What is a Formal Contract?

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.