A valid contract requires two and sometimes three elements:

• An agreement (meeting of the minds) between the parties.
• "Consideration:" a legal term meaning the exchange of things of value.
• Something in writing, if the contract covers certain matters, such as the sale of real estate and tasks that can?t be completed in one year.

For example, suppose you're opening a new store. You meet with Joe, a sign maker, to discuss the construction and installation of a five-foot by three-foot sign. Joe offers to do the work for $450 and to have the sign ready for your grand opening on June 15. "It's a deal," you say. You now have a legally binding contract, enforceable in court or by arbitration. All the necessary elements are present:

• An Agreement. Joe offered to build and install the sign at a certain price by a certain date. You accepted the offer by telling Joe, "It's a deal."
• Consideration. The two of you are exchanging something of value. You're giving your promise to pay $450. Joe is giving his promise to build and install the sign.
• Written Agreement Not Required Here. Normal business contracts that can be performed in less than a year don?t have to be in writing to be enforceable.

To understand why "consideration" is important, let's explore the difference between a contract and a gift. Assume that Joe installs the sign on time and you pay him $450 as agreed. Impressed by the high quality of his work, you say: "Joe, to thank you for the great job you did, I'm going to send you a $100 bonus next week." Can Joe enforce your promise to pay the bonus? No. He got what he bargained for - the $450 payment. He didn't promise you anything (consideration) for the extra $100 payment. If you pay it, fine. If not, Joe can't force you to.

Excerpted from the "Legal Guide for Starting and Running a Small Business" by Fred S. Steingold
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