The Essentials of a Contract – Part 3

Over the past couple of months, we have been exploring the five essential parts that create a strong, supportive, and enforceable contract for your business. Today we will dig into valid considerations, and why they are necessary to ensure a contract is effective. As a refresher, the five key contract components are:

1. Competent Parties
2. Proper Subject Matter
3. Valid Consideration
4. A meeting of the minds
5. Mutual Obligations

We have already established that contracts are between at least two competent parties, meaning that they are have satisfied the legal requirements to enter into a contract. As we reviewed last month, proper subject matter is crucial to ensuring your contract can be enforced in the event of a dispute. Next, we must include valid considerations so that the contract is effective and clear. Now, let’s define what that means…

This is the essential reason for the parties to enter into the contract.

A  consideration is something of value that was promised in exchange for the specified action or nonaction. This can take the form of a significant expenditure of money or effort, a promise to perform some service, an agreement not to do something, or reliance on the promise. Consideration is the value that induces the parties to enter into the contract.

The existence of consideration distinguishes a contract from a gift. A gift is a voluntary and gratuitous transfer of property from one person to another, without something of value promised in return. Failure to follow through on a promise to make a gift is not enforceable as a breach of contract because there is no consideration for the promise.¹

Every contract has some benefit or value that is being exchanged between the parties. In the case of a service agreement, the considerations include the service being provided and the fees being paid to procure those services. These services can vary, ranging broadly from construction and business consulting to legal representation. Tangible products, such as software applications, are also considerations which are negotiated between the parties, and for which fees will be paid.

As with all parts of a contract, detail and clarity are vital to ensuring that all parties have a common understanding of the benefits, expectations, and requirements. Clearly defined scope and considerations will pave the way to a business relationship that is based on mutual trust and satisfaction. As a result, the parties will have a positive contract experience, and be more likely to engage in future contracts and service agreements.

Does a contract consideration have to always be about money?

No. Money is just one way of “paying” for the services or goods mentioned in the agreement. Some contracts will include an exchange of services or even a trade of goods as the considerations that have been negotiated. Cash is important, but it’s not always necessary!

Regardless of what is being exchanged, documenting the details is the most critical part of creating an enforceable contract. Be sure to include specific terms, such as:

• Detailed service descriptions
• Service period dates (beginning and ending)
• Who will be doing the work
• The type of compensation offered

Do you have concerns or questions about whether your document is a legally binding contract? Be sure that you speak to an experienced legal professional. The team at the Law Office of Adriana E. Baudry LLC is available to guide you through the process and make sure your agreement is clear, effective, and enforceable.

References:

^{1 http://jec.unm.edu/education/online-training/contract-law-tutorial/contract-fundamentals-part-2}