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What Is a Contract Agreement?

No matter the size of your company, a contract agreement is an essential part of conducting business. A legal contract is a document that all parties agree to. Contract agreements typically lay out the terms and conditions of an agreement, clearly explaining all parties' expectations. This often includes specific details about important aspects like payments, materials, and timelines as well as how the parties can resolve disagreements.

Contracts vs. Agreements

You will often hear the terms contract and agreement used interchangeably. However, it's important to note that contracts and agreements aren't exactly the same things. Agreements create mutual understandings between parties, while contracts are agreements that create enforceable obligations.

When Do You Need a Written Contract Agreement?

Verbal contracts are technically legal in most cases, though there are specific situations when they are not. Still, most businesses create written contracts today. Contracts include many details to try to cover all possibilities and eventualities as clearly as possible.

Most contract agreements never get to a courtroom. Theoretically, they could, therefore, be verbal. However, should something go wrong, a written contract better protects all parties involved. If a party to a valid and enforceable contract thinks the other party has in some way broken the contract (in other words, they've breached the contract), the harmed party can bring a lawsuit using the written contract for support.

While verbal contracts can still have the force of law, certain types of contract agreements are required to be in writing. This includes long-term contracts as well as contracts for marriage, or prenuptial agreements. ( Here is an article with further information about prenuptial agreements.)

It is also possible to have an implied contract. A party can enter into a contract unknowingly and still be forced to fulfill the contract's terms.

What Makes a Contract Agreement Enforceable?

A contract must be clear and specific to be legally enforceable. It also must meet certain criteria. If a contract agreement is legally enforceable, it can be used in a court of law to support a decision if a dispute arises between the parties to the contract. However, if a contract does not include certain key components, it will not be legally enforceable and thus will not stand up in court.

If a contract is valid, litigation (the legal process) can determine if a contract has been breached or if there are circumstances negating the breach. However, a court will only consider a contract dispute if the contract itself is valid.

Essential elements for business contracts relate to both the agreement itself and to the parties entering the agreement. However, it is not illegal for someone to enter into a contract that does not include all of the essential components. A court simply cannot enforce a contract that doesn't include the necessary elements.

Components needed to create a valid contract include:

Offer, Acceptance, and Mutual Consent

All valid contracts must have a specific offer. An enforceable contract must also include acceptance of the specific offer.

Further, both parties to the agreement need to consent to their free will. That means neither party can be forced or coerced into signing a contract. Both parties to the contract must also clearly agree to the same terms.

The conditions of the offer, acceptance, and mutual consent also imply that the parties intend to create a binding agreement. That means if one of the parties (or both of them) aren't serious, there isn't actually a contract.

Consideration

All contracts must include consideration, or something of value being exchanged between the contract's parties, to be valid. That thing of value can be either services or money. However, both parties must be giving something. If not, you have a gift, not a contract.

Here is an article about consideration in contracts.

Competence

Parties to an agreement must all be of sound mind for a contract agreement to be legally enforceable. In other words, the agreeing parties must be able to understand the situation and what is being required of them. Competence also requires that:

  • Neither parties are minors
  • Neither parties are mentally deficient
  • Both parties are sober, i.e. not under the influence of alcohol or drugs, when they sign the contract

If a party to a contract is not competent, that means the contract is not considered valid. The party that is not competent can ignore, or disavow, the contract in that case.

Legal Purpose

For a contract to be enforceable, it must be a contract for a legal purpose. In other words, a contract for something illegal, such as prostitution or selling drugs, is not enforceable in a court of law.


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Other Important Aspects of a Contract Agreement

While the above components are required to make a valid contract, there are other important aspects that anyone creating a contract should be aware of. Things to keep in mind include:

Researching Local Regulations

Contracts should incorporate local regulations that could apply to the specific situation of the agreement. Industry and/or union regulations may also apply and should be included in the contract. Examples to consider include:

  • Requirements for insurance
  • Noise and other restrictions
  • Required fees
  • Required licenses or planning permissions

Defining Specific Details

Good contracts don't leave anything to chance. You'll want your contract to include all details relevant to the agreement you're entering into. Even if something seems obvious to you, it may not be clear to the other party, so make sure your contract defines any key terms as well as exact services or products.

Important details to cover include:

  • Contact information for all parties
  • Time period the contract covers, including start and end dates
  • Definitions of key terms
  • Services of products you are providing or receiving
  • Liability requirements
  • Insurance requirements
  • Terms of payment, including due dates, milestone payments, and/or part payments
  • Interest and/or fees required for late payments
  • Dispute resolution processes
  • Breach-of-contract processes
  • Any other special conditions

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Types of Contract Agreements

Various categories of contracts exist. Examples include:

Unilateral Contracts

These contracts are usually one-sided. One party makes all promises in this type of agreement. Item repairs and maintenance agreements are examples of this type of contract.

Bilateral Contracts

Both parties make promises in this type of contract. Bilateral agreements can give parties access to new markets. Real estate contracts are typically bilateral contracts.

Executed and Executory Contracts

An executed contract is simply a completed contract, typically made between two or more individuals. Executed contracts are also possible between a person and entity, or two or more entities. The purchase of a service or product is an example of an executed contract. The terms of an executed contract must be fulfilled right away.

Executory contracts, on the other hand, are contracts with terms that will be fulfilled later on.

Contracts Under Seal

Some agreements require the use of a seal to show the contract is official. This seal can be a wax seal, a seal created using a special stamp to emboss the seal onto the document, or the attachment of adhesive paper.

Working with an experienced contract lawyer can help you make sure your contract includes all the necessary components to protect you and your business given the specific circumstances of your agreement. This way, you'll know that your contract is valid and will stand up in a courtroom if a dispute arises.

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