A legal contract is an enforceable set of promises made between two or more parties. Both written and oral contracts can be legally valid, as long as all of the elements required to form a valid contract are satisfied.

There are two types of legal contracts: bilateral contracts and unilateral contracts.

The majority of contracts are bilateral. In a bilateral contract, each party makes a promise to the other party. A contract to purchase goods is a classic example of a bilateral contract. The seller agrees to deliver the goods to the buyer, and the buyer agrees to pay the buyer for the goods once they are received.

In a unilateral contract, one party makes a promise to be carried out on a future date in exchange for a present action by the other party. A good example of this type of contract is a liability Insurance policy: you perform a present action by paying your monthly premium in exchange for the insurance company's promise to pay your claims in the future.

Contract law is governed by both the common law and statutory law. The common law is created through decisions made by judges, whereas statutory law is written by state and federal legislative bodies, such as Congress.

Generally, contracts do not have to be committed to writing to be enforceable. However, each state has its own Statute of Frauds, which requires certain types of contracts to be written to be legally valid. However, all legally binding contracts must involve the exchange of something of value, such as goods, services, or money.

Legal contracts must also clearly and accurately describe the agreement between the parties. Errors, ambiguous or omitted terms, and mistakes can all render a contract invalid. For a contract to be as clear as possible, it should specify all the terms of the contract, accounting for any possible contingencies that may occur, when and how the contract will terminate, and any Non-Disclosure Agreement the parties want to include in the contract.

what is a contract

4 Elements of a Valid Contract

Every legally enforceable contract must satisfy four basic elements: Offer, Acceptance, Consideration, and Legality. Each of these elements must exist to make a contract legally valid.

  1. An offer occurs when one party makes a promise to do something or refrain from doing something.
  2. Acceptance occurs when the offer is accepted unambiguously by the other party. Acceptance can be given through words, actions, or performance of the promise required by the contract.
  3. Consideration means that the accepting party promised something of value in exchange for the offered action or nonaction. Consideration law is what distinguishes a contract from a gift.
  4. The legality element requires that the contract serve a legal purpose. A contract cannot be used to enforce illegal and/or criminal activities.

Read more: Importance of a Service Agreement

How Can a Contract Be Signed?

For a written contract agreement to be valid, it must be signed by both parties. The signatures are legally recognized as each party’s agreement to the terms of the contract and to be bound by the obligations of the contract.

Contracts can generally be signed either by hand or electronically. Until recently, “wet ink” physical signatures were the only type of legally-accepted signature. However, with the increase in international business and the improvements in modern technology, digital signatures are now a common and legally-recognized practice.

Termination of a Contract

Most written contracts will include terms that explain when the contract will terminate. Contracts generally terminate on a certain date, upon the performance of the duties of the contract, or at the request of either party.

Many written contracts will also include terms regarding how parties can terminate the contract if the one party fails to perform their duties under the contract. This failure to fulfill contract obligations is called a “breach of contract”, or just a “breach”. If the contract does not contain terms allowing for the termination of a contract upon a breach, then the non-breaching party can pursue compensation from the breaching party through the court system.

In court, there are several remedies for a breach of contract. Most commonly, the non-breaching party can sue for damages, requesting that the breaching party compensate for the loss suffered because of the breach. However, in certain situations, a judge may order that the breaching party perform the obligation required by the contract (this is called “specific performance”) or terminate the contract.

What Makes a Contract Invalid?

There are a variety of reasons why a contract can be considered invalid. Generally, a contract that was made with someone who did not have contractual capacity is not considered a binding contract, nor is a contract that was not mutually assented to.

People who are under the legal age of consent, who are mentally disabled or mentally ill, or who are intoxicated are not considered to have the mental capacity to form a contract. This means that any contract that is made with someone without contractual capacity is voidable by that party. The party who lacked capacity can choose to honor the contract or they can render it invalid.

Additionally, for a contract to be valid, all parties must have agreed to the terms of their own free will. This concept is called “mutual assent”. If one party induced the other party to agree to the contract through fraud, force, threats of violence, or other undue influence, the agreement is a voidable contract. Contracts may also lack mutual assent if both parties had the same mistaken belief about a fact at the time the contract was made.

Finally, a contract may be invalidated if one party fails to perform its duties. For example, in a contract for the sale of goods, if the seller never delivers the goods, the buyer will not have to pay.

Helpful Resources:

Contract Law — Legal Information Institute, Cornell
Contract Law — FindLaw
Contract Law — Judicial Education Center, University of New Mexico