A contract is a legally enforceable agreement signed between two or more parties. 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.
To constitute a legal contract, an agreement must have all of the following 5 characteristics:
- Legal purpose. A contract must have a legal purpose to be enforceable. For example, Steve hires Paul to kill Susan. Steve drafts an agreement outlining Paul's responsibilities, namely to acquire a gun and shoot Susan in the head. The agreement also specifies the amount Steve will pay Paul once Susan is dead. A contract of murder for hire is illegal. If Paul fails to fulfill his obligations under the agreement, Steve will have no recourse against Paul. The agreement Steve has drafted is unenforceable.
- Mutual Agreement. All parties to the contract must have reached a "meeting of the minds." That is, one party must have extended an offer to which the other parties have agreed. For example, Jim signs a contract with Tom's Tree Trimming. The contract outlines the scope of the work Tom will perform on Jim's property. Jim and Tom have a mutual agreement regarding the work that will be done.
- Consideration. Each party to the contract must agree to give up something of value in exchange for a benefit. For example, you hire an independent contractor to repave your driveway. You and the paving contractor sign an agreement in which you promise to pay a sum of money in exchange for the paving work. Both you and the contractor have agreed to give up something of value. You have agreed to pay money, and the contractor has agreed to perform the paving work.
- Competent Parties. The parties to a contract must be competent. That is, they must be of sound mind, of legal age, and unencumbered by drugs or alcohol. If you enter into a contract with a minor or an insane person, the contract will not be enforced.
- Genuine Assent. All parties must engage in the agreement freely. A contract may not be enforced if mistakes have been made by one or more parties. Likewise, a contract may be voided if one party has committed fraud or exerted undue influence over another. For example, 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, so the contract is not valid.