Contracts 101: The Essential Parts of Every Agreement

Contracts are the foundation of modern business relationships. Contract law as we know it today originated in English common law, but contracts have been around since ancient times. Many of the earliest examples of contracts in history have the same characteristics—such as offer, acceptance, and consideration—that we currently recognize as elements of a legally binding agreement.

Having a better understanding of contract law will help you to identify your rights and obligations under an agreement and prevent legal conflicts. Before signing a business contract, however, it is important to have an attorney review it to make sure it accurately expresses the parties’ intentions.

From Stone Tablets to Digital Documents: A Brief History of Contracts

Many aspects of our daily life, both professionally and personally, are governed by contracts.

The home we live in or apartment we rent was obtained using a real estate purchase or lease agreement. The car we drive was purchased using a sales agreement. We go to work at an office that our employer rents using a commercial lease and often perform a job that has terms dictated by an employment or independent contractor agreement. The office supplies we use were provided on a contractual basis by a provider, and the utilities our job requires continue in service as part of ongoing contracts.

Even in our personal life, we utilize contracts. If you are married, you have vowed to stay together until “death do us part.” This lifetime commitment to your partner is more than just romantic lip service. Marriage is also a legal contract that confers responsibilities on each party.

Contracts have been used throughout the history of commercial civilization. Scholars are aware of sales contracts from Mesopotamia dating as far back as 2,300 B.C. In “the cradle of civilization,” there were contracts for purchase and sales, labor and employment, and marriage and divorce. In fact, the purpose of the first writing system, developed in ancient Sumeria, was to document business transactions and create contracts. These early contracts were created with picture symbols marked on clay tablets that hardened into a permanent record.

From the Magna Carta in 1215 to the Louisiana Purchase in 1803, the Universal Declaration of Human Rights in 1948, and the 2015 Paris Agreement, contracts have shaped the world as we know it. Today, most contracts are digital and require little more than a button click to sign, but the record they create is no less permanent than the stone tablets that have survived from Sumeria.

What Is an Enforceable Contract?

At its most basic, a contract is a voluntary and legally enforceable exchange of promises between two or more parties.

We are constantly entering into contracts, often without even realizing it. When you agree to the terms of service for a website or an app, you are contracting with the service provider. By clicking “I agree,” you are promising to abide by the terms of use and could be refused service if you break those terms. At the same time, the terms of service may give you rights, such as privacy rights, that, if violated, give rise to legal consequences for the provider.

Merely clicking “agree” or providing your digital signature does not necessarily mean a terms of service agreement is legally enforceable. Courts have ruled that some terms of use are not legally binding because they contain clauses prohibited by law or designed to trick or exploit the user.

When assessing the legality of a contract, courts look to past judicial decisions (case law) and legislation.

● The Restatement of the Law of Contracts is based on tens of thousands of judicial decisions over the years about contract legal questions and serves as a guide for judges; it is often cited by the courts in matters involving contracts for the sale of real estate and services.

● Courts also look to statutory law, particularly the Uniform Commercial Code, a model law adopted by most states that applies to contracts for the sale of goods.

In addition, the Convention on Contracts for the International Sale of Goods (CISG) governs international sales law, and the federal government has laws about how contracts can be entered into by and with the federal government.

Elements of a Valid Contract

Some contractual language might contain legalese, which is often confusing. Every contract should be individually assessed by your attorney to ensure it is valid. Its validity rests in part on what is being contracted and which laws apply to the specific contract. However, every contract should include a few basic elements that are necessary to create a binding agreement based on mutual assent:

● Offer. A contract cannot exist if one party does not first extend an offer to another party. An offer is a party’s promise to perform a specific action—or refrain from that action—in the future, which would lead the other party to believe that a contract will be formed when they accept it. For example, “I will pay you $3,000 per month to rent this office space” is a contract offer. The offer extended should also contain the details, terms, and conditions to which the individual making it is willing to be bound.

● Acceptance. The party who receives the offer has the option to accept or reject it. If they choose to accept it, they generally may do so in the manner indicated in the offer. Acceptance is typically communicated by a signature, but it could be expressed by words, deeds, or performance.

● Consideration. Something of value must be provided by both parties to a contract to induce the parties to reach an agreement. This may be payment for goods or services, but it could be a nonfinancial benefit such as the receipt of products, property, or protection. In the example above, one party receives $3,000 and the other party receives the use of the office space. The key is that the signatories agree that the consideration, whether it is an action or an item, has value.

● Capacity. Each signatory to a contract must have the legal capacity to understand what they are agreeing to. Minors and individuals with dementia or a brain injury, who are under the influence of alcohol or drugs, who cannot understand the terms used in the contract, or who are being coerced to enter a deal lack legal capacity.

● Legality. Contracts must comply with all applicable federal, state, and local laws. A contract cannot be considered legally binding if it involves an illegal action, product, or service. The contract should state in the governing law clause which law applies to disputes arising from the agreement.

Beyond the bare minimum requirements that make a contract legally binding, business contracts should also contain the following fundamentals:

● an introductory clause that identifies and provides basic information about each party, such as contact information

● Details regarding the rights and obligations of each party

● Clear payment terms with due dates and prices

● Potential damages for unfulfilled obligations, missed deadlines, or other contract breaches

● Dispute resolution measures, including the forum where interstate disputes will be resolved

● Start and termination dates

● confidentiality provisions

● indemnification provisions

● limitations of liability

● a force majeure clause addressing risks arising from unforeseen, disastrous events (i.e., “Acts of God”)

Always retain a signed copy of a contract for your records in case a dispute arises.

Make Sure Parties Are on the Same Page

Well-drafted contracts are essential to protecting your business and making sure others keep their promises to you. They set boundaries and expectations for each party and ensure that procedures are in place to resolve conflicts.

In contracts, as in business, it is the small details that can matter most. Protect your business by having an attorney review all potential business contracts before you enter into them. To make sure you get what you bargained for, contact our office to schedule a meeting.