In his last and most controversial work "The Laws," Plato wrote extensively about the laws of agreement among men. Even in the 300s BC, his writings expressed a deep familiarity with contracts, lending credence to the notion that the contract is an ingrained, ageless part of human culture. Because contracts can cover a virtually limitless variety of agreements among people, there is no single, universal template for a contract between two parties. But there has been plenty of time to perfect the form since Plato was slumming around Athens, and modern laws have plenty to say about exactly what legitimizes a contract.
Binding Agreement Between Two Parties
In the most general sense, contracts govern a relationship between two entities or people, who agree to do or to not do something or agree to exchange something of value. This agreement is usually written, but it may be verbal – in some cases, it may even be undated and unsigned. State laws nail down the nitty gritty of when a contract needs to be in writing to be valid, but the most important part of any contract between two people are the foundational elements that make a contract a contract.
To be considered voidable (meaning valid and enforceable), a contract typically must include:
- An offer.
- Acceptance of said offer.
- Consideration (something of value exchanged for something else).
- Competency and capacity.
While the first three items are pretty self-explanatory, "competency and capacity" sounds a little intimidating at first. Really, though, it's just a fancy way of saying that both parties are capable of understanding the core nature of the contract.
On Competency and Capacity
Just as there are certain elements that make a written contract between two parties legally binding, there are certain things that can cause a contract to be void (meaning unenforceable). Speaking of competency and capacity, most states agree that legal minors (typically those under the age of 18 or 21) don't have the mental capacity to form a legally binding contract. Entering a contract with a minor can make the contract void.
Similarly, both parties in the agreement must be of sound mind to enforce a contract; if either party is mentally incapacitated, impaired or mentally unfit at the time of signing, courts may deem that the party lacks the mental competency to create a binding document.
Crafting Your Contract
The potential for an unenforceable contract doesn't end with competency and capacity. The considerations within the contract must, of course, fall in line with prevailing public policies and the laws of the land. So, if the agreement has anything to do with illegal activity, it won't hold up in a court of law.
Agreements that can be interpreted as significantly one-sided or impossible to perform may not be enforceable, either – the same goes for contracts that restrict the basic rights of either party. On a similar note, courts may cancel a contract that relies on trickery or coercion. It should go without saying, but fair-mindedness isn't just morally important when crafting a contract; it's legally important, too.
To ensure that all of your legal i's are dotted and t's are crossed, doing an internet search for "how to draw up a contract between two parties" just won't cut it – always enlist a business lawyer when drafting contracts.
Read More: How Does a Contract Work?
You've got nearly limitless options for writing legal agreements between two parties, but certain elements make the document legally binding, while others can make it legally void.
- The National Law Review: Basics of Binding Contracts
- USLegal: Elements of a Contract
- Legalmatch: In a Contracts Setting, What Do the Terms "Competency" and "Capacity" Mean?
- LegalMatch: When Does a Contract Become Void?
- Nolo: Contracts 101: Make a Legally Valid Contract
- LegalMatch: What Are the Differences Between a Void Contract and a Voidable Contract?
As a freelance writer and small business owner with a decade of experience, Dan has contributed legal- and finance-oriented content to diverse sources including Chron, Fortune, Zacks.com, Motley Fool and MSN Money, among others.