What Is a Legal Contract?

Definition & Examples of a Legal Contract

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Definition

A legal contract is an enforceable agreement between two or more parties. It may be verbal or written.

How a Legal Contract Works

A contract is essentially a set of promises that can be enforced by law. Typically, a party promises to do something for another in exchange for a benefit. A contract can be written or verbal and involves one party making an offer and another accepting. If the contract's promise isn't kept, the harmed party can seek a legal remedy.

To be a legal contract, an agreement must have all of the following five characteristics:

  • Legal purpose: A contract must have a lawful purpose to be enforceable. For example, if one business partner contracted someone to kill another business partner, but the person took the money without fulfilling the contract, there's nothing that can be done. A contract of murder for hire is illegal and the contract is unenforceable.
  • Mutual agreement: All parties to the contract must have reached an agreement. That is, one party must have extended an offer to which the other parties have agreed. For example, Jim signs a contract with Tom's Tree Trimming. The contract outlines the scope of the work Tom will perform on Jim's property. Jim and Tom have a mutual agreement regarding the work that will be done.
  • Consideration: Each party to the contract must agree to give up something of value in exchange for a benefit. For example, you hire an independent contractor to repave your driveway. You and the paving contractor sign an agreement in which you promise to pay a sum of money in exchange for the paving work. Both you and the contractor have agreed to give up something of value. You have agreed to pay money, and the contractor has agreed to perform the paving work.
  • Competent parties: The parties to a contract must be competent. That is, they must be of sound mind, of legal age, and unencumbered by drugs or alcohol. If you enter into a contract with a person who isn't competent, the contract can't be enforced.
  • Genuine assent: All parties must engage in the agreement freely. A contract may not be enforced if one or more parties have made mistakes in the language. Likewise, a contract may be voided if one party has committed fraud or exerted undue influence over another. For example, you sign a contract in which you agree to sell your house to your next-door neighbor for $1. When you signed the contract, your neighbor was threatening you. Clearly, you made the agreement under duress, so the contract isn't valid.

Note

Some types of contracts must be in writing. For example, real estate sales contracts must be written in order to be enforceable.

Breach of Contract

If one party fails to fulfill their duties under the agreement, that party has breached the contract. For example, suppose that you've hired a masonry contractor to construct a brick patio outside your restaurant. You pay the contractor half of the agreed-upon price upfront. The contractor completes about a quarter of the work and then stops. They keep promising they'll return and complete the job but never do. By failing to fulfill their promise, the contractor has breached the contract.

If one party breaches a contract, the other party may suffer a financial loss. In the above example, you paid for 50% of the work but only received half that much. You have several options for obtaining compensation:

  1. Sue for damages: You may file a lawsuit against the contractor for damages. For example, you might sue for the cost of hiring another contractor to finish the job plus the costs you have incurred due to the delay.
  2. Specific performance: You can compel the contractor to complete the work required by the contract.
  3. Other remedies: If the contractor tricked or forced you into signing the contract, you might convince a court to terminate the agreement or amend its terms.

Failure to fulfill the terms of an insurance policy may constitute a breach of contract. An insurance policy imposes obligations on both you and your insurer. An insurer has an obligation to pay covered claims. If the insurer reneges on this duty, you may sue the insurer for breach of contract.

Likewise, you have an obligation to cooperate with your insurer when it investigates a claim. If you file a claim and then refuse to cooperate with the insurer's investigation, your refusal to cooperate may constitute a breach of the insurance contract. Your insurer may rely on your breach of the policy as a basis for denying the claim.

Types of Legal Contracts

Most contracts are bilateral. This means that each party has made a promise to the other. When Jim signed the contract with Tom's Tree Trimming, he promised to pay the contractor a specified sum of money once the job was completed. Tom, in turn, made a promise to Jim to complete the work described in the agreement.

In a unilateral contract, one party makes a promise in exchange for an act by the other party. Insurance policies are unilateral contracts. When you buy liability insurance or any other type of policy, you pay a premium (an act) in exchange for the insurer's promise to pay future claims.

Key Takeaways

  • A legal contract is a legally enforceable agreement between two or more parties. It may be verbal or written.
  • Typically, a party promises to do something for the other in exchange for a benefit. 
  • A legal contract must have a lawful purpose, mutual agreement, consideration, competent parties, and genuine assent to be enforceable. 
  • If a contract is breached, you may be able to sue for damages or seek other remedies. 
  • Contracts can be bilateral, which means each party has made a promise to the other, or unilateral, which is when one party makes a promise in exchange for an act by the other party. 

Frequently Asked Questions (FAQs)

What is an example of a legal contract?

Contracts are agreements between people that are ultimately enforceable by law. They can be as simple as the implied contract between a buyer of a bottle of water and the liquor store owner that sells it. Or they can be as complex as a written agreement between a landlord and a tenant in which the rights and responsibilities of both parties are clearly spelled out.

What makes a contract legally binding?

For a contract to be binding, it must meet four characteristics: One party has made an offer to another; something of value ("consideration") was offered in exchange for an action or non-action; the offer was accepted clearly and unambiguously; both sides mutually agreed to the terms of the contract.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Cornell Law School Legal Information Institute. "Contract."

  2. University of New Mexico: Judicial Education Center. "Remedies for Breach of Contract."

  3. University of New Mexico: Judicial Education Center. "Contract Law."

  4. University of New Mexico: Judicial Education Center. "Elements of a Contract."

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