Make a Contract

If you are creating a contract for goods or services, it is important that you protect yourself by ensuring that the contract is legal and enforceable. Knowing the elements necessary to create and execute a contract can help you create an appropriate legal contract.

Steps

Forming a Contract

  1. Make a valid offer. A valid offer has three elements: communication, commitment, and definite terms. This means that you must communicate the offer in written, oral, or otherwise understandable form. Your offer must include a commitment to be bound to the terms of the agreement, and the terms must be clear and precise.[1]
    • For example, you may say to your neighbor, “I’d like to sell you my 2010 pontoon boat for $5,000. I am willing to finance it for you if you pay me $1000 per month for 5 months.” The offer is made orally, there is a commitment (to give the boat to your neighbor in exchange for money), and definite terms (an exact boat and dollar amount are named.)
    • An offer has to be considered fair by both parties to be considered valid.[2] This may also be referred to as a "good faith" offer. Fairness is a tricky concept in contracts, but in general, it presumes that both parties will not manipulate the other or try to bend or break the terms through shifty tactics or twisting wording.[3]
  2. Think about consideration. Consideration in a contract is the agreement by all parties about what they are going to do or refrain from doing. Consideration should be fair and equitable.[4]
    • For example, if your neighbor agrees to buy your boat, her consideration is giving you money. Your consideration is surrendering the boat in exchange for that money. The consideration is fair, in this case, if the value of the boat is close to the price that is being asked.
    • A fair offer will not provide conditions that are unlikely or impossible to meet. For example, you wouldn't want to stipulate that your neighbor must pay you $1000 per month, in $1 bills, for 5 months. While this is technically legal if your neighbor agrees to it, it places an unusual burden on her and may not hold up if the contract is challenged later.
  3. Negotiate offer acceptance. An offer alone is meaningless unless it has been accepted by the offeree.[5] The offeree may accept an offer as-is, or she may change the terms of the offer. For most contracts, changing the terms of an offer negates the initial offer and creates a new counter-offer.[6]
    • For example, your neighbor may agree that she wants to buy the boat, but she might want you to finance it by accepting $500 per month for 10 months instead. This does not constitute an acceptance of your offer, but a new counter-offer, which you can now choose to accept or decline.
  4. Take notes. If you plan on having a verbal or oral contract -- which most lawyers don't recommend -- taking notes at the time of making the agreement will help you if the contract is later challenged.[7]
    • Taking notes can also help you when you draw up the written contract. You won't have to rely on your memory of the terms because they will all be written down.

Putting a Contract into Writing

  1. Have a written contract. It’s likely that in everyday use, many offers and counter-offers are oral rather than written (except with real estate). However, it is crucial to have a written contract. Some states require that contracts be written in order for them to be considered enforceable.[8] An oral contract, even if legal in your area, is far more difficult to enforce if one side does not hold up her side of the contract.
    • All states determine that some contracts fall within the "statute of frauds." Contracts involving land or real estate, contracts by an executor of a will to pay the debts of an estate, contracts for goods over a certain amount (usually $500), and contracts that will last longer than one year must be put in writing.[9][10]
    • There is no concrete, presentable evidence of a verbal or oral contract. If you and the other party later disagree on what the terms of the contract were, neither of you will have proof that your opinion is correct. Courts find it incredibly difficult to rule on verbal contracts. For this reason, any contract involving important, expensive, or time-consuming consideration should be written.
  2. Name the contract and the parties involved. The contract itself should have a name (something simple such as “sales agreement” or “service contract.”) You should also specifically name the parties involved in the contract.[11] If you are going to use a contract repeatedly, you can provide a shorthand representation (such as “buyer” and “seller”) throughout the contract, provided that there is a place to provide the legal names of the parties involved early in the contract.
    • For example, you might have a “Sales Contract” for the sale of your boat to your neighbor. You will need to specify the buyer, Jane Smith, and the seller, John Henry, in the beginning of the contract.
    • If you have a recurring contract, such as for your photography business, you may wish to identify a shorthand representation such as “photographer” and “client.” You would say, in this case, Jane Smith (hereafter “photographer”) and Robin Jones (hereafter “client”) the first time the names are introduced. In the remainder of the document, you can provide “photographer” and “client” rather than specific names.
  3. Lay out the terms of the contract. The contract needs to specify the exact terms of the agreement. If you are exchanging goods or services, the specific goods or services should be specified along with the expected return (money or an exchange of other goods or services).[11]
    • You may also want to provide specific details about what will happen if the expected exchange is not upheld completely. In particular, consider whether there will be "damages," or remedies for what happens if the contract is breached.[12] There are several types of damages, and they are appropriate for different situations.
    • Liquidated damages are penalties instituted if the contract is breached. For example, if your neighbor buys your boat but is late with one of the payments, a liquidated damages clause could state that she will have to pay an additional amount of money for each week the payment is late. You have to be careful with these types of clauses; courts may not want to enforce clauses that seem too much like a punishment.[13] A late fee is likely to be considered a reasonable liquidated damage; requiring your neighbor to return the boat regardless of how much they have already paid you is likely to be considered overly punitive.
    • Consequential damages are indirectly the result of the breached contract. They are often difficult to recover.[14]
    • If the contract deals with something very expensive or time-consuming, you may wish to include a statement that disputes will be resolved through arbitration or a court proceeding.
    • For example, if you are selling your boat to your neighbor, you should specify the make, model, and year of the boat as well as the name of the boat (if it has one) and a serial number if possible. You should also include the exact dollar amount and the terms of the payment. For example, you may specify that your neighbor will pay you $500 per month for 10 months until the $5000 payment is made.
  4. Include a termination clause. Many contracts, especially those that are for longer periods of time, have a termination clause. This clause lets all parties know how to legally "get out" of the contract without being held responsible for breaching it.[15]
    • For example, a rental agreement may specify that the renter may terminate her lease early by giving 30 days notice and paying a fee.
  5. Provide dates and other details. To ensure that your contract is as specific as possible, be sure to include exact dates. If you want to provide a deadline but events or actions need not occur on a specific date, you can use the phrase “on or before” preceding the deadline.
    • For example, you may put in a contract that your neighbor is going to take possession of your boat upon the first payment, to be made on or before June 1, 2015. She will then pay $500 on the first day of each subsequent month until the full $5000 payment has been reached, on or before April 1, 2016.
    • If the contract is for the sale of goods or property, provide a clear, fully detailed description.[16] For example: "Jane Smith agrees to purchase a white 2010 twenty-foot pontoon boat from John Henry."
  6. Provide a signature area. Allow space for all parties involved in the contract to sign and print their names. You should also leave a space for providing the date that the signature is affixed to the contract.
    • You may want to have a notary (or at least a 3rd party witness) witness the signatures and sign the document. Even if this is not a requirement for your contract, it could come in handy if one party later claims that the document was forged or modified.
      • Witnesses or notaries are normally required for wills, deeds, mortgages, and marriage contracts, depending upon state law.[17]

Ensuring that a Contract is Legal

  1. Ensure that all parties have the capacity to enter a contract. In order to enter into a contract, all parties involved must be legal adults (over the age of 18 in most states), of sound mind, and free of mental incapacity that precludes their understanding the content of the contract. [18]
    • Some states allow minors to enter contracts with an adult co-signer, and some states may allow emancipated minors to sign their own contracts.
    • Being of sound mind when entering a contract means that a person cannot be legally bound to a contract if she is intoxicated or otherwise impaired.
  2. Do not attempt to write a contract for something illegal. A contract is not legal or enforceable if the goods or services in the contract are illegal.[19]
    • For example, you cannot contract someone into prostitution services in a state in which prostitution is illegal. Similarly, you cannot have a contract involving the sale of an illegal substance, such as drugs.
  3. Do not coerce someone into entering a contract. A contract becomes voidable if someone is coerced, threatened, or blackmailed into signing the contract. All parties must enter the contract willingly and mindfully for the contract to be legal.[19]
  4. Avoid fraudulent claims or terms within the contract. Be sure that claims and conditions mentioned in the contract are not fraudulent. Contracts based on fraudulent premises, whether or not the fraud was intentional, are not legally enforceable.[19]
    • For example, you cannot enter into a contract to sell your boat to your neighbor if you are not the rightful owner of the boat. Claiming that the boat is yours when it isn’t constitutes fraud, and will void the contract altogether.

Tips

  • You can find templates for many types of contracts online. Rocketlawyer, LawDepot, and TidyForm all provide templates. Most contracts, such as rental agreements, must be prepared in accordance with state-specific guidelines, so be sure you are aware of any requirements in your area.
  • When signing a contract, the parties should sign as many copies as needed in order for each party to keep one original copy for him or herself.
  • Be sure your contract is clear about the work to be performed, loan repayment terms, or item to be sold and the compensation to be provided. A contract does not need to be elaborate or "legalese" in order to be enforceable by a Court. It only needs to clearly describe the terms of the contract, identify the parties to the contract, and be signed by the party against whom the contract is being enforced.
  • Until an offer is accepted, the person who made the offer, called the offeree, may revoke or modify the offer.

Warnings

  • You are legally obligated to abide by the terms of any contract you sign. You can be sued for breach of contract, so make sure you understand exactly what the contract covers. Consult with an attorney if you are unsure.
  • Don't sign contracts with any shady folks. If the one offering you a contract is a sea witch with eight legs singing a villain song and wanting your voice as a fee, get out of there immediately!

Related Articles

Sources and Citations

  1. ↑ Miller, Roger Leroy. Fundamentals of Business Law: Summarized Cases. 9th ed. Cengage: 2012.
  2. ↑ http://www.britannica.com/EBchecked/topic/135270/contract/21771/Fairness-and-social-utility
  3. ↑ http://dictionary.law.com/Default.aspx?selected=906
  4. ↑ http://www.nolo.com/legal-encyclopedia/contracts-101-make-legally-valid-30247-2.html
  5. ↑ http://www.nolo.com/legal-encyclopedia/acceptance-of-contract-offers-32651.html
  6. ↑ https://www.law.cornell.edu/wex/mirror_image_rule
  7. ↑ http://thelawdictionary.org/article/is-a-verbal-agreement-legally-binding/
  8. ↑ https://www.law.cornell.edu/ucc/2/article2
  9. ↑ https://www.law.cornell.edu/ucc/2/article2
  10. ↑ http://nationalparalegal.edu/public_documents/courseware_asp_files/contracts/DefensesToFormation/StatuteOfFrauds.asp
  11. ↑ 11.0 11.1 www.pcs.gov.sk.ca/contract-checklist
  12. ↑ http://contracts.lawyers.com/breach-of-contract/contract-damages.html
  13. ↑ http://contracts.lawyers.com/breach-of-contract/contract-damages.html
  14. ↑ https://www.law.cornell.edu/wex/consequential_damages
  15. ↑ http://www.lsuc.on.ca/For-Lawyers/About-Your-Licence/Audits-and-Reviews/The-Contract--Potential-Issues-and-Sample-Clauses/
  16. ↑ http://jec.unm.edu/education/online-training/contract-law-tutorial/contract-fundamentals-part-2
  17. ↑ http://www.legalmatch.com/law-library/article/writing-and-signature-requirements-for-a-valid-contract.html
  18. ↑ http://www.legalmatch.com/law-library/article/void-vs-voidable-contract-lawyers.html
  19. ↑ 19.0 19.1 19.2 http://www.legalmatch.com/law-library/article/void-vs-voidable-contract-lawyers.html
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