Contract Law

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Contract in law is an agreement between two parties that creates an obligation to do something or refrain from doing a particular thing. The purpose of a contract is to establish the terms of the agreement by which the parties have fixed their rights and duties. Courts must enforce valid contracts, unless one party has legal grounds to bar enforcement.

Contracts in law are promises that the legal system will enforce. The law provides remedies if a promise is breached or recognizes the performance of a promise as a duty. Contracts arise when a duty does or may come into existence, because of a promise made by one of the parties. To be legally binding as a contract, a promise must be exchanged for adequate compensation. Adequate compensation is a benefit or detriment which a party receives which reasonably and fairly induces them to make the promise/contract. For example, promises that are purely gifts are not considered enforceable because the personal satisfaction the grantor of the promise may receive from the act of giving is normally not considered adequate compensation. Certain promises that are not considered contracts may, in limited circumstances, be enforced if one party has relied to his detriment on the assurances of the other party.
Elements needed to have a valid and legally binding contract
  • The first element to the creation of a contract is that both parties must be of sound mind, and they must be legally able to enter into a contract. Minors cannot enter into most contracts without parental consent. However, minors can independently enter into contractual agreements for basic necessities, such as food, clothing, and shelter. Minors can also sign contracts for student loans. Individuals under the influence of drugs or alcohol cannot enter a contract. Also, individuals who suffer from a mental illness that prevents them from making rational decisions cannot enter a legally binding contract.
  • The second aspect of a contract is compensation. Compensation refers to both the payment made and the service or product received. You cannot have a binding contract that requires one or both parties to commit an illegal action. If you hire a hit man, have him sign a contract or enter a verbal agreement, and he fails to perform the murderous task you specified, you cannot take him to court for breach of contract. You also cannot have a valid contract where the compensation is an illegal item, such as drugs or stolen merchandise. For the contract to be valid, both parties must receive some sort of compensation. There cannot be a valid contract wherein only one person receives money or services. The compensation must be reasonably equitable as well, in order for the contract to be upheld in a court of law.
  • The third aspect of a contract is a meeting of the minds. Both parties must fully understand the agreement. One way to ensure that a true meeting of the minds has been accomplished is to put as many details as possible into the contract. For example, if you are trying to sell a car, describe it in minute detail. This will prevent your buyer from protesting that they thought they were buying a car in a different color or with fewer miles. Details will help strengthen your contractual agreement.

How Is a Contract Interpreted?


The court reads the contract as a whole and according to the ordinary meaning of the words. Generally, the meaning of a contract is determined by looking at the intentions of the parties at the time of the contract’s creation. When the intention of the parties is unclear, courts look to any custom and usage in a particular business and in a particular locale that might help determine the intention.

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