What is a Contract? A Simplified Guide for Everyday People

Demystifying Contract Law: Empowering Small Business Owners and Entrepreneurs


Meetesh Patel

8/3/20234 min read

As business owners and entrepreneurs, we encounter contracts regularly. Contracts are the backbone of business transactions. From lease agreements for our business premises to employment contracts for our staff, contracts are integral to our business operations. But what exactly is a contract? It is essentially a legally binding agreement between two or more parties, each agreeing to do (or not to do) something. Understanding the fundamentals of contract law can save us from potential pitfalls and legal tussles down the road. This article aims to demystify contract law and empower small business owners and entrepreneurs with a basic understanding of contract

Why Contracts Matter

Contracts serve as the lifeblood of commerce - they outline the rights and responsibilities of parties involved, ensuring every party upholds their end of the bargain. Think of a contract as a blueprint or a roadmap for a business transaction - it defines the scope of the agreement, outlines what's expected of everyone involved, and provides reourse if things don't go as planned. From hiring your first employee to securing a deal with a new supplier, contracts guide these processes, providing a safety net should disputes arise.

For instance, imagine you hire a graphic designer to create a logo for your business without a contract. If they fail to deliver the agreed-upon design, you will have little recourse. However, with a contract in place, you can protect yourself by outlining expectations, timelines, and consequences for non-performance.

Understanding the Basics of a Contract

At its core, a contract involves four fundamental elements: agreement, consideration,

intention to create legal relations, and certainty.

1. Agreement: Contracts begin with an offer made by one party and accepted by the other. An offer is a proposal to enter into a contract, while acceptance is the agreement to the terms of the offer. For example, a supplier offers to sell 100 widgets at $10 apiece, and you accept this offer.

2. Consideration: Contracts require the exchange of something of value, known as consideration, between the parties involved. Consideration can be money, goods, services, or even a promise not to do something. In our widget example, the supplier's consideration is the 100 widgets, while yours is the $1000 you're willing to pay for them.

3. Intention to create legal relations: Both parties must demonstrate an intention to be legally bound by the contract. For example, an agreement between friends to go out for dinner may not be legally binding, but an agreement between two businesses to supply goods should be.

4. Certainty: Contracts must be clear and specific, leaving no room for ambiguity. All essential terms, such as price, quantity, and delivery dates, should be explicitly defined.

Different Types of Contracts

Contracts come in various forms. They can be written, oral, express, or implied, each with its own advantages and disadvantages, and their enforceability may vary depending on the circumstances and the specific laws in your location.

1. Written Contracts: Provide the most protection as they clearly outline the terms and conditions. They are highly recommended for significant business transactions.

2. Oral Contracts: Verbal agreements are valid and enforceable, but they can be challenging to prove in court as there is no written record of the terms. It’s best to have written contracts for important agreements.

3. Express Contracts: These contracts explicitly state all terms and conditions, leaving no room for interpretation.

4. Implied Contracts: These contracts are inferred based on the actions and conduct of the parties involved, rather than explicit written or verbal agreements.

Key Components of a Written Contract

A typical written contract includes sections such as:

1. Parties involved: Clearly identify who is entering into the contract.

2. Scope of work: Describe the services or goods being provided in detail.

3. Payment terms: Specify the amount, method, and timing of payment.

4. Duration: State the start and end dates of the contract, if applicable.

5. Confidentiality: Include provisions to protect sensitive information.

6. Dispute resolution: Outline how any disagreements will be resolved, such as through mediation or arbitration.

7. Termination: Specify the conditions under which the contract can be terminated.

As a rule of thumb, ensure that all the terms and conditions are thoroughly discussed, negotiated and agreed upon before putting pen to paper.

Common Misconceptions about Contracts

Contrary to popular belief, not all contracts need to be in writing. Oral and implied contracts can be legally binding. Additionally, while breaking a contract has consequences, it is not always impossible to do so. Breach of contract may lead to legal consequences, but there are situations where contracts can be terminated by mutual agreement or due to unforeseen circumstances.

The Consequences of Breach of Contract

Breach of contract occurs when one party fails to fulfill their obligations as outlined in the contract. Consequences can include monetary damages, specific performance, or termination of the contract. The nature and severity of the consequences largely depend on the specifics of the contract and the extent of the breach. Seeking legal advice in such situations is crucial to understand your rights and options.

Seeking Legal Advice

While this guide provides a fundamental understanding of contracts, the specifics of contract law can be complex and often require professional guidance. Having a business lawyer review your contracts can help you navigate potential issues and ensure that your interests are well-protected. A lawyer can help you understand the terms, negotiate favorable conditions, and draft or review contracts to ensure they are legally sound.


Understanding contract basics is essential for any business owner or entrepreneur. Contracts shape our business relationships, and a solid understanding of how they work can help ensure these relationships are legally sound. After all, knowledge is power - and in the world of business, it could mean the difference between success and legal turmoil. Stay informed, and remember - when in doubt, seek legal advice.