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Basic fundamentals of contracts

Most employers enter into contracts more often than they think. Every time you or your company agree to take action or make a payment in exchange for something of value, a legal contract has been created, even if the agreement does not seem like a formal contract. For example, most bills of sale, purchase orders, employment agreements, and other common business transactions are legally enforceable contracts. The following is a discussion to help you understand the basics of contracts.

What is a contract?

A contract is a legally enforceable agreement between two or more parties that creates an obligation to do or not do particular things. The term “party” can mean an individual person, company or other legal entity. Regardless of who the parties are, contracts almost always contain the following essential elements:

  • Parts that are competent to enter into a contract. For example, a person with a mental disability cannot sign a contract. Minors can enter into contracts, but in most cases they can cancel them before they reach the age of majority.
  • Mutual agreement between all parties. In other words, all parties have a meeting on a specific topic. Each party promises to perform an act that the party is not legally obligated to perform, or promises to refrain from performing an act that it is legally authorized to perform.

Why should I use a written contract?

To be enforceable, some agreements must be in writing. The situations in which an agreement must be in writing can vary from state to state, but generally include real estate transfers, sales of property valued at more than $ 500, and contracts that take more than a year to complete.

Required or not, a written agreement becomes proof of what was agreed and prevents someone from forgetting or changing the story later. Writing the contract also makes the parties focus on the essentials and reach a final agreement.

Can I and should I write my own commercial contracts?

Yes, you can write your own business contracts. If the stakes are high or the issue is complex, you may want to use an attorney. Your best money can be spent upfront to prevent any potential legal trouble, rather than fighting it in a lawsuit later. If the amount at stake in your business contract is moderate or the terms simple, you can use a legal form that both parties understand.

What laws regulate contracts?

Contracts are generally governed and enforced by the laws of the state where the agreement was made. Depending on the object of the agreement (ie sale of property, real estate lease), a contract may be governed by one of two types of state laws. Most contracts (i.e. employment agreements, leases, general business agreements) are controlled by state law common law a set of laws based on tradition but in constant evolution, which are mostly made by judges, based on judicial decisions over the years.

However, Anglo-Saxon law does not control contracts intended primarily for the sale of goods. Instead, such contracts are governed by the Uniform Commercial Code (UCC), a standard set of guidelines governing commercial law. Most states have adopted the UCC in whole or in part, making the UCC provisions part of the state’s codified laws concerning the sale of property.

What is “breaking” a contract?

In the business world, disputes can arise over contracts and one party (or both) can accuse the other of breaking their obligations under the agreement. In legal terms, the breach of one of the parties to a contract is known as “breach” of the contract. When a breach of contract occurs (or at least when a breach is alleged) one or both parties may want the contract to be ‘performed’ on their terms, or they may seek to recover any financial damage caused by the alleged breach.

How are the contracts applied?

The most common method used to resolve commercial contract disputes and enforce contracts (if informal resolution methods fail) is through lawsuits and the court system. If the amount in question is below a certain dollar figure (generally $ 3,000 to $ 7,500 depending on the state), the parties can use “small claims” court to resolve the matter.

But formal lawsuits are not the only option. The parties can also agree to have a mediator review a contractual dispute. The parties are not bound by a mediator’s decision, but can be persuaded to avoid a costly court battle over the way the mediator governs. The parties can also agree to binding arbitration of a contractual dispute, whereby a neutral party hears the arguments of both parties and issues a binding decision.

When trying to enforce a contract, an individual or business should always consider the effect that any dispute will have on any long-term business relationship between the parties involved.


If you have problems related to contracts, it would be wise to speak to an attorney. For example, you may want to have an attorney review your billing procedures and forms to make sure they are legally enforceable. However, some contracts involve very high interest rates and complicated legal issues and must be reviewed. Contact a small business attorney in your area for professional help.