What is a Legal Contract?

A contract is an agreement between two or more parties that is legally enforceable. It may be oral or written. A contract is essentially a set of promises. Typically, each party promises to do something for the other in exchange for a benefit.

Required Characteristics

To constitute a legal contract, an agreement must have all of the following 5 characteristics:

  • Legal purpose: A contract will not be upheld if its purpose is not legal. For example, suppose that Steve hires Paul to kill Susan. Steve drafts a contract outlining Paul's responsibilities and the amount Steve will pay Paul once Susan is dead. A contract of murder for hire is illegal. If Paul reneges on his duties under the contract, Steve will have no recourse against Paul.
  • Mutual Agreement: All parties to the contract must agree on the terms of the agreement. One party must extend an offer to which the other parties have agreed.
  • Consideration: Each party to the contract must agree to give up something of value in exchange for a benefit. For example, suppose you hire an independent contractor to repave your driveway. You and the contractor sign a contract in which you agree to pay a sum of money in exchange for the completed work. Each of you has agreed to give up something of value. You have agreed to pay money and the contractor has agreed to complete the work.
  • Competent Parties: The parties to a contract must be competent, meaning they must be of sound mind, of legal age and not under the influence of drugs or alcohol. A contract you enter into with a minor or an insane person will not be enforced.
  • Genuine Assent: All parties to the contract must make the agreement freely without fraud, duress, undue influence etc. For example, suppose you sign a contract in which you agree to sell your house to your next door neighbor for $1. When you signed the contract, your neighbor was pointing a gun at your head. Clearly, you made the agreement under duress and the contract is not valid.

    To be enforceable, all contracts must have the above five elements. In addition, some contracts must be in writing. An example of a contract that must be written is an agreement in which you promise to pay the debt of someone else.

    Bilateral or Unilateral

     Contracts may be bilateral or unilateral. Most are bilateral, meaning that both parties to the contract have made a promise to the other.

    An example is your agreement with the concrete contractor cited above. You have made a promise to the contractor to pay money. The contractor, in turn, has made a promise to you to complete the work.

    In a unilateral contract, one party makes a promise in exchange for an act by the other party. Insurance contracts are unilateral contracts. When you buy liability insurance or any other type of policy, you pay a premium (an act)  in exchange for the insurer's promise to pay future claims.

    Breach of Contract

    If one party to a contract fails to hold up his or her end of the bargain, he or she has breached the contract. For example, suppose that your concrete contractor finishes half of your driveway and then stops working. By failing to fulfill his promise, the contractor has breached the contract.

    You have a few options for obtaining compensation for a breach of contract.

    1. Sue for Damages: You can sue the contractor for damages. For example, you might sue for the cost of hiring another contractor to finish the job plus the costs you have incurred due to the delay.
    1. Specific Performance :You can compel the contractor to complete the work required by the contract
    2. Other Remedies: If the contractor tricked or forced you into signing the contract, you might convince a court to terminate or rewrite it.

    Failure to fulfill the terms of an insurance contract may constitute breach of contract. An insurance policy imposes obligations on you and the insurer. An insurer has an obligation to pay covered claims. If the insurer reneges on this duty, you may sue the insurer for breach of contract. Likewise, you have an obligation to cooperate with the insurer when it investigates a claim. If you file a claim and then refuse to cooperate with the insurer's investigation of it, the insurer may not be obligated to pay the claim.

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