What is a Contract? Everything You Need to Know
What is a contract? Contracts are a part of our everyday world. A contract might include a simple transaction at the local store.3 min read
What is a contract? Contracts are a part of our everyday world. A contract might include a simple transaction at the local store. It might include buying a ticket to your favorite concert.
What Is a Valid Contract?
It is important to understand the definition of a contract to ensure you are using them properly and that both parties are protected. A contract connects two parties into an agreement that is legally binding.
To be considered a valid contract, the following rules must be followed:
- The contract cannot include any illegal items.
- The contract can include both formal/informal verbiage.
- The contract must be between two competent parties (both parties are at least 21 years old and be of sound mental health).
- Information about the who, what, where, when, and how of the contract agreement are included.
Defining these components, however, is not always easy. Minors are sometimes able to enter into contracts, but the legal requirements differ by state. Additionally, what is considered to be sound of mind in one state may not be the same in another one.
Oral contracts are also considered valid. However, it is best to create a written contract that lays out the specific details of the agreement. It can be difficult to dispute an oral contract because it is one person’s word against another’s.
A breach of contract occurs when one party fails to complete their side of the agreement. Contracts can be complicated with a significant monetary value or they can be simple and of low value. When a contract includes a high monetary value, it is best to work with a lawyer to ensure you are protected.
How Do You Form a Contract?
Forming a contract includes the following steps:
- Offer: One party will present the other with an offer. The offer must include the terms to be agreed upon.
- Acceptance: After receiving an offer, the other party can accept or decline the offer terms. If they accept, they are agreeing to the terms of the offer. They may also choose to counteroffer. If the person accepts, the contract is created. This party must notify the other party that they have accepted the contract.
- Consideration: Contracts often require that each party gives something up. This ensures that each party is given something of value.
- Mutual assent: Both parties must understand that they are legally bound to the contract and its details. This is the one important piece of a contract that is often missing in informal verbal agreements.
- Material terms: Material terms place a value on the contract’s components. If one party breaches the contract, a monetary value can be assigned to the agreements. Material terms include names, dates, clear description of what is being transferred, and payment terms and dates.
If a counteroffer is made, there is no valid contract until both parties come to an agreement. The counteroffer process can go back and forth until both parties agree. No one is officially in a contract until an agreement is made.
It is also possible that an implied agreement is a contract. For example, when you visit a medical provider, you expect to receive medical services. In return, the physician expects that you will submit payment for the services rendered.
What Is Contract Law?
Contract law is the area of the legal field that evaluates and analyzes contract agreements. One party will often take a breached contract to court to sue for liabilities. Contract law looks at the agreement to evaluate whether or not the contract is valid. It will also look at the monetary value of the breach.
Most people use contract law, sometimes on a daily basis. Whether you are a business owner, consumer, or homeowner; you are met with contracts all the time. The purpose of the contract is to ensure that both parties have a clear understanding of the agreement. With contracts, everyone can do business with confidence, understanding the agreements that they are entering into.
The industry of contract law is constantly changing. With technology becoming an important part of our lives, contract laws have been forced to adapt to things like electronic signatures.
The requirements that make a contract valid can be confusing. If you need help with understanding what is a contract, you can post your legal job on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.