In U.S. contract law, there are six components that a contract must have to be legally binding and enforceable. These are an offer, the acceptance of that offer, some sort of consideration going to each party, the legality of the contract subject, legal capacity to enter into a contract and the intent to form a contract. If a court finds one component of a contract is absent, it may rule the contract can't legally be enforced.
Offers in Contract Law
One of the parts of a contract that legally must be present is an offer to do or not do something, such as providing particular goods or services. A car dealership might offer a car at a certain price with certain features and warranty terms, or a cleaning service might offer to clean an office on a weekly basis in exchange for a certain fee.
The offer generally has to be specifically made to someone with the purpose of forming a contract, and generally, advertisements and other public offers don't count for contract law purposes. Usually, an offer can be withdrawn if the other person doesn't accept it in a certain amount of time.
Accepting the Offer
Once the offer is made by one party, it has to be accepted by the other people involved in the contract for the contract to be formed. Some offers might specify a particular way the offers must be accepted, while others may allow a variety of ways to accept the offer, such as with a verbal nod or a handshake.
The acceptance has to mirror the terms of the initial offer, or else it's effectively a counteroffer that the other party is free to accept or reject. It also needs to be definitive and unambiguous, so there's no confusion about whether the offer was accepted or rejected.
If the person receiving the offer initially rejects it, he or she cannot unilaterally decide to accept it later on without further negotiations.
Understanding the Consideration Requirement
For a contract to be valid, each party must receive something of value from the deal. This is called consideration. It can take the form of money, some other items of value or a pledge to do something, like perform a service, or not do something, like compete with one of the other parties to the contract.
If each side to a contract doesn't receive something of value, the contract generally won't be legally binding. That means that you can't enter into a contract agreeing to do something for no compensation or to give somebody a gift.
You also can't build a contract having consideration as something that's already been done, such as a service you've already performed.
Legality of a Contract
You can't legally enter into a valid contract to do something illegal. That means that you can't sign a pact to rob a bank, sell someone illegal drugs or engage in activities like gambling and prostitution where they aren't legal.
If you do enter such an illegal contract, you generally won't be able to enforce it through the court system, and if the contract is in writing, it naturally might be cited as evidence if you're charged with committing a crime.
If you aren't sure whether something you're contracting to do is legal or if it is regulated in some way, consider consulting a lawyer for advice.
Capacity to Enter a Contract
If a contract is to be valid, the people entering into it must be legally competent to do so. That generally means they can't be below the age of majority, which might be 18, 21 or another age depending on the jurisdiction. This means you may wish to ask for ID before entering into a contract with someone if you aren't sure how old they are, since a minor often has the right to unilaterally exit a contract with an adult.
They also can't be mentally incapacitated in some way, which could be the result of disease or a medical condition, medication, liquor or drugs. Courts may vary as to when they rule that somebody was too intoxicated to enter into a contract, but they often won't take kindly to someone who purposely enticed an intoxicated person into a contract they wouldn't have signed sober.
Understanding Contractual Intent
To enter a legally valid contract, all the parties involved need to intend to do so. This can usually be shown by evidence like the signing of a physical contract, but a contract can still be declared void if someone was coerced into signing it or didn't understand the document.
If there's a dispute about whether people intended to enter a contract, a court will usually look into the circumstances in which it was formed.
When Contracts Must Be Written
Not every contract needs to be formally written down and signed to be a valid contract. It's possible to enter a contract orally, over the phone, via email or through various other means.
But various state laws require that certain types of deals must be done through formal, written contracts. These typically include real estate transactions, certain long-term contracts lasting more than one year, insurance contracts and contracts for the sale of items valued more than a certain amount. You may also simply want to use a written contract even when it's not legally mandated to make sure that everyone's rights and obligations are clearly spelled out.
Some state and local laws also require that specific terms and information must be inserted into particular types of contracts, such as information about warranties on certain goods or about tenant rights in residential leases. If this information isn't present, the contract may not be legally valid.
If you're looking for a contract for a common situation, you may be able to find model template forms online that you can use, but you may also wish to consult with a lawyer to draft a contract that works for you.
Ending a Contract
Once you enter into a contract, you may want to end it for various reasons. Ideally, a written contract should spell out who can end it under what circumstances.
For example, a consulting agreement might specify how much notice the company receiving services must give to the consultant before terminating his services, and a lease will usually have provisions for how the lease can be ended or renewed when its term is up.
In some cases, you may also be able to terminate a contract for other reasons, such as if it becomes impossible to perform the services for some reason. For example, if you are contracted to clean a building each week and the building burns down, or you're contracted to provide a product or service that is made illegal. If a contract was improperly formed for some reason, such as if one of the 6 elements of a contract was not present, the contract can also often be legally terminated without any sort of penalty.
If you simply don't perform the services you've agreed to do in a contract, a court may rule that you are in breach of the contract and order you to pay damages to the other party.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.