Mention of the word 'contract' can send shivers down the spine and invoke nightmares of never-ending pages written in complex legal jargon. There might be mountains of dusty law books, heaps of yellow paper and miles of literal red tape. It's certainly not a pretty sight.

Thankfully, this mental picture couldn't be further from the truth. Contracts are a part of doing business and are encountered time after time in everyday life. Think about it: If you've ever opened a bank account, checked into a hotel or even order a meal at a restaurant, you've entered a contract. Even pay-as-you-go cell phone plans involve a contract-you have agreed to pay a phone company a specific rate for a specific service provided.

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Simply put, a contract is an agreement between two or more people or organizations that creates a legally-binding promise or set of promises. Everyone involved must follow through with what they've promised to do, and if the promises are ever broken-called a breach of contract-the law provides specific remedies for the injured party.

What's in a contract? Essential elements explained

The notion of a contract might seem so intimidating because people often associate it with major life decisions such as buying real estate or accepting a job offer. But in reality, all contracts contain the same three elements no matter whether you're signing a mortgage for a new home or just buying groceries:

  • Subject: A contract must define terms to spell out all the details, and these specifics are referred to as the contract's subject. A contract's subject generally contains the offer and an acceptance of clear terms. If you're buying a car from a dealer, the sales agreement is the subject. If you're buying a sweater on sale at your favorite boutique, the price tag might be considered the subject. In each case, the subject gives the details of an offer to exchange an item for money, and you're accepting the offer when you chose to hand over the agreed upon amount.
  • Consideration: Contracts shouldn't be arbitrary. There needs to be a reason to have a contract in the first place. Consideration of a contract is the reason, motive, price or objective behind the contract. The consideration is money in many cases, but it also might include acceptance of liability or a promise not to do something. A non-disclosure agreement, for example, contractually rules out sharing information that might otherwise be fair game. Essentially, consideration is what convinces everyone involved to enter the contract in the first place.
  • Capacity: Everyone involved must be competent and have authorization to enter the arrangement. This means that a person who is severely mentally disabled or under age 18 can't enter an enforceable contract. It also means that everyone in the contract must have authority to do so. Jane can't sell June's car unless she has explicit permission.

Elements in action: Examples

By now you might realize that everyday life is filled with contracts. You're entering a contract every time you order a cup of coffee at the corner cafe, shop in your favorite stores, or even when you sit down in your barber's chair for a haircut. Each situation involves subject, consideration and capacity, even if it's not the first thing that comes to mind as you go through these actions.

Other examples of contracts might be more obvious. Consider renting an apartment or office space. A clearly defined rental contract's subject will likely give clear cut rules about what's expected as you as a tenant. You'll make monthly payments to your landlord in consideration for use and possession of the property. Your landlord or manager is capable or has the capacity to rent or lease out the property to you. Making it official with a contract means that should something go sour, you both can rely on the original rental contract to protect you and offer remedies in case of a breach.

Regardless of whether you're renting an apartment, taking a new job or swiping your debit card to make a purchase, you're entering a contract with a subject, consideration and capacity. Contracts are a part of everyday life, and being well-informed about the elements of a contract can help you be confident when making any kind of business, legal or personal decision. 

Getting started making your own contract is easy. Just answer a few simple questions on our step-by-step interview and you'll have a written agreement faster than you think. 

