Contract Basics

Overview

Description

Business leaders enter into contracts and agreements every day. These contracts and agreements contain both rights and obligations and often form the foundation of a business's relationships. Leaders must be aware of what is required to make a contract, as well as of how they can exercise both their rights and duties under the contract. The elements of a contract are offer, acceptance, consideration, and legal intent. Courts interpret contracts, or decide what they mean, when there are disputes. When a court is interpreting a contract, the parol evidence rule limits evidence to what is contained in the actual contract itself while excluding e-mails and conversations that are not reflected in the final written contract.

At A Glance

  • A contract may result from an agreement, but unlike most agreements, a contract is legally binding. A contract is a legally recognized agreement, typically for the transfer of ownership of property, the performance of services, the sale of goods, or a combination of these.
  • To have a valid contract, there must be an offer, acceptance, consideration, and legal intent.
  • The parol evidence rule limits a court's interpretation of the content of a contract to the actual written terms of the contract. The parties must sign the agreement, which must identify the subject matter and set out the terms and conditions. The parol evidence rule comes into play when the contract is final, complete, and unambiguous.
  • Assignment occurs when a party to a contract transfers their rights and duties under that contract to another person. The assignee steps into the shoes of the original party and can exercise all the rights owed to the original party under the contract.
  • Delegation transfers a contractual obligation to another person, but, unlike assignment, the original parties to the agreement remain the same. The only thing that changes is that one party has someone else perform an obligation on its behalf.
  • For an offer to be valid, it must be communicated, committed, and specific. An offer results in a contract when accepted. An invitation to offer is not intended to be the final word in negotiations and does not create a contract.
  • Acceptance indicates assent to the offer as presented, in the manner stated in the offer. For an offer to be valid, the accepting party must know the offer terms, show acceptance or intention to accept, and express the acceptance of the offer's terms without condition.
  • Consideration is the value bargained for and exchanged in a contract, and it is required for a contract to be valid. Insufficient consideration does not necessarily make an agreement void, but it can make a contract unenforceable.