Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What characterizes a legal contract?

1. A casual agreement between friends

2. An agreement to do something or refrain from doing something

3. A formal arrangement with a lawyer present

4. A document that has no binding power

The correct answer is: An agreement to do something or refrain from doing something

A legal contract is characterized by a mutual agreement between parties to do something or refrain from doing something. This definition emphasizes the essential elements of a contract, which include offer, acceptance, consideration, and the intention to create legal relations. When two or more parties agree to undertake certain obligations or forgo specific actions, they enter into a legally binding agreement, provided that the contract meets the legal requirements. The choice indicating a casual agreement between friends does not meet the necessary criteria for a legal contract, as typically, casual agreements lack the elements of enforceability. The presence of a lawyer does not inherently create a legal contract; rather, contracts can exist without legal representation, though having one is advisable for complex agreements. Finally, a document that has no binding power contradicts the fundamental purpose of a contract, which is to create enforceable obligations. Therefore, the characterization of a contract as an agreement to perform or abstain from actions encapsulates the essence of what constitutes a legal contract.