Careers Business Ownership The Basics of Business Contracts and Agreements Share PINTEREST Email Print Paul Bradbury/ OJO images/ Getty Images Business Ownership Operations & Success Business Law & Taxes Sustainable Businesses Supply Chain Management Operations & Technology Marketing Market Research Business Insurance Business Finance Accounting Industries Becoming an Owner Table of Contents Expand Binding Contract = Valid Contract Essentials of Business Contracts When a Contract Must Be in Writing Creating an Implied Contract Get Help From an Attorney By Jean Murray Jean Murray Jean Murray, MBA, Ph.D., is an experienced business writer and teacher. She has taught at business and professional schools for over 35 years. Learn about our Editorial Process Updated on 12/29/20 Contracts and agreements are important for conducting business for all sizes of companies. In earlier decades, there were few written business contracts, and many business and personal deals were done with a handshake. If a problem arose, the two parties could take the issue to court, and a judge would hear the case even if the contract was not put into writing. While a verbal contract is still legal (except for in specific situations), most contracts are documented in written form. Contracts have become increasingly detailed these days, and every effort is made to make all possibilities and eventualities clear. Enforceable Contracts = Valid Contracts In addition to being clear and specific, a contract must meet certain criteria to make it legally enforceable. A legally enforceable contract is called a valid contract. Being legally enforceable means that can be used in court to support a decision on a disputed item. If a contract does not have certain essential ingredients, it is not legally enforceable. Most contracts never see a courtroom and they could easily be verbal unless there is a specific reason for the contract to be in writing. When something goes wrong, a written contract protects both parties. If one party to a valid (enforceable) contract believes the other party has broken the contract (the legal term is breached) the party being harmed can bring a lawsuit against the party who it believes has breached the contract. The legal process, or litigation, determines whether the contract has been breached or whether there are circumstances that negate the breach. The court, however, will only hear a contract dispute if the contract is valid. Contracts vs. Agreements Many people use the terms contract and agreement interchangeably, but they are not precisely the same thing. Black's Law Dictionary defines an agreement as "a mutual understanding between...parties about their relative rights and responsibilities." It defines a contract as "An agreement between...parties creating obligations that are enforceable." Essentials of Business Contracts There are six required, essential elements for a contract to be valid (enforceable by a court). The first four, considered here together, relate to the agreement itself, and the other three relate to the parties making the contract. Offer, Acceptance, Consideration, and Mutual Consent Every contract must include a specific offer and acceptance of that specific offer. Both parties must consent to their free will. Neither party can be coerced or forced to sign the contract, and both parties must agree to the same terms. Implied in these three conditions is the intent of the parties to create a binding agreement. If one or both parties are not serious, there's no contract. There must also be consideration, something of value exchanged between the parties. The thing of value may be money or services, but both parties must give something. If someone gets something for nothing, that's a gift, not a contract, and it's not binding. Competence Both parties must be of "sound mind" to comprehend the seriousness of the situation and understand what is required. This definition requires that neither party be minors, both must be sober (not under the influence of drugs or alcohol when signing the contract), and neither can be mentally deficient. If one party is not competent the contract is not valid and the non-competent party can disavow (ignore) the contract. Legal Purpose The contract must be for a legal purpose. It cannot be for something illegal, like selling drugs or prostitution. Remember that it is not illegal to enter into a contract that doesn't have all of these essential items; it just means that if an essential is missing the contract cannot be enforced by a court. When a Contract Must Be in Writing As noted above, verbal contracts can have the force of law, but some types of contracts must be in writing, as required by the Statute of Frauds. some common types of contracts that must be in writing are: Agreements that cannot be performed within a year from the date the contract was signedContracts for the sale of goods exceeding $5000Contracts that involve the sale or transfer of landPromised made in consideration of marriage (prenuptial agreements, for example) State laws govern fraud statutes, and states may have different requirements for written contracts. Check with your state's bar association for specific requirements. Could a Contract be Created Without Meaning To? You can actually create a contract situation without meaning to. In this situation, you may have an implied contract. For example, let's say a vendor sends goods to a customer and the customer accepts them without paying. The customer then uses the goods to make its products and sell them. The vendor can infer that a contract has been created, even if there was no bill because the customer used the goods in its normal course of business. The contract is implied because the parties assumed a contract existed and if the contract existed it would be unfair to one of the parties (the vendor in this case). A contract that is implied can be taken to court, but's more difficult to get a resolution because there's nothing in writing. Getting an Attorney to Create a Contract You could create your own contract, but it's not a good idea. The Florida Bar Association says, "only a qualified lawyer can advise you on whether an agreement is binding and what rights or obligations may have if there is a breach (someone breaks the contract)." You may be tempted to use a "free" contract template, but that's not a good idea, for several reasons. One big reason not to use these templates is that they are generic and may not be what you want for your specific situation. Using this template could lock you in to a situation you don't want. Pay an attorney and get the contract done right.