Business Contract Basics
The definition of a contract is "a legally-binding promise made between two or more parties." Those who violate the terms set forth in a contract can be held legally liable for breach of contract and be ordered to pay damages. Courts will uphold legally binding contracts, unless they are against public policy, are otherwise unlawful or were inaccurately drafted or fraudulent.
What Are the Elements of a Contract?
There are certain elements that must be present for a contract to be legally binding:
- Mutuality of obligation -- Often described as "meeting of the minds," this term refers to the agreement between the parties on the specifics of the matter at hand.
- Offer -- This is the first component of the mutuality of obligation, and is the manifestation of one party's willingness to enter into a bargain with the other party; a proposed exchange to another individual.
- Acceptance -- The second and final component of the mutuality of obligation is the manifestation of agreement to the offer's terms. An acceptance can be made in several ways. Sometimes the offer specifies a type of acceptance, meaning that the offeree must accept the bargain in a certain way, by the promised act being performed or by a return promise. In many courts of law, acceptance can be tendered by any reasonable means unless otherwise indicated. It ise understood that, upon the other party's acceptance, a deal has been struck.
- Definite terms -- For a contract to be legally binding, the offer must spell out certain obligations of the bargain that are considered reasonably certain.
- Consideration -- This is the exchange between the parties of something of value. It does not have to be money; it can be profits or benefits or responsibilities or losses that are assumed or incurred. The term "legal detriment" applies here to consideration, meaning that one party can abstain from an action they are legally entitled to perform or, alternatively, may do an action that they are not otherwise obliged to do to fulfill contractual terms. However, past consideration is not enough to form a contract.
Two final elements comprise a legal contract. It must have been made for legal purposes between parties who are legally competent. If either of those are negated, the contract may be rendered unenforceable.
Types of Contracts
A unilateral contract is one wherein the offeree is required to accept an offer by the performance of the contract. If there is no performance, breach of contract is inapplicable because a contract does not exist.
A bilateral contract is one where the offer is accepted by the offeree with a promise, as when an offeree makes a promise to fulfill a specific obligation at some future point. If this obligation remains unfulfilled, a breach of contract has occurred as the promise alone was the acceptance.
A bare contract is simply a promise made by one individual to another without the element of consideration to make it legally enforceable by the courts.
A fixed price contract specifies an amount of money that shall be given upon completion of a specific project, as when a structure is being built. The fixed price may be firm or adjustable with a specific target price and maximum price.
A cost reimbursement contract is used in lieu of a fixed price contact and is sometimes referred to as a "cost-plus contract." They are commonly used by individuals, businesses and government entities on building or other projects where materials must be purchased. Its terms specify that the one performing the work, i.e., the contractor must be compensated for said costs which are unknown at the time the contract is drawn up. Additional funds are also promised so that a profit is made as well.
Adhesion contracts make up the bulk of contracts that are signed. These are completely one-sided and considered to be a "take it or leave it" proposal where one side retains all the bargaining power and the other can either sign it or not. Cellphone contracts, rental agreements, documents signed for car purchases all fall into this contractual category.
Breach of Contract
When one party doesn't live up to the obligation to perform some action after a valid offer was accepted, a material breach of contract can occur. Actual damages must be suffered in order to pursue a claim in court.
Because there are many complexities and contingencies involved in business contracts, retaining an attorney familiar with the ins and outs of contractual law is recommended.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.