Contracts Frequently Asked Questions

Most individuals and business people enter into contracts more often than they realize. In almost all business dealings, any time you or your company agrees to take some action or make a payment in exchange for anything of value, a legal contract has been created. For example, most bills of sale, purchase orders, employment agreements, and other common business transactions are legally enforceable contracts. The following is a discussion to help you understand the basics of contracts.

What is a contract?
A contract is a legally enforceable agreement between two or more parties that creates an obligation to either do something or refrain from doing something. The term "party" can mean an individual, a company, or a corporation. No matter whom the parties are contracts almost always contain the following essential elements:

  • Parties must be competent to enter into a contract. For example, a mentally disabled person could not enter into a contract. Minors can enter into contracts, but can void them in most cases before they reach majority age.
  • Mutual agreement by all the parties. All parties have a meeting of the minds on a specific subject. Each party either promises to perform an act that the party is not legally required to perform, or promises to abstain from performing an act that it is legally entitled to perform.
Why should I use a written contract?
Some types of agreements must be in writing to be enforceable. The situations in which an agreement must be in writing usually include transfers of real estate, sales of goods valued at over $500, and contracts that require more than a year to perform.

Your written contract becomes your proof of the agreement and prevents someone from forgetting or changing the story later on. Writing the contract down also forces both parties to focus on the essential points and come to a definite agreement.

Can and should I write my own business contracts?
Anyone can write their own contracts, but if the matter is complex or there is a lot at stake you are advised to retain an attorney. Spending a small amount up front can prevent much more costly and drawn out litigation down the road. If the amount at stake is moderate or the terms are simple, you may use a legal form that both sides understand.

What laws govern contracts?
The majority of contracts (i.e. employment agreements, leases, general business agreements) are controlled by common law -- a tradition-based but constantly evolving set of laws that are mostly judge-made. However, the common law does not control contracts that are primarily for the sale of goods. Such contracts are instead governed by the Uniform Commercial Code (UCC), a standardized collection of guidelines governing the law of commerce.

What is "breaching" a contract?
A party's failure to fulfill their end of the bargain under a contract is known as "breaching" the contract. When a breach of contract occurs or is alleged to have occurred one or both parties may wish to have the contract legally enforced or try to recover for any financial harm caused by the breach.

How are contracts enforced?
If informal negotiations fail, the most common method of resolving contract disputes is through lawsuits in the court system. However, the court system and a formal lawsuit is not the only option for resolving a contract dispute. Both parties can agree to have a mediator review a contract dispute. The parties are not bound by a mediator's decision, but may be convinced to avoid a costly lawsuit by the mediator's ruling. Both parties can also agree to binding arbitration of a contract dispute. In arbitration, a neutral party listens to the arguments from both sides and issues a decision that is binding on the parties. This is also less expensive and less time-consuming than a lawsuit.

When attempting to enforce a contract, an individual or business should always consider the effect any dispute will have on any long-term relationship between the parties and any negative publicity which may arise from litigation.

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