- A meeting of the minds between the parties demonstrating they both understand and agree to the essentials of the deal
- Consideration (something of value exchanged by each of the parties, such as cash, goods or a promise to do something)
- An agreement to enter into the contract (typically evidenced by both parties signing a written contract, although oral contracts can be valid too in some situations)
- The legal competence of each party, meaning the parties are not minors and are of sound mind.
The first step in creating a contract is making sure both parties are talking about the same deal, so that when they subsequently agree to enter into the contract they are both agreeing to the same thing. Seems obvious, right? Until you realize that the "vintage red car" you planned on buying from your brother-in-law isn't the Ferrari, it's his Pinto. Take the time to communicate your understanding of the deal to the other party, and listen carefully when he talks back.
Consideration
Once the parties have had a "meeting of the minds" as to the deal, they must each exchange something of value in order to create a contract. Often one party provides its goods or services in exchange for the cash of the other party. But consideration can take many other forms, as long as each party is giving up something of value to it to convince the other party to enter into the contract.
You could read law treatises defining "consideration" until the cows come home, but in the real world your biggest issues related to consideration will be how much and when.
If cash is exchanging hands in your contract, think through any assumptions you are making about the way payment will be made.
- If you expect to be paid at the time the contract is signed, say so.
- If one of the parties will be paying after the contract is signed, say whether the payment will be in cash, by check, by cashiers' check or by wire transfer. It's better to be explicit about the way the money will change hands. For example, you would likely want a cashier's check if you are turning over title to a car or other significant assets.
- If payments will be made over time, or will be made based on external factors such as the amount of business done, you may need to define the payment schedule using a formula. Keep the formula simple, and feel free to put examples of how the formula will work right in the body of the contract.
- If you have to use a complex royalty or other payment formula, test the formula out with the other side to be sure you both understand it.
Agreement to Enter into the Contract
Once both parties understand the deal and understand what type of consideration will be exchanged by each party, they are ready to form an agreement. Usually the parties demonstrate that negotiations have ended and an agreement has been reached when the parties sign the contract.
In business as in opera, it's not over until the fat lady sings - I mean signs. It's fine, within reason, to negotiate changes in a written contract up until the moment you sign it.
Legal Competence
Be sure that the party you're working with is legally competent to enter into a contract. Otherwise your signed contract may be void and unenforceable (as in worthless and worth zippo). Even if the other guy wears a lampshade on his head, he may be legally competent. But watch out for the following situations
- Minors cannot enter into contracts without the additional signature of their parents or guardians. In most states a minor is a person under the age of 18.
- Persons lacking sound mind usually cannot enter into contracts because, the reasoning goes, they lack the ability to understand what they are doing and to create a "meeting of the minds." Persons lacking sound mind generally are those who are mentally handicapped, or impaired by the use of drugs or alcohol, to such an extent that they cannot understand the significance of their acts.
- Persons who lack authority to act on behalf of someone else may not be able to legally bind that other person or company. So make sure that the person signing on behalf of a company or other person has the legal authority to do so.
