Introduction

As a business owner-manager, it’s likely you’ve been asked to sign a business contract for an important project or to work with a client. But have you ever wondered: what actually is a contract? Well, you’re in luck. In this article, we’ll explore what a contract is, its building blocks, as well as some other important bits you should know before signing an agreement—all without putting you to sleep (we hope).

Read: Consideration: Overview, definition and example

What is a contract, anyway?

A contract is basically a fancy way of saying, "Hey, we all agree to these promises, and if anyone breaks them, there are consequences." It’s an agreement between two or more parties that’s legally binding—meaning the law gets involved if things go south. Whether it’s a handshake deal at the local coffee shop or a 20-page document drafted by lawyers, a contract makes sure everyone’s on the same page about who does what, when, and what happens if they don’t.

However, there’s more. A contract isn't just about making promises. For it to be a real, genuine contract, a few ingredients need to be in the mix: an offer, an acceptance, consideration (that’s the legal term for something of value being exchanged), and mutual intent to be bound by the agreement. Plus, all parties need the capacity to understand what they're signing up for—meaning no drunk signing at happy hour.

Building blocks of a business contract

Not all agreements are contracts. For a contract to be legally enforceable, it needs to tick a few boxes. While the ingredients for a valid contract may differ depending on the type of the law, here are the usual requirements:

• Offer and acceptance: One party makes an offer (“I’ll do X if you do Y”), and the other says, “Deal!” It’s that simple. If someone offers to sell you their car for $5,000 and you nod your head with a “Yes,” you’ve nailed the first step of a contract. Clarity is key—both parties must know exactly what they’re signing up for.

• Consideration: This isn’t just a big word to impress your friends; it means something of value must be traded. Money, services, goods, or even a promise to not do something (like not suing) can count. If there’s no consideration, there’s no contract—it’s just an empty promise.

• Intention to create legal relations: Both sides must actually want the agreement to be legally binding. Promises made over a beer? Probably not a contract. Business deals? Definitely. Business agreements typically come with the intention to be enforceable.

• Capacity: Everyone signing the contract has to be capable of understanding what they’re getting into. That means being of sound mind, not a minor, and not forced or pressured into it. A contract with someone who's hammered? Probably not going to hold up.

• Lawful purpose: The contract must have a legal objective. If the goal is illegal, like selling banned substances, the contract is as good as toilet paper—worthless in court. The law won’t back it up if it’s for something shady.

Bottom line: For your contract to stand a chance in court, make sure it checks all these boxes.

Read: Consideration: Overview, example, definition

Types of contracts: oral, written, implied

Contracts come in all shapes and sizes—think of them like ice cream flavors, but with less sugar and more fine print:

• Written contracts: The go-to choice for anyone who likes things crystal clear. Written contracts are usually the safest bet because they spell out all the nitty-gritty: who does what, when, and what happens if they don’t. It could be a business deal or that endless terms of service you scroll through and blindly accept.

• Oral contracts: Yep, a good ol’ handshake can be a contract, too. But beware: oral contracts can turn into “he said, she said” drama real fast. The challenge? Proving what was actually agreed upon. Still, they’re pretty common for smaller deals or when you just need to agree on something quickly.

• Implied contracts: These are the sneaky ones, formed by what people do, not what they say. Like when you sit in a barber's chair—you’ve just entered into an implied contract to pay for that snazzy haircut. Implied contracts are usually less common in business-to-business scenarios, but they can happen.

Whether you write it down, shake on it, or just go with the flow, contracts come in all flavors.

Read: Does a contract have to be in writing?

Why business contracts matter

Contracts are everywhere in business, from employee agreements to sales contracts. They establish a clear understanding between parties, outline what each party should do, and provide a framework for resolving disputes if something goes wrong. Think of contracts as the glue that holds the business world together—they keep everyone accountable and help avoid misunderstandings.

But they’re not just about preventing disputes; they’re also about protection. A well-drafted contract protects your rights and interests and can be your best defense if a disagreement turns into a legal battle.

What happens when a business contract is broken?

Breaking a contract, or “breaching” it, means failing to perform any term of the contract without a legitimate legal excuse. This could range from not paying on time to not delivering goods or services as promised. If a breach occurs, the non-breaching party might be entitled to remedies such as damages (money), specific performance (forcing the party to carry out their end of the deal), or rescission (canceling the contract).

Read: How can I get out of a business contract?

How to make sure your contract is enforceable

Want your contract to stand up in court? Here’s how to make it rock solid:

Get it in writing

While oral agreements can technically hold up, they’re like a game of broken telephone—details get lost. A written contract lays everything out in black and white, reducing the chances of confusion or “creative” memory lapses later. Keep the language clear and simple—ditch the legal mumbo jumbo.

Be specific

Spell out every term in detail—who does what, when, and how much it’ll cost. Ambiguity is your enemy. If there’s wiggle room, disputes will sneak right in. The clearer the terms, the less likely you are to end up arguing about what “reasonable effort” or “soon” actually means.

Know the law

Laws can change from state to state or country to country, so make sure your contract is playing by the local rules. Some states have specific requirements—like needing certain types of contracts to be in writing (think real estate deals or agreements that last longer than a year).

Seek legal advice

Not sure if your contract’s airtight? Don’t wing it—consult a lawyer. Or better yet, use tools like Cobrief to get a second opinion. Think of it as insurance—better to spend a little upfront than pay big later.

Bottom line: Put it in writing, be clear, follow local laws, and don’t be afraid to call in the pros. Your future self will thank you.

Conclusion

A contract isn’t just a piece of paper—it's your game plan for who does what, when, and what happens if things go sideways. Whether it’s a simple handshake or a 50-page legal epic, knowing the basics of what makes a contract enforceable helps keep you out of trouble and protect your interests.

By knowing what to look for—like clear terms, proper consideration, and legal intent—you can ensure your contracts are rock solid. And remember, when in doubt, don’t be afraid to get some legal advice or use tools like Cobrief that can help clarify the fine print. A little preparation now can save you a lot of trouble later!

Read: Can I extend a business contract that has expired?

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.