Business law permits verbal contracts in many situations, but most businesses in New York rely on written contracts when making an agreement with another entity. Because contract formation is so integral to many businesses, it is important to understand what the elements of contract formation are, so that the final agreement is legally enforceable.

First, a contract must contain a specific offer, acceptance and mutual consent. The parties to the contract must agree to it without coercion and of their own free will, so it is important that the terms of the agreement are specific, and that the parties have a mutual understanding of the terms.

In addition, there must be an exchange of “consideration” for a contract to be valid. Consideration is simply something of value. Two common forms of consideration include the exchange of money for goods or for services. Consideration must be given by both parties to the contract — gifts do not constitute consideration.

The parties forming the contract must be competent to do so. This means they understand what they are agreeing to under the contract. For example, a child cannot enter into a contract nor can a person who is intoxicated.

Finally, the purpose of the contract must be legal. People cannot agree to a contract that ultimately has an illegal purpose. For example, an agreement to sell drugs will not be enforceable, because selling drugs is against the law.

Keep in mind that if a contract is missing one of the elements discussed in the post, the contract is not illegal — it simply means that it is unenforceable should one party claim it was breached. Business contracts can be incredibly complex and may include elements not discussed here. Therefore, businesses looking to execute a contract may want to seek legal advice, which this post does not provide.