What Makes a Valid Contract? | Company Activities & Management > Contracts & Bids from AllBusiness.com
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What Makes a Valid Contract?

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The offer and acceptance are the beginning steps in the contract process. When one party makes an offer and a second party accepts the terms and conditions of this offer, then an agreement has been reached. At this point, the only the thing needed to become a valid contract is what's known as the consideration.

The two key components that compose a legally binding contract are the agreement and consideration. The agreement involves a meeting of the minds where the parties to a contract agree upon the terms of the contract. For the contract to be valid, this agreement must include some form of consideration, meaning that the contracting parties must receive something of value from the contract. For more on this, be sure to read What Must a Contract Contain to Be Legally Binding?

The agreement aspect of a contract is a process that involves one party making an offer to the other parties involved. The offer should clearly specify any terms and conditions that are pertinent to making an agreement, including what is expected from each party and what each will receive in return as consideration for the contract. In the case of a publishing contract, the publisher offers the author an advance plus a royalty rate in exchange for publishing the author's manuscript. If the author accepts the publisher's offer, there is an agreement and a contract can be drawn up.

Instead of accepting the publisher's offer, however, the author can respond by asking for a higher advance and/or royalty rate. When the responding party rejects and amends the offer, it becomes a "counter-offer." This starts a process of negotiation where each party submits counter-offers to one another until they reach an agreement. Once an offer has been accepted and an agreement reached, then both parties have made a formal contract.

Contracts may be either oral or written, although real estate contracts and contracts lasting for more than one year need to be in writing. A written contract leaves less possibility for misunderstandings and gives you a better chance of recourse should the other contracting parties breach the terms and conditions of the contract. For more information on contract terminology, be sure to read our helpful Glossary of Common Contract Terms.

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