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Elements of a Contract

Updated: March 28, 2023
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Businesses rely on contracts to establish the foundation of their professional relationships while also supplying the agreed-upon procedures that govern those relationships. Having the right elements of a contract are important to keep you protected. With a contract, the parties involved establish how they will work together and how each party’s duties and responsibilities will be enforced.

For a legal document to be a binding contract and enforceable, certain elements must be present in the contract. The required elements of a contract are:

  • the offer
  • acceptance
  • awareness
  • consideration
  • capacity
  • legality

A contract is an agreement, written or spoken, between two or more parties that create legal obligations between the parties.

What are the Elements of a Contract?

  • Contract Offer. This is a promise by one party to another that they will or will not perform a specific action in the future. Example : I will pay you $6,800 for the purchase of your golf cart.
  • Contract Acceptance. The acceptance usually mirrors the terms of the offer – an expression, through words or deeds, that both parties agree to the terms of the contract.
  • This is proof that both parties clearly understand and agree to “the basic substance of the contract”.
  • Contractual Consideration. Contractual consideration entails something of value promised in exchange for the actions (or nonactions) defined in the offer, the most common of which is payment for goods delivered distinguishes a contract from a gift because it removes the voluntary nature of the act/non-act by requiring something of value in exchange for the promise.
  • Capacity. This element indicates that each signatory to the contract has demonstrated the “legal capacity” to understand what they are signing.
  • Legality. This element indicates that all contracts are subject to the laws of the jurisdiction under which they operate. This is typically found in the Governing Law clause.

Different Types of Contracts

Contracts are everywhere. You are probably using one or more contracts in your everyday life and do not even realize it. Following are some types of contracts used in our everyday lives.

  • Your lease agreement or mortgage
  • Terms and conditions of your credit card
  • Employment contracts
  • Rental car company contracts
  • Terms and conditions when you sign up for a service
  • Cellphone contract

Contracts are at the heart of every service that you perform or receive. Contracts govern so many facets of life, from individual actions to the actions of a multinational company. Yet though their impact is profound, contracts often operate “under the radar” quietly managing all manner of business and personal relationships. As an individual, there are contracts associated with a variety of day-to-day activities and responsibilities.

In business, the three most common types of contracts are:

  • Sales contracts. Sales contracts facilitate sales transactions and customer engagement.
  • Nondisclosure agreements (NDAs). Nondisclosure agreements protect organizations key assets, reputation and business data.
  • Service & vendor agreements. Service contracts optimize and manage business relationships with consultants, contractors and other third-party actors.
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What is the average cost of hiring a lawyer to draft a contract?

Hiring a contract lawyer is not always necessary, however, before signing a business contract, always have a lawyer look it over and confirm that you are getting what you expected. The lawyer should go over all the contract clauses in a contract before you sign it. You want to be sure that the contract protects your interests specifically.

Following is a list of reasons why you should hire a contract lawyer.

  • To help you better understand a contract clause
  • To advise you before of potential pitfalls prior to signing the contract
  • Identify potential liability issues and resolve them
  • Ensure that the contract is valid and legally enforceable
  • Ensure new regulations and applicable state laws are considered
  • Offer new perspectives and make new suggestions
  • Respond to a breach of contract
  • Advocate on your behalf
  • Terminate a contract

The terms and clauses in a contract can have direct financial consequence for your business. A well-written contract that is strategically aligned with your business interests is an incredibly valuable guarantor that the obligation to you will be met.

Every business deserves that peace of mind and contractual protection. To ensure your contracts will stand up to scrutiny, it might make sense to delegate the writing, reviewing, negotiation, or execution of your contracts to a contract lawyer. Delegating this critical task to a knowledgeable contract lawyer is one of the best ways to manage risk.

The consequences of a poorly written contract, or worse, not having a contract to begin with, can be severe. Hiring a contract lawyer is certainly a worthwhile expense for your company. Better to err on the side of caution, rather than not.

What is the average cost to hire a contract lawyer to draft a contract ? Contract drafting costs range between $200 and $800 for a simple contract and $1,000 and $5,000 for a complex contract. Contract lawyers can offer hourly or flat fee contract drafting services. The cost of drafting a contract depends upon the scope and depth of your objectives and the complexity of terms and business relationship.

Unless you feel comfortable about what you are doing, if you do not want to hire a lawyer to draft the contract, you can write the contract yourself. It is not mandatory that a contract is written by a lawyer. Again, if you feel comfortable that you know what you are doing, go for it.

How to Write a Contract

Following are a few things to keep in mind when writing a contract.

  • Keep it simple. Excessive legalese in a contract is not necessary to make the contract enforceable.
  • Identify each person correctly in the contract. Be sure that each party that the contract pertains to, is identified correctly in the contract.
  • Spell out all the details. Be sure to spell out the terms and conditions of the contract and what is expected of each party in the contract.
  • Specify payment obligations. Be specific about the payment obligations so that there is no confusion or misunderstanding in the future.
  • Agree on circumstances that terminate the contract. Specify reasons why the contract could be terminated.
  • Agree on a way to resolve disputes. Be clear about how disputes will be resolved.
  • Pick a state law to govern the contract. You must specify a state law that governs the contract. Example, if both parties live in California, then California would be the state law that would be used.
  • Keep it confidential. Unless agreed upon by all parties in advance, information in the contract should be kept confidential.

Even though a contract is not required to be in writing, to protect yourself, it is best that the contract be in writing. More times than not, people have entered into verbal contracts, only to run into all kinds of issues down the line.

If the contract is in writing, it can be proven. If a contract was entered into verbally, you will have no way of proving that you entered into a contract unless someone else was present at the time the verbal contract was made. Even if someone else is witness to a verbal contract, the validity of the contract still may be hard to prove in a court of law.

One of the elements required to make a contract enforceable is a signature. If you enter into a verbal contract, there is no signature.

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