How Does a Contract Work?

Contracts are written or oral agreement between two or more parties. The parties can be individuals, companies, non-profits or government agencies. With a contract, two or more parties agree to exchange services or promises. Many parts of our daily lives involve contracts. When we buy an insurance policy for the home or the car, for example, we are entering into an agreement. Many people have employment contracts. Even when we go to a doctor these days we have to sign a contract agreeing to receive medical treatment. While these types of contracts are all different, there are some basic similarities that are a part of every contract.

There are three parts of a contract: offer, acceptance and consideration. An offer is what someone is willing to do or to give. Such offers include services like writing or medical treatments. Other types of offers include purchases of real estate or eBay items. The acceptance is agreeing to the offer. The offer and acceptance is often referred to as "the meeting of the minds." Consideration is the most important part. The law requires that something of value be given in exchange for receiving the offer. The consideration is often money, but other things can be exchanged as well. Instead of money you can give your time, services or products.

Read More: How to Break a Construction Contract

Once the offer, acceptance and consideration have been determined, the contract describes in detail all the parts. A contract answers the who, what, how, where, how and when of the agreement. It is important that the terms of the agreements be clearly stated. The terms of the contract--the obligations, expectations, and responsibilities of all the parties--must be detailed and without ambiguity. Once all the parties have read and understood the contract, the parties sign and date the contract. The contract is legally binding which means that once signed all parties are legally obligated to do what they have agreed to. Contracts are legally enforceable as well. Breach of contract is when one party does not do what the party agreed to do in the contract. The other party then has the right to go to court to ask the judge to compel or force that party to follow the terms of the contact. This is how a contract is enforceable. Oral contract are much harder to enforce because there is no evidence, such as a written agreement, to show what the parties agreed to or what the consideration was.

Not everyone can sign a contract. There are state laws which decide how old a person can be before she can sign a contract. In many cases a person must be over 18 years old, but 16 years of age is also possible. In other situations a parent must co-sign a contract if a child is a minor. Another requirement is that all parties signing a contract must be competent and sane. While this requirement is open to interpretation, people are expected to have the intellectual capacity to understand what they are signing. Contracts are also not binding if fraud is involved or if one of the parties misrepresents himself. An extreme example is selling a house that you don't own or don't have the legal right to sell. If such factors of a contract are uncovered, the contract is void and is unenforceable. Contracts can be one or several hundred pages long. No matter the length, it is your responsibility to understand what you are signing. Having an attorney look over any contract is always a good idea.