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What is a Formal Contract?

By John Kinsellagh
Updated May 16, 2024
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A formal contract is an agreement between two parties that is legally binding and enforceable. In order to be legally enforceable, a contract must contain an offer, an acceptance of the offer, and payment for services rendered or goods delivered. Although there is no requirement that a contract be in writing to be legally binding, a formal contract expresses each of the substantive terms of the parties' agreement in a written document. In order to eliminate uncertainty, each element of the contract — including the parties' respective obligations to perform — is detailed with particularity in the document.

One of the goals of drafting a formal contract is to eliminate any ambiguity concerning its terms and conditions. In a written contract, the respective obligations of each of the parties is clearly delineated and precisely defined. In order to avoid misinterpretation, many formal agreements will contain a preamble or preface section that clearly defines important terms used throughout the contract. This helps eliminate redundancy in the use of common or recurring language, and insures that substantive terms of the contract are described and referenced throughout the contract document in a consistent and unambiguous manner. In addition, the parties to the contract are identified and defined, and in many cases, a one-word designation is substituted for complex terms, or for multiple parties, to avoid confusion throughout the document.

Many formal contracts will contain provisions that define the instances that constitute a breach of the agreement. If agreed to by the parties, some written contracts may contain a clause that describes the manner in which a breaching party can return to the confines of the agreement, as well as the remedy options of the non-breaching party. Other common characteristics of a formal contract include provisions that stipulate which region’s laws will govern the interpretation and enforcement of the contract, as well as a requirement that any amendments to the contract must be in writing and signed by both parties.

Since litigation can be time-consuming and costly for both parties to a contract, many agreements will contain an arbitration clause. This will usually provide that any disputes arising out of the performance, interpretation, or breach of the contract will be resolved by binding arbitration. Such a clause may also stipulate the forum in which the mediation shall be conducted. If there are no unusual circumstances, contractual arbitration clauses are generally enforced by most courts.

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Discussion Comments
By popcorn — On Jun 17, 2011

I personally believe that if you are lending a sum of money to a friend or family member that you should have a formal contract for repayment. Many people feel that because it's someone close to them that there is no way the person wouldn't pay them back, unfortunately that is not the case.

I think that you shouldn't lend an amount of money to someone, without a contract, unless you are OK with never getting that amount back. This sum differs for everyone.

If you worry about repayment, treat it as a business transaction and make up a simple formal contract. People tend to treat money differently when paper and ink come into the agreement.

By lonelygod — On Jun 17, 2011

There are so many situations in which you should draw up a formal contract, and it never ceases to amaze me how many people do.

The first time for a formal contract most people experience is with roommates when you are sharing a place, whether in college or later in life. No matter how cool the people are you should have a contract stating who pays what and what the responsibilities are. This gives you some leverage when someone skips out on bills or does damage to the place.

Also, if you are hiring someone for a service, whether it is for babysitting or cutting your grass, a simple formal contract is great so there are no arguments over payment, duties or hours.

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