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Fundamental Principles of Contract Law

Updated on May 1, 2014

Contract Forms Can Be Quite Elaborate

Contract forms in the past were quite elaborate with illustrations and gold seals and ribbons. One thing to remember about contracts: its not the form that's important, it's the content.
Contract forms in the past were quite elaborate with illustrations and gold seals and ribbons. One thing to remember about contracts: its not the form that's important, it's the content.

What is a contract?

A contract is an agreement between two or more parties. For a contract to be valid and enforceable by law it must contain a number of elements. That is, it must follow a set of principles. If these elements are present then the contract is enforceable and must be honored. Failure to honor a contract can lead the party harmed by the failure of the other party to satisfy the contract to seek legal remedy.

Contracts Can Be As Binding As If "Written in Stone"

This contract actually written in stone deals with the sale of a  slave and a building in Shuruppak in Sumer.
This contract actually written in stone deals with the sale of a slave and a building in Shuruppak in Sumer.

Contracts in Everyday Life

So much of everyday life depends upon contracts. People buy or sell property, exchange goods or services, get married. Some contracts are rather informal and may be merely an oral agreement or understanding. Other contracts are written in precise legal terminology and may require acknowledgment by a notary public and/or be filed in a court of law.

Whether the contract is informal or formal, written or oral, understanding the basic principles and elements of contract law can help avoid legal disputes in the future. A consumer using a checklist of the elements of the contract itself can determine whether the mutual set of expectations and obligations are understood so that they can be fulfilled. These elements of law are vaild in all civil law systems and by international agreements.

Elements of Contract Law

There are eight key requirements for a contract to be considered valid:

Key Requirement 1: Agreement (Offer and Acceptance)

Generally speaking one party has something or can provide a service that the other party desires. What is important in a contract fulfilling this element is that both parties have a clear understanding of what is being offered and under what conditions.

A simple example may illustrate this point. Party 1 wants yard work done and is willing to pay $10.00 per hour. Party 2 is interested in cutting grass for $10.00 an hour. They agree in principle, however Part 1 intends that yard work consists of cutting, raking, edging, bagging the grass while Part 2 only intended cutting the grass. The point here is carefully qualification of what is wanted and what can be delivered can later avoid a contract dispute.

Key Requirement 2: Legal Capacity

Parties to a contract must have the legal capacity to enter into an agreement. Age is one consideration, for example, a ten year old cannot enter into a contract. Infirmity and mental capacity of one of the parties will invalidate the contract.

Money Is Often The Basis for "Consideration"

Money is often the "consideration by which a contract is bound but it need not be. Promised services, intellectual or real property rights often are the consideration. The "fairness" of the consideration does not impact the validity of a contract.
Money is often the "consideration by which a contract is bound but it need not be. Promised services, intellectual or real property rights often are the consideration. The "fairness" of the consideration does not impact the validity of a contract.

Key Requirement 3: Consideration

This element states that each party must bring something to the bargain or agreement. A car dealer exchanges the vehicle and receives money from the buyer. Consideration states nothing about the “fairness” of what is offered. Continuing with our grass cutting example, Party 2 can accept the grass cutting job for a penny. This may not seem fair but if this was the understanding among the parties it would be enforceable.

Key Requirement 4: Legal purpose

The contract cannot be illegal. That is it must be in compliance of the law of the land and public policy. A contract for the sale of illegal drugs does not constitute a legal contract.

Key Requirement 5: Legality of Form

In certain instances the law has stated that certain forms and procedures must be abided by. For example, in money lending, certain documents or statements such as “Truth in Lending” must be part of the written contract.

Key Requirement 6: Intended purpose

Not every detail can be written down when parties enter into contracts. Some elements rely on intent. For example, if two businessmen, to their mutual benefit, discuss and agree to contract, whether this is explicitly stated, their cooperation is sufficient to indicate that their intention was to create a contract.

Contracts Are Created By Mutual Agreement

A contract is achieved by mutual agreement. The wording of a contract helps assure each party of their rights and obligations.
A contract is achieved by mutual agreement. The wording of a contract helps assure each party of their rights and obligations.

Key Requirement 7: Consent to contract

A contract is created when there is an agreement between the parties. A promise by one party without acceptance by the other does not create a binding contract. Back to our grass cutting example, if Party 2 says they are going to come over and cut Party 1’s grass, there is no contract. Party 1 has not entered into a contract and Party 2 is not legally required to cut the grass.

Key Requirement 8: Invalidating conditions

If one party misrepresents what they are offering or what they will exchange in the performance of the contract, the contact is invalid. If the contract were to be entered into under duress by threatening either physical or economic harm would also constitute a reason for invalidating the contract.

Good References and Sources of Contract Forms

This article has only touched on the basics of contract law. Cases involving contracts can become quite involved and their conditions can be questionable or indefinite. The following are several good sources of additional information for the layman.

Adamson, John E. (2008) Law for Business and Personal Use. Mason, OH: South-Western Cenage Learning. ISBN 9780538445887

Eisenberg, Melvin A. (2002) Gilbert Law Summaries: Contracts. Chicago: The BarBri Group ISBN 9780159007761

Maeda, Martha (2011) The Encyclopedia of Small Business Forms and Agreements. Ocala, FL: Atlantic Publishing Group ISBN 9781601382481. This book also contains a CD with numerous forms.

Moran, John Jude (1995) Practical Business Law. 3rd ed. Englewood Cliffs, NJ: Prentice-Hall. ISBN 0131386603

Reader's Digest Editors (1981). Family Legal Guide : A Complete Encyclopedia of Law for the Layman New York: Reader's Digest ISBN 9780895771001

What Type of Contracts are You Involved With

What type of contracts do you mostly seem to need information on?

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    • Dave Collado profile image

      Dave Collado 

      3 years ago from San Jose California

      I like your hub! Very concise and to the point. You should consider doing a small amendment to include computable contracts.

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