The Requirements of a Valid and Enforceable Contract
Most types of commercial contracts are governed by state law. The Uniform Commercial Code, adopted in part or in whole by all states, establishes the laws regarding the sale of goods.
In general, there are five essential components to a valid legal contract:
- There must be an agreement—The technical language of the law is that there must be offer and acceptance. Essentially, though, this means that the parties must be in accord regarding all the material elements of the agreement—what’s being bought, sold or delivered; how much is being paid, when the goods or services will be delivered.
- Each party must give something in exchange—This is what distinguishes a contract from a gift. The law calls this “consideration,” but it really means that both parties must either give up something that they had a right to keep (dollars, goods, services) or refrain from doing something they had a right to do.
- The parties must have the legal capacity to enter into a contract—Basically, this means that you must understand that you are entering into a contract, and that the contract will be binding. If you suffering from delusions at the time, or were intoxicated or under the influence of a mind-altering drug, you (or others) may argue that you did not understand what you were doing and, therefore, lacked capacity. Most states have laws as well that hold that persons under a certain age (typically 18) have not fully matured to the point where they understand the legal implications of a contract.
- You must willingly enter into a contract—If you entered into a contract against your will, or you were misled into signing or entering into a contract, you may be able to void the agreement. Examples include situations where you were subjected to duress or undue influence, or where the other party misrepresented the nature of the agreement or that you were entering into a contract. You may also be able to void a contract if there was a mistake about what was being bought or sold.
- The subject matter of the contract must be legal—You cannot enforce a contract to perform an illegal act.
Oral vs. Written Agreements
As a general rule, oral contracts are enforceable, with very specific exceptions, such as contracts for the sale of land, or certain contracts relating to the sale of goods.
The Different Types of Commercial Contracts
A contract may be executed to establish the terms of any legal business transaction, provided the components listed above are present. Typical business agreements involve:
- The sale of goods, either retail products or parts
- The provision of services, including vendor services or employment
- The use of intellectual property, such as patents, copyrights, trademarks and trade secrets
- A party’s right to disclose confidential information, or to engage in competition
- The purchase or lease of real property
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