer). When the clerk rings you up, the store is in effect naming a price (acceptance of your offer). When you pay in a form the store can process (cash, check, debit or credit card), you and the store have reached a meeting of minds (mutual assent). The fulfillment of this contract is when you take your items and leave the store, and the groceries have now transferred to your ownership.
Consideration is a commonly overlooked element of a contract. In contract terms, consideration is the reason why a party would want to enter a contract in the first place. A party’s consideration may be cash, services rendered or some other desirable result of the contract. In order to be a contract, an agreement must include consideration for both parties, even if the consideration for one party is a straightforward payment in cash.
To understand consideration, it can be helpful to imagine a contract without it. A labor contract for employment, for instance, includes consideration for both the employer and the employee. The employer gets the value of a worker’s labor, while the worker gets paid. A situation where one person works for another for free, or where a company gives a paycheck to someone who performs no work, is not an employment relationship, since there is no benefit to the arrangement to one party.
Curiously, this is one reason you may not be bound by the “Park at Your Own Risk” signs in many privately owned parking lots. As with many other “This Contract Limits Our Liability” -style public signs, this may not always be fully enforceable. A sign informing you that parking in a lot constitutes a full release from liability generally contains no consideration for you, since you are theoretically giving up the right to sue in exchange for no benefit. As always with a thorny legal question, be sure to ask a knowledgeable lawyer what your rights are in any given situation.
Capacity to Agree
In order to join a contract, all of the parties must have the capacity to agree. This means that every party to a given contract must be an adult of sound mind who is not subject to impaired judgment. One likely way to void a contract is to demonstrate to the court that one or more people listed as parties to the contract were unable to give their consent to the terms due to age, disability or another reason.
Perhaps the best-known reason for capacity problems in a contract is age. Minors are generally held to have no capacity to agree to a contract, though this standard is flexible in certain cases. No state’s courts uphold credit card contracts that have been signed by a 14-year-old child, for example. In a similar way, marriage contracts may be annulled if one of the parties can be shown to have an intellectual impairment serious enough that they lacked the ability to understand the contract they entered.
Not all capacity issues are matters of age or disability. Some able-bodied adults can be found to have lacked capacity under some circumstances, even if it was just for the brief time they agreed to a contract. An English-language contract, for instance, may not be enforceable if one of the people who signed it doesn’t understand English and there was no proper translation available to them. A person is said to have lacked the capacity to agree if they felt threatened or coerced into a contract or if they are the victim of fraud or other misrepresentation. In limited cases, usually involving very complex contracts, a party may not have the capacity to agree if they received poor or mistaken legal advice prior to signing.
Finally, a contract’s provisions must be legal to be enforced. You cannot, for example, enforce a written contract to commit murder or arson. A contract to distribute drugs as part of a gang is typically not going to be upheld by a court, though such a document might bring up other legal issues for you. As always when assessing the legality of a contract, or when evaluating whether an agreement is enforceable, only your lawyer can give you definitive answers.