7 Essential Elements of A Contract

Know the essential elements of a contract for it to be legally binding. If one or more of these elements are missing, the contract may be void or unenforceable.

A contract is a legally binding agreement between two or more parties. Having a contract in place is important because it sets out the terms of the agreement between the parties involved. This clarity is essential in ensuring that all parties know what is expected of them and can help to avoid any misunderstandings down the line.

The contract provides assurance that the parties will perform the roles and responsibilities as intended, and provides some protection in the event that things do go wrong. 

For a contract to be valid and recognized by the common law, it must include certain elements— offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.

However, it is important to note that not all legal contracts need to be in writing in order to be valid. For example, an oral contract between two parties is still legally binding as long as all of the required elements are present. Whether written contract or verbal contract, all bilateral contracts must include the essential elements to be valid and enforceable by contract law. Keep reading to learn more!

Offer

For there to be a contract, there must first be an offer by one party and an acceptance by the other. An offer is a key element because without it, there can be no contract. It is a promise by one party to enter into a bargain contingent on the performance of another party. It involves someone who desires certain goods, services, or other performance and someone who can fulfill the responsibility of providing it.

The offer must be clear and definite, and it must be communicated to the other party. The offeree must then accept the contract terms of the offer, which can be done explicitly or implicitly. If the offeree accepts the offer, a binding contract exists, and that contract will be enforced by common law.

An offer is a definite statement of the terms of an agreement that the offeror is willing to be bound by. It must be unambiguous and made to create a legally binding contract. To illustrate, an offer to sell a car for $500 is an offer that, if accepted, will create a binding contract.

The offeror can make the offer to the offeree directly or indirectly. An offer made indirectly, such as an advertisement, is known as an “invitation to treat”. This type of offer is not legally binding because the advertisement is not a definite offer to sell the car for $500, but rather an invitation for the offeree to make an offer. 

For there to be a binding contract, the offeree must accept the offer. An invitation to treat, on the other hand, is not an offer. It is simply an invitation to negotiate and is not legally binding. An offer exists when it reaches the requesting party, and it can be revoked, altered, or terminated before acceptance. For example, a for sale sign in a shop window advertising an expensive watch for $1 does not become a binding contract if a customer walks into the store and says, I accept the watch for $1.

Acceptance

Acceptance is the agreement to the specific conditions of an offer. It must be unequivocal and must correspond with the contract terms of the offer, denoting that the offeree cannot change the terms of the offer. The offeree can either accept the offer explicitly or implicitly.

Communication with the offeror should always be maintained, and it is important to know that a counteroffer might be recognized as a termination of an offer, or in other words, if an offer is modified, it is no longer the same offer. For example, if someone offers to sell you a car for $500 and you counteroffer with $600, the original offer is no longer valid. 

An acceptance can be expressed or implied. An express acceptance is an affirmative statement by the offeree that they accept the terms of the offer. An implied acceptance is when the offeree takes some action that indicates their acceptance of the offer.

Words or actions can be used to accept an offer. It can be done in different possible forms: conditional acceptance (if the offeree accepts the offer subject to certain conditions, which must be fulfilled before the bilateral contract is formed), acceptance by action (by performing the actions specified in the offer), and option agreement (when the offeree pays for the offeror to keep the offer open for a certain time).

Consideration

Consideration is what each party to the contract gives up, or promises to do, to form the contract. It can be something of value, such as money, goods, services, or property. For instance, consider an employment contract between an employer (promisor) and employee (promisee). The employer offers the employee a job, and the employee accepts the offer. In this case, the employer's consideration is the job (and paying the employee), and the employee's consideration is their promise to work for the employer. 

But it can also be something detrimental to the promisee, such as a forbearance from doing something they have a right to do. For example, if someone stops you from smoking in your own home, that is a consideration.

Consideration does not have to be a financial investment. In most cases, the courts will not assess the adequacy of the consideration. The parties are free to enter into a bad bargain. Classically, the courts have rules that a “mere peppercorn” can count as consideration. An exception is sometimes made, however,  in the case of employee non-compete agreements, where the courts may consider the adequacy of the consideration.

Intention to create legal relations

To be legally binding, a contract must show an intention to create legal relations. This can be shown by the use of formal language, such as “I agree to…” or “This contract is binding on the parties”. However, intent need not be formalized. It can be inferred from the conduct of the parties. The reason why intent is important is because it demonstrates the seriousness of the parties’ intention to accept both the benefits and the obligations of the agreement.

If one side does not agree to every condition, there is no binding agreement, which is to say that an agreement should be accepted as a whole, considering every specific term. To give an example, if you sign a contract to buy a house and the seller does not agree to one of the terms, there is no contract. The lack of this element might result in the contract being voided. A standard entire agreement clause states that a written contract contains the complete terms, and any prior statements, written or oral, are superseded.

Authority and capacity

Contract law judges the circumstances for a party to contract. Each party to the contract must have the legal capacity to enter into the mutual assent. This indicates that they must be of legal age and have the mental capacity to understand the terms of the contract. If one party does not have the capacity to enter into the contract, the legal document may be void.

A contract is only valid if all of these elements of a valid contract are present. If one element is missing, the contract may be void or unenforceable.

Certainty

To be enforceable, a contract must include certain terms, and the ability to fulfill the essential terms of an agreement must be guaranteed. These terms must be clear and unambiguous.

There are two essential terms in any agreement: the first one is consideration or price to a bargain (something of value given in exchange for something else of value), and price to be paid for the promised obligation (the service to be delivered, the product to be sold, and so on). 

If any of these terms are missing, the contract may be void. For example, if you agree to buy a car for $500, but there is no mention of what kind of car it is, the contract is void because the essential terms are missing. The same goes if you agree to sell your car for $500, but there is no mention of what kind of car it is.

The courts may not enforce a contract if the terms are too vague or uncertain. To give you an idea, if the contract is for the sale of goods, but the parties do not agree on what “goods” are, then the contract is too uncertain to be enforced.

To sum up, it is important to know these seven elements of a contract because they determine whether or not a contract is legally binding. If one or more of these elements is missing, then the contract may be void or unenforceable. This suggests that the parties to the contract will not be held responsible for fulfilling their obligations under the agreement. Also, knowing the seven elements of a contract can help you avoid entering into agreements that are not legally binding.

Find more information to ensure your contractual well-being in Akorda. Visit our website and employ our management services.

Kingsley Martin

Kingsley is a founder of Akorda. He holds law degrees from Oxford University (First Class Honours) and Harvard Law School, and has 30 years of experience in the practice of law, software design and development, strategy, and management. Kingsley pioneered the new discipline called contract analysis. He is a founder of KMStandards and has developed software capable of automatically analyzing legal agreements and creating contract standards.

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THE PROBLEM
Searching through stored contracts
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