Contracts are a fundamental part of our economy.  Every time you buy something from a grocery store or a department store you are entering into a contract.  You don’t have to sign a piece of paper to enter into a valid and fully enforceable contract.  Some contracts can be oral while others must be reduced to writing.  So what exactly makes a contract binding?  There are two main requirements for a contract to be binding and enforceable:

1. Consideration
2. Mutual Assent

Consideration

Consideration is a legal term for quid pro quo.  In other words, consideration is something of value that is offered in exchange for something else of value.  In everyday experience, when you buy a box of Krispy Kreme donuts you give up some money and in exchange the store gives up the donuts.  Both the money that you give up and the donuts that the store gives up have value to the respective parties.  Essentially there are two separate concepts required for consideration to be valid and enforceable.

The first concept is the actual sought after exchange.  In legal circles this is called the “bargained for exchange“.  In my previous example when you go looking for Krispy Kreme donuts you are seeking out an exchange.  Additionally, the store that offers the donuts for sale is also seeking out an exchange.  In other words, there are at least two parties looking to exchange something that the other party has to offer.

The second concept involves giving up something of value in order to get something of presumably greater value.  However, often parties to contracts are seeking to exchange intangible items.  Unlike donuts and cash, intangible items might be something like a promise to provide a service.  A good example of this is the arrangement you have with your cell phone company.  The cell phone company promises to give up cellular bandwidth in exchange for your promise to pay them for such use at the end of each month.

Mutual Assent

Mutual Assent is another legal term for a shared understanding of contractual obligations between parties.  In other words, mutual assent is present whenever there is an offer from one party that is accepted by the other party.  Going back to the donut example, the grocery store offers the donuts for a specified price.  This is the offer.  When you give the cashier the asking price for the donuts you are accepting the offer and entering into a binding and enforceable contract.  Mutual asset cannot exist until both parties understand and agree to be legally bound by their respective obligations.

Most simple contracts do not require the assistance of counsel.  Contracts are really just common sense.  However, if you are an entrepreneur, doctor or other self-employed professional you will eventually get into more complicated transactions where legal technicalities will be ever present.  It is in these instances when you should have a professional draft and review your agreements.  A major cause of expensive business litigation is a poorly drafted contract.  Now you know contracts and knowing is half the battle!