Contracts are an essential part of business transactions. They provide a framework for every working relationship you have. They help define expectations, allocate risk and provide some protections in case things go wrong.
But what does it take to make a contract valid? Understanding the basics can help you evaluate the legitimacy of a contract and avoid mistakes when executing legally-binding documents.
4 things that make a contract
It’s important to remember that some contracts don’t even have to be in writing. There are only four elements required for a contract to be considered valid:
- An offer: One party must make a clear and definite offer to the other. This is the crux of the bargain between them, and it is basically a promise from the first party that’s contingent on the behavior of the second party.
- Acceptance: The second party must clearly and explicitly agree to the offer as presented. (If the second party seeks to make any modifications to the terms of the bargain in the offer, that’s considered a rejection and a counteroffer.)
- Consideration: This is whatever each party promises to do or gives up in exchange for what the other brings to the table. For example, when an employment contract is made, the employee’s job and compensation serve as the employer’s consideration, while the employee’s work is their consideration.
- Mutuality: This is also called “intent” or a “meeting of the minds.” There has to be an intention to form a contract in the first place, and a joint agreement about the basics of what that might mean.
If any of these elements are unclear or missing, a contract may not be enforceable. Additionally, even when you believe you have a solid contract in place, disputes may still arise. When that happens, it’s best to get experienced legal guidance that’s tailored to your specific situation.