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What's a contract? The basics explained

Simply put, a contract is an agreement between two or more people or entities that creates a legal duty or responsibility. Entities entering a contract might include individual people, companies, corporations and organizations, but there are a few conditions that must be met for the contract to hold water in the courtroom. Specifically, a legally enforceable contract must contain some key ingredients:

  • Offer and acceptance
  • Consideration
  • A meeting of the minds regarding the legal subject of the contract (e.g., both parties intend on the purchase and sale of a car for an agreed price)
  • Legal capacity (competency)

Here's a further breakdown:

  • Subject: A contract needs to have definite terms that spell out all the details and a clearly defined offer. These specifics are referred to as the contract's subject. Consider purchasing a used car from a dealer. The sales agreement is the subject and likely includes information such as price, warranty, and transfer of title or ownership.
  • Consideration: There needs to be a valid cause to enter the contract. Consideration of a contract is the reason, motive, price or whatever objective there is to have a contract. In many cases, the consideration is money, but it also might include acceptance of liability or a promise not to do something. A non-disclosure agreement (NDA), for example, contractually rules out sharing information that might otherwise be fair game. This is often established during the meeting of the minds.
  • Competency: Everyone involved must be competent. This means that a person who is severely mentally disabled can't enter an enforceable contract. Additionally, contracts entered by minors usually can't be enforced until they reach age 18 or whatever the majority age is where they reside.

Written vs. Oral, Implied vs. Express

Contracts can be oral or written, implied or express, depending on what the situation at hand calls for. While an oral contract-basically a verbal agreement made out loud in conversation-might suffice in some instances, most enforceable contracts should be expressly written into a tangible document.

Contracts can also be implied or express. Written contracts are generally considered express, which means the subject is clearly stated and all details are included. Consider a car rental contract. When you're renting a car, you agree to pay a certain amount for the use of the car over a specific period of time and agree to pay certain, predetermined fees in case the car is returned late or in different condition than it is was received.

Other situations where an express, written contract will likely be required include:

  • The transfer or sale of real estate, such as when selling a house or land, or perhaps if leasing office space or an apartment
  • The sale of goods or services worth more than $500, such as when hiring someone to put a new roof on your house or when buying a car
  • An agreement for something that will require more than a year to perform, for example a year-long maintenance contract for your home or a non-disclosure agreement that will last at least 12 months

On the other hand, implied contracts are just as they sound-the details are assumed. Consider ordering a latte at your favorite coffee shop. You just entered an oral contract with the barista taking your order, even though the subject wasn't clearly verbalized or expressly explained. By ordering the drink, it was assumed that you were willing to pay for it.

Examples of contracts

It's not hard to find examples of contracts in everyday life. In fact, you enter contracts daily without even thinking about it. You are entering an implied contract every time you make a purchase at your favorite store, order a meal at a restaurant, receive treatment from your doctor or even checkout a book at your library. Other examples of contracts are more concrete or express. You're entering a contract when you drop your car off at the shop for service, accept a new job or sign a check.

No matter whether you're running a small business, applying for a job, leasing an apartment or swiping a credit card to pay for lunch, contracts are a part of life, and being well-informed about contract basics can help you be confident when making all kinds of legal decisions. Get started creating yours now

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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