The Nuts and Bolts of an Enforceable Contract

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Every day, people enter into agreements: selling or leasing property, becoming an employee or independent contractor, settling disputes, and much more. But too often, individuals enter these agreements without considering the essential provisions necessary to create an enforceable contract. Don’t be one of them.

Contracts May be Oral or Written
A contract is intended to formalize an agreement between two or more parties. A contract can be oral, but an oral contract (sometimes referred to as a verbal contract) may be difficult to enforce unless its terms can be proved or are admitted by the parties. A signed, written contract that contains the essential provisions reduces this risk.

A law called the “Statute of Frauds” requires that certain types of contracts be in writing to prevent an individual from offering proof of a nonexistent agreement through fraud or perjury. In general, the Statute of Frauds says that a contract for the sale or transfer of land, or a contract that, by its terms, cannot be performed within one year of its execution, are only enforceable if it is in writing and signed by the parties. Land contracts must identify the buyer and seller, identify and describe the property being sold, and state the sale price and terms of the agreement.

Notwithstanding the requirements of the Statute of Frauds, an agreement may be upheld in court if the party being sued admits under oath to the existence of a contract. If the seller has accepted payment or the buyer has accepted delivery of the goods or property covered by the oral contract, it may also be ruled valid.

The Essential Provisions of an Enforceable Contract
There are six basic requirements in a legally enforceable contract:

  1. An offer
  2. An acceptance
  3. Competent parties who have the legal capacity to contract
  4. Lawful subject matter
  5. Mutuality of obligation
  6. Consideration.

Offer
An offer is an expression of willingness by one party to contract on certain terms with another party with the understanding that the contract will become binding when accepted by the person to whom it is offered. An offer may be made in different ways, such as in a letter, an email, or even your behavior, so long as it conveys the basis on which the offering party is willing to contract. An offer should consist of: (1) a statement of present intent by the offering party to enter into a contract; (2) a specific proposal that is certain in its terms; and (3) a communication that identifies the person to whom the offer is made. If any of these elements are not present, an offer has not been made.

Acceptance
Acceptance is a final and unqualified expression of consent to the terms of an offer. An offer may only be accepted by the person to whom it is made unless an agent is authorized to accept on behalf of that person. In addition, an acceptance must be made in the manner requested or authorized by the offering party. If the party to whom the offer is made changes the terms of the offer, he or she has rejected the initial offer and has made a counteroffer that may or may not be accepted by the other party.

Competent Parties
Parties to a contract must be competent to enter into a contract. In general, most individuals are deemed to have the capacity to contract unless the person is a minor, incompetent or insane, or drunk or drugged when entering into the contract.

Lawful Subject Matter
In order for a contract to be enforceable, its subject matter cannot be prohibited by law or violate public policy. For example, a contract for the sale of illegal drugs is not enforcable, and a person cannot promise to transfer clear title to real estate if the property is encumbered by a lien or mortgage.

Mutuality of Obligation
In order for there to be an enforceable contract, the parties must have a common intention or a meeting of minds on the terms of the contract. The parties must agree to the same thing, in the same sense, and at the same time. If one party to a contract has been fraudulently misled about the terms of the contract by the other party, the contract is voidable. A review of the communications between the parties and how they performed the terms of the contract are used by the courts to determine whether mutuality of obligation or a meeting of the minds exists.

Consideration
Consideration is a very important element of an enforceable contract. Consideration may be money or a promise. In addition, consideration may consist of a restraint from suing on a claim that may be part of a legal dispute. Whatever consideration is provided under a contract, it must be clearly agreed upon by both parties to the contract or it must be clearly implied by the terms of the contract.

With this general overview of essential terms, consult an attorney to make sure your next contract is legally enforceable and meets your original intentions.

Carlon B. Walker is an attorney licensed to practice law in Michigan and Illinois. In his private practice, located in Chicago, he provides legal advice and counsel with respect to tax, employee benefits, and estate planning.The information contained in this article, however, is for informational purposes only and should not be construed as legal advice.

Recommended Resources

Essential Contract Law
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The Law of Contract
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Photo credit: Lease image. Used under Creative Commons.

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