Where Contract Law Comes From
Contract law in the United States is mainly state law. Two sources matter most:
- Common law (court decisions) governs contracts for services, real estate, employment, and most other agreements.
- Article 2 of the Uniform Commercial Code (UCC), adopted in some form by every state except Louisiana, governs contracts for the sale of goods. The UCC has special, often more flexible rules for merchants.
The Elements of a Valid Contract
1. Offer
A definite proposal showing a willingness to enter an agreement on specific terms. Advertisements are usually treated as invitations to make offers, not offers themselves.
2. Acceptance
Agreement to the terms of the offer. Under the common law mirror image rule, an acceptance that changes the terms is a counteroffer. Under the UCC, an acceptance with additional terms can still form a contract, and between merchants the additional terms may become part of it unless they materially change the deal (the "battle of the forms," UCC § 2-207).
3. Consideration
Each side must give something of legal value — money, goods, services, or a promise to act or not act. A promise to make a gift is generally not an enforceable contract.
4. Capacity
Parties must have the legal ability to contract. Minors and people lacking mental capacity may be able to cancel contracts. For businesses, the person signing must have authority to bind the company.
5. Legality
A contract for an illegal purpose, or one that violates public policy, is unenforceable.
6. Mutual assent
The parties must actually agree. Contracts can be undone for fraud, duress, undue influence, or certain mistakes.
When a Contract Must Be in Writing
Under the statute of frauds, certain contracts must be evidenced by a signed writing to be enforced, including:
- Contracts for the sale of land or interests in real estate
- Contracts that cannot be performed within one year
- Promises to pay another person's debt (guarantees)
- Contracts for the sale of goods of $500 or more (UCC § 2-201)
- Contracts in consideration of marriage
Even when not legally required, a written contract is the best evidence of what the parties agreed.
Electronic Contracts and Signatures
The federal E-SIGN Act (15 U.S.C. § 7001) and the Uniform Electronic Transactions Act, adopted by nearly every state, generally make electronic records and signatures legally valid. Clicking "I agree," typing a name, or using a signature platform can create a binding contract, as long as the parties intended to sign and the terms were reasonably presented.
Common Clauses in Business Contracts
| Clause | Purpose |
|---|---|
| Scope of work / description of goods | Defines exactly what will be delivered |
| Price and payment terms | Amount, schedule, invoicing, and late charges |
| Term and termination | How long the contract lasts and how it can end |
| Warranties | Promises about quality or performance |
| Limitation of liability | Caps the damages each side can recover |
| Indemnification | Who covers losses from third-party claims |
| Confidentiality | Protects sensitive information |
| Intellectual property | Who owns work product and licenses |
| Dispute resolution | Arbitration, mediation, or court; choice of law and venue |
| Force majeure | Excuses performance after events beyond the parties' control |
| Entire agreement | States the written contract replaces earlier discussions |
Tips for Small Businesses
- Read the whole contract, including terms incorporated by reference.
- Sign in the company's name with your title (for example, "ABC LLC, by Jane Smith, Manager") to avoid personal liability.
- Define deliverables and deadlines clearly to prevent disputes.
- Check auto-renewal and termination terms.
- Watch limitation-of-liability and indemnity clauses, which shift risk significantly.
- Keep signed copies and records of changes; require amendments in writing.
- Have a lawyer review high-value or long-term contracts.
