At the foundation of every legal transaction is the document known as a contract. Here is a guide to this document, why it is important and why you should use it.

The Basic Elements of Contracts

For as long as we can remember, things have been accomplished by agreement. At one time, a person's handshake was good enough to cement that agreement. In these more hectic times, that is no longer the case. To bind someone to an agreement, a written contract is needed.

At its core, a contract is simply an agreement between two parties. One party agrees to do something in exchange for the other party doing something. In most instances, this involves one party paying money to the other in exchange for something. A classic example would be a real estate transaction. I agree to pay you $300,000 in exchange for you transferring the home to me. Obviously, there is more a real estate agreement, but this is the basic idea.

The courts have very particular views about the enforcement of contracts. Simply put, they almost always enforce them. If they did not, the entire business world would be rocked to its foundations. If you cannot count on the other party doing something, how can you possible do business? Imagine if you made widgets and a large retailer ordered a huge amount after signing a contract to pay you an equally large amount. What if the retailer than decided not to go forward and didn't pay? You would be stuck with a huge inventory, no revenues and probably go out of business. With a contract, you can go to court and force the retailer to honor the terms of the contract, to wit, pay you and take the product. This is the beauty of a contract.

For contracts to be enforced, they need to be in writing. If you reach an oral agreement with another party, it means little. The reason this is the case is it is very difficult to tell which party is telling the truth about whether there was an agreement and, if so, what the terms were. The courts feel so strongly about this that there is a body of law known as the Statute of Frauds. Although it differs from state to state, the basic premise is any agreement exceeding $500 must be in writing to be enforced. Obviously, there are exceptions to this rule, but they are few.

A contract is a critical weapon in the arsenal of any business. Oral agreements mean nothing these days, so make sure it is in writing to protect yourself.