What Constitutes a Legal Contract?

Reviewed by Carina Jenkins, J.D.

When you buy a home, take out a student loan or enter into a partnership with a business associate, you're entering into a legal contract. Because contracts have lasting consequences, it's important to understand exactly what each one entails.

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Before you agree to anything, learn more about the elements needed to create an enforceable contract.

A contract is a formal agreement between two or more parties. When you enter into a legal contract, you usually promise to do something in exchange for something else. For example, when you sign a lease, you promise to pay rent to your landlord every month. In exchange, your landlord allows you to use their property.

What Does a Contract Need to Include to Be Legal?

To be legally enforceable, a contract must contain the following elements.

Mutual Assent

For a contract to be valid, each party must agree to the terms. To prove mutual assent, you must show that there was an offer and acceptance. One party makes an offer, and the other parties accept that offer.

This element also involves what lawyers call a "meeting of the minds." This means that both parties understand what the contract is for and agree to the essential terms.

Consideration

Consideration is something of value that each party gets by participating in the contract. For example, if your company contracts with a business consultant for a 6-month engagement, you get the benefit of the consultant's expertise. In exchange, the business consultant gets money from your company.

Capacity

Capacity refers to competence, or the minimum mental capacity required to understand the terms of a contract and agree to them. Children don't have capacity, so a contract between a 12-year-old and an adult isn't enforceable. An adult may lack capacity if they have a disability that prevents them from understanding the terms of the contract.

Legality

You can't enforce a contract unless the terms of the contract align with the laws in your jurisdiction. In other words, a contract isn't valid if it requires one of the parties to do something illegal. For example, you can't enforce a contract that requires someone to sell illegal drugs.

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Does a Lawyer Need to Read the Contract or Be Present at Signing for a Contract to Be Legal?

It's wise to have an attorney review a contract before you sign it, but it's not required. In fact, you don't even need an attorney to draw up a legal contract. You can download a template or write the contract yourself. There's also no need to have an attorney present when you sign a contract.

You may not need legal advice if you're agreeing to sell an old gaming console for $50, but you should consult with an attorney before you sign anything that has lasting legal or financial implications. For example, if you're an actor looking for representation, a good attorney can help you negotiate a fair deal with a talent agency.

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Oral Contracts Vs. Written Contracts

In some situations, oral contracts are just as enforceable as written ones. An oral contract is a legal agreement that you create with spoken words. For example, if you tell someone at your church that you'll buy their record collection for $200, you may be entering into an enforceable contract. Of course, an oral contract must have the same elements as a written contract: mutual assent, consideration, capacity and legality.

Most states have what's known as a statute of frauds, which aims to protect people from fraud and other legal injuries. Each state is a bit different, but this type of statute typically requires certain contracts to be in writing before they're enforceable. For example, California's statute of frauds requires written contracts for real estate leases lasting for more than one year. This gives you extra protection when you're entering into an agreement involving large sums of money.

Common Contract Issues

Hiring an attorney may help you avoid some of these common contract issues:

• Inadequate recital: The introduction of a contract should list each party, explain why the parties are entering into the contract and summarize what the contract entails. Including these elements makes it easier to determine the intent of each person signing the agreement. Unfortunately, many laypeople don't understand the importance of adequate recital, leaving their contracts open to interpretation.
• Ambiguous terms: Something is ambiguous when it has more than one possible meaning. For example, the word "dollar" is ambiguous because it doesn't specify U.S. dollars, Canadian dollars or Australian dollars. Ambiguity makes it more difficult to understand contract terms, so it's something you should avoid.
• Missing termination clauses: A termination clause allows you to end a contract without penalty. Many homemade contracts have no termination clauses, leaving the parties in a real bind if they're unhappy with how things are going and want to end their contract early.