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Contract Basics

What Are Contracts?

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.

Unlike a simple agreement, a contract is a legally binding obligation between two or more parties. As legally binding, a contract can be enforced under the law, which means that the parties can use the courts to enforce them. A contract may be an obligation to sell property, provide services, sell goods, or perform other specific actions.

Anyone, as long as they are competent to do so, may enter into a contract. Contractual competency, or contractual capacity, is the minimum mental capacity a person is required to have by law in order to enter into a binding contract. By law, three classes of persons are generally not considered to have contractual competency: minors, people with certain mental disabilities, and those under the influence of alcohol or drugs. Parties to a contract may be individuals, sole proprietorships, partnerships, corporate entities, nonprofit organizations, or governments. There are rules regarding minors making a contract. For example, while a minor may not usually enter into a contract, they can enter into a contract for necessities. Further, if they reach the age of majority, they can affirm a contract entered into previously.

Subject Matter of Contracts

Contracts can have a variety of subject matters. The versatility of contracts is one reason so many business leaders use them regularly.
The simplest form of a contract is an express contract, which is explicit on its face—that is, it is clear and in plain words. An implied contract is not explicitly entered into but is suggested. An implied-in-fact contract is one that the parties presumably entered into based on conduct that indicates they did so. For example, Hannah pulls weeds from her neighbor's garden without being asked, and her neighbor pays her $10. An implied-in-law contract exists when the law obligates parties to enter into a contract because of some obligation due to one party or some other special circumstance. Unjust enrichment occurs when one person is enriched at the expense of another in circumstances that the law sees as unjust.

Express Contracts versus Implied Contracts

Express contracts have a clear agreement and are easier to enforce. Even if the two parties do not have a clear agreement, a court may decide that there is an implied contract between them.
Contracts can be further classified based on the number of parties making promises. For example, a bilateral contract involves two parties each agreeing to do something. In a unilateral contract, one party agrees to do something if a condition is fulfilled. An example of a bilateral contract would be "I agree to wash your car, and you agree to pay me $100." An example of a unilateral contract would be "I will pay you $100 if you wash my car."

Bilateral Contracts versus Unilateral Contracts

In a bilateral contract, two parties each agree to do a specific action or set of actions. In a unilateral contract, one party agrees to certain actions if the second party fulfills a specified condition.
Another way to classify contracts has to do with the fairness or equality of their terms. In general, courts will not prevent parties from entering into what may be considered an unfair agreement. However, in certain instances, contracts may be unenforceable as contrary to public policy. An unconscionable contract has terms that are extremely one-sided or unfair. An example would be an unusually high interest rate. An adhesion contract is a contract drafted by the party who has much more bargaining power, giving the weaker party only the option to accept the contract as is or reject it. An example would be an insurance policy. While adhesion contracts are standard form contracts, courts generally protect parties from unconscionable provisions. These contracts are typically enforced regarding reasonable provisions, not those that are hidden or highly unreasonable.

Finally, it is possible to classify contracts based on whether they are enforceable. A void contract is not binding, which means that courts will not enforce it. An example would be a contract to sell illegal drugs or commit fraud, because the terms of the contract itself are illegal. Another example would be a contract that lacks a required element, such as the offer, acceptance, or consideration. A voidable contract is one that one party can be void if they so choose. An example would be a contract with someone who is underage or who lacks capacity to enter into the contract. A voidable contract may be converted to an enforceable contract by the actions of one of the parties.