How Do Contracts Work?

Updated: Jun 17


Contracts are everywhere. Whenever you agree to the terms of service or sign a lease agreement, you are engaging in a contract. Because you come across so many contracts in your everyday life, you should have a clear understanding of what they are and how they work.


Contracts are legally binding agreements that are made between two or more parties. These parties could be anything as long as they are at least 18 years of age ranging from a single person to a corporation.


Every contract consists of 3 elements:

1. Offer

2. Acceptance

3. Consideration


An offer initiates the contract. One party approaches another with some sort of promise in exchange for something in return. A valid contract requires the offer to be communicated clearly. This gives the other party the opportunity to either accept or reject the offer.


Acceptance is when the other party or parties agree to the terms of the offer. Upon accepting an offer, both parties are legally bound to carry out the terms agreed to in the contract. Also, once an offer is accepted, the other party is unable to withdraw or change their original offer. If your acceptance is, in any way, different from the original offer, you are actually rejecting that offer and making a counteroffer.


Consideration is the item of value the parties involved will gain from the contract. Each party should be able to provide a clear answer as to why they entered into an agreement. Consideration can be anything of value to the parties. It could be money, an action to do or not do something, or a tangible object.


Every agreement and transaction you make is a contract. Say that you go to the grocery store to buy an apple. The store offers an apple in exchange for a set amount of money. By accepting that offer you agree to provide the requested money for the apple. The consideration being provided is an apple from the store and money from you.

That, of course, is a very simple example of a contract. Not every contract needs to be done with a pen and a legal document. In some situations, such as a large purchase or a long-term agreement, contracts must be in writing. Not every situation requires the formality of a written contract. However, writing out a contract, or documenting it in anyway, such as requesting a receipt, is advisable, since purely oral contracts can be difficult and sometimes impossible to prove.


Once you have accepted and considered the offer, you are legally obligated to whatever you have agreed to. Very often will people fail to read a contract carefully before signing it only to find out that they agreed to something they weren’t aware of. There may be hidden clauses that can affect the entire contract. In some situations, you may even be able to dispute something you disagree with. When you are handed a document to sign, read it carefully before signing it. Make sure you clearly understand an offer before accepting it.




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