Understanding what makes up a contract can be useful in many settings, including the business and real estate setting. Understanding the components of a contract can be useful when negotiating, drafting and enforcing a contract that protects the interests of the business owner.
Components of a contract
Contracts are a part of doing business. Understanding the components of what makes a valid contract is useful including:
- Offer: A contract begins with an offer for goods or services.
- Acceptance: The second component of a valid contract is acceptance. The acceptance must mirror the offer to ensure the meeting of the minds between the parties to the contract.
- Consideration: Consideration refers to the exchange of something of value, such as money, but does not always have to be money.
In addition, the parties need to have legal capacity to enter into a contract, which typically refers to being over the age of 18, must have intent to enter into a contract and must not do so under any duress. The subject matter of the contract also must be legal for the contract to be considered valid.
Purpose of a contract
Contracts outline the rights and responsibilities of the parties; when contract obligations are not met, it may be considered a breach. Damages for a breach of contract can be different depending on the circumstances. Damages can include specific performance of the contract when the breaching party is ordered to perform their obligations under the contract; rescission of the contract when it is torn up; or monetary damages to compensate the non-breaching party for damages suffered because of the contract breach.
Understanding the components for a contract to be legally binding can help business owners better protect themselves in their everyday business dealings. It can also help them know what to do to handle a contract dispute but may also help them avoid costly and time-consuming contract disputes down the road.