A legal contract is an agreement between two parties that creates mutual, legally enforceable obligations. Seven essential elements must be present before a contract is binding: the offer, acceptance, mutual assent (also known as “meeting of the minds”), consideration, capacity, and legality. Contracts are typically in writing and signed to prove all of those elements are present.
The “offer” is the promise one party makes to pay the other for their services. For example, you might agree to pay a graphic designer $1,000 to create a logo for your business. You agree to pay a deposit and the balance upon delivery of the logo electronically, in formats you can use for both print and online marketing.
The offer often includes other terms and conditions, such as the graphic designer giving up the copyright to the logo.
“Acceptance” is when the other party agrees to perform the task for the compensation specified in the contract. In this example, it’s when the graphic designer agrees to the price and accepts the deposit.
“Mutual assent” is the combination of a valid offer and acceptance between the parties. A signed contract proves mutual assent. In the absence of a written contract, mutual assent can be demonstrated by the actions the parties take after the offer is made and accepted. For example, mutual assent might be when you’ve sent a deposit to the graphic designer, and they’ve provided you with three rough concepts for your logo.
Exchanging items of value
“Consideration” is what is paid in exchange for goods or services. Consideration is usually but not always money. A lawyer might write a lease agreement for an accountant in exchange for the accountant doing the lawyer’s taxes.
What matters is that the parties involved agree on the purchase price, acknowledge their mutual benefit from the arrangement, and achieve the agreed-upon outcome. In the graphic design example, you agreed to pay the balance of the $1,000 fee when the designer delivers a logo that you accept as suitable for your company.
Capacity and legality
In contract law, “capacity” is the presumed ability of a person to understand the terms, obligations, and consequences of signing a contract. Some parties, such as minors, people suffering from illnesses like dementia, and anyone under the influence of alcohol or drugs are presumed to lack the capacity to sign a binding contract.
People who can’t read the language the contract is written in lack capacity but would gain capacity if provided with a translated copy of the contract. In general, a person must understand the meaning and effect of the words that comprise the contract. A contract can be voided in litigation if one party took advantage of the other party’s incapacity.
To be legal, the contract must adhere to the law in the jurisdiction where it’s signed.
For example, let’s say you sign a contract to lease your garage for $100 per week to a very loud rock band for practice beginning at 11 p.m. You later learn their practice violates a local noise ordinance. That contract is void, regardless of whether you like the music and the band paid the rent.
Similarly, you wouldn’t be legally bound to pay $1,000 if the graphic designer you hired submitted another company’s logo as their original work.
A contract doesn’t have to be written to be binding if all six elements — offer, acceptance, mutual assent, consideration, capacity, and legality — can be demonstrated.
A written contract, even a simple document drawn up by the two parties without lawyers, is always a good idea, but it’s possible to prove a contract exists between the parties even if nothing’s in writing. Actions, such as you paying the graphic designer a deposit for the logo design, are evidence of a contract.
In many circumstances, a written contract is required to enforce terms in court. Marriage, leases, mortgages and other real estate agreements, and agreements for projects requiring more than a year to complete must be in writing to be disputed in court. Thought there are rare exceptions, a signed contract is generally necessary to get a judge to resolve disputes.