Basics of Contract Law (Part One)

"A contract is only as good as the people signing it."

In one of last week’s blog posts, we discussed essential legal topics for small business owners. As a follow up to that post, today we are beginning a three-part series of in depth discussions about one of those legal topics—the basics of contract law. For part one, today we are broadly discussing how contracts are formed and interpreted.

To begin, a contract is defined in legal terms as an agreement between two or more parties. In the event that one party breaches the agreement, or, in other words, violates one or more provisions of the agreement, then the other party or parties can seek to enforce the agreement by seeking legal remedies against the breaching party (such as damages).

In the business context, contracts are especially important because they define the expectations, rights, and obligations between the parties doing business with each other. To summarize, an agreement is a set of shared terms and conditions between parties and is enforceable by law. If one party violates the agreement, the other party can seek legal remedies.

To be enforceable by law, however, an agreement must contain satisfactory "consideration." In simple terms, consideration is a bargained-for promise, such as an amount of money, property, an action, or inaction (provided that the action or action must not violate any laws or ordinances or be something that the other party is currently required by law to do).

While contract law is similar throughout the United States, it is generally administered by each state’s common law, which is defined each state’s statutes and court opinions. From state to state, the courts could have different interpretations of certain elements of a contract. With this in mind, it is best to consult a licensed attorney in your jurisdiction if you have any questions about contract law, such as whether an agreement is enforceable or how to draft an enforceable agreement.

For future discussions about other contract law basics, please check back Thursday and Friday, where we will continue parts two and three of the basics of contract law series.

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