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Do You Know the 5 Basic Requirements For A Contract?

by | Jul 24, 2019 | Business, Contracts, Law, Negotiating, Startups

At its most basic level, a contract is a legally binding agreement entered into by two or more parties which describes the obligations, rights, and duties of those parties. In New York, for a contract to be binding there are five basic requirements that must be met:

1. Offer: One party must demonstrate clear intent to propose a specific agreement to another definite party.

Good: “Andrea, will you write a contract for my business?

Bad: “Andrea, I’m thinking of asking you to write a contract for my business.”

2. Acceptance: The party which received the offer must communicate a readiness to be bound to the terms of the offer, without additional strings attached.

Good: “Yes, I will write the contract for you.”

Bad: “Sounds good, let me get back to you.” or “Sounds good, I’ll just need you to pay me $10,000

3. Consideration: Each party to the contract must give something of value to the other party or parties, such as money, or the promise of a future benefit.

Good: A person agrees to sign a company’s non-compete agreement in exchange for the promise
to become employed by that company, and is hired afterwards.
Bad: A person agrees to execute a company’s non-compete agreement, but the company decides
not to hire the person. The non-compete is void.

4. Mutual Obligations: The contract must show that there has been a “meeting of the minds” to enter into the agreement. One party cannot lie, misrepresent, or fraudulently induce the other.

Good: A vendor and a customer enter into an agreement, with each of them knowing they can
fulfill the contract’s terms and conditions.

Bad: A vendor promises to sell a customer product it knows it doesn’t have and is unlikely to acquire, but the customer doesn’t know this.

5. Legal Competence: The parties must understand the agreement they are entering into, and be capable of making such an agreement.

Good: After reviewing the agreement with their attorneys, both parties comprehend the legal
obligations they are agreeing to, and knowingly execute the contract.

Bad: One party is fraudulently misled by the other to sign the agreement.

If any one of the above elements is missing, the contract may be found to be unenforceable. The above outline is a general overview of contracts. Every business scenario is unique, so it is always a good idea to consult with an attorney before making, or executing a legally binding contract.

Andrea A. Tarshus, Esq. began Tarshus Law Firm @Tarshuslaw.com in 2015 to fill a void in the legal ecosystem: efficient, accessible, and fair in-house and General Counsel legal services for business owners. Her engagements regularly include business legal startup paperwork, negotiating and executing contracts, administering internal legal and operational controls, and creating legal documents that protect the company’s best interests.

This article is intended to be informational in nature, should not be relied upon by the reader without consultation with an attorney, and does not create an attorney-client relationship between the author and reader.