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What should be included in a contract?

| Sep 10, 2020 | Corporate Finance, Credit & Bankruptcy |

Contracts govern most business relationships which is why how they are negotiated, drafted, executed and enforced is so important. For that reason, it is valuable to know what the elements of a valid contract are and what should be included in a contract.

Offer

The first element of a contract is an offer that is made. The offer should be a promise to do something or refrain from doing something in the future.

Acceptance

The second element of a contract is acceptance. The acceptance must mirror the offer to demonstrate mutuality between the parties. In generally, the acceptance must be a mirror image of the offer. Otherwise, it may be viewed as a rejection of the offer and a counteroffer that would then need to be accepted by the other party for contract formation.

Consideration

A third element of a contract is consideration. Consideration refers to the promise of something of value in exchange for a specified action or refraining from taken a certain action. Consideration can include money but is not limited to money. It can also include a reliance on a promise, such as a promise to perform a service, or an agreement not to do something.

Mutuality

The parties must have a basic meeting of the mind concerning the contract terms. For mutuality to exist, the parties must agree to the basic substance of the terms of the agreement between the parties memorialized in the contract. In general, it is a good idea for the contract to be in writing whenever possible.

Contracts outline important rights and obligations of parties to the agreement. Understanding these elements of a contract can help draft a contract that will protect the rights and interests of the parties and are, as such, important to be familiar with.