By Kimberlee Leonard Updated February 04, 2019
Contracts are part of doing business. There are contracts with partners and vendors, and there are employment contracts. Most business owners don't have an attorney on retainer to look at every single contract that come across their desks. Because of this, it is important for business owners to understand the elements of a contract that make it legal and binding. Even though there are many other components that a contract can have, there are five requirements for a document to be a legal contract.
Tip
The five requirements for creating a valid contract are an offer, acceptance, consideration, competency and legal intent.
The Offer: Would You Like to ...?
The offer is the "why" of the contract, or what a party agrees to either do or not to do upon signing the contract. For example, in a real estate contract, the seller will offer to sell the property to the buyer for a certain price. The offer must be clearly stated so that all parties understand what the expectations are. In this example, the property is identified by address and perhaps also by the county assessor's parcel number, and the price would be written clearly in the contract.
If the offer is not clear, then the contract may not be specific enough for a court to enforce.
Acceptance: I Agree to Your Offer
Acceptance is exactly what it sounds like: the person receiving the offer agrees to the conditions of the offer. Acceptance must be voluntary. This means that a person who signs a contract when a gun is pointed directly at him is legally not able to accept the offer, because he is under duress.
This is an extreme example but there are situations in which one party is being blackmailed or threatened in other ways so that he is unable to complete and sign the contract. These are not legally binding. The parties must be mutually bound and agree to the terms of the contract without outside factors influencing the acceptance of the offer.
Consideration: Who is Paying What?
Consideration is what one party will "pay" to complete the contract. Payment is a loose term when defining consideration in a contract, because what a party gets for signing the contract isn't always money. So while a real estate contract might say the property will change hands for $1 million as the consideration, a tenant may get a place to live for the consideration of improvements to the property while living there.
Ultimately, consideration is considered something of value and usually, it's a defined monetary amount. But if you offer to provide your knowledge and expertise to an employer, you would still be giving consideration.
Legal Intent: We Intend this Agreement to be Legally Binding
This requirement for a contract refers to the intention of each party. Often, friends and family members will come to a loose arrangement but they never intend for it to be legally binding, that is, they do not intend that one person could sue the other if someone does not do what they said they would do. This type of agreement is not a valid contract because there is no legal intent.
Another aspect here is that the contract terms must adhere to the laws and regulations in the state where the contract exists. An example of an illegal contract is if a person signs a contract to rob a bank. Robbing a bank is not a lawful action and thus the contract does not have legal intent.
Competency: Parties Must Know What They're Doing
Those signing the contract and entering into the contract agreement must be competent. This means that they are of legal age to sign a contract; they have the mental capacity to understand what they are signing; and they are not impaired at the time of signing – meaning they are not under the influence of drugs or alcohol.
Although "competent parties" is a requirement for any legal contract, it is highly scrutinized in contracts dealing with senior citizens or disabled persons. A person suffering from dementia might not be mentally competent to sign a contract to sell his property to another party.
FAQs
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality. In some states, elements of consideration can be satisfied by a valid substitute.
What are the 5 essential elements of a contract? ›
- The Offer.
- Acceptance.
- Consideration.
- Mutuality of Obligation.
- Competency and Capacity.
- Other Considerations.
- Types of Contracts.
- Why Are Contracts Necessary?
To be valid, an oral contract must contain all of the following elements, which are required in any other type of contract:
- Offer. The offer is the promise to do something—or to not do something—in exchange for what the other party is providing.
- Acceptance. ...
- Consideration. ...
- Meeting of the minds. ...
- Legally enforceable.
Match
- Offer.
- Acceptance.
- Consideration.
- Capacity.
- Lawful Purpose.
Contracts can be verbal or in writing and must contain five parts in order to be legally binding (i.e. legally enforceable); there must be:
- an offer.
- acceptance of the offer.
- consideration (something given in return, e.g. payment or transfer of ownership)
- an intention to form legal relations.
- certainty of terms.
For that to happen, a contract must have all the essential elements including, offer, acceptance, mutuality, capacity, consideration, and legality.
What 4 elements make a contract? ›
The fundamental elements required to make a contract legally enforceable in the US include a valid offer and acceptance, sufficient consideration, capacity, and legality.
What are the 4 elements that must be presented in a contract? ›
To be valid, a contract must generally contain all of the following elements:
- Offer.
- Acceptance.
- Consideration.
- Legality.
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.
What is a requirements type contract? ›
A requirements contract provides for filling all actual purchase requirements of designated Government activities for supplies or services during a specified contract period (from one contractor), with deliveries or performance to be scheduled by placing orders with the contractor.
Elements of a Contract
- Offer - One of the parties made a promise to do or refrain from doing some specified action in the future.
- Consideration - Something of value was promised in exchange for the specified action or nonaction. ...
- Acceptance - The offer was accepted unambiguously.
Essential Elements of a contract:
- Offer And Acceptance. A Contract always involves two or more parties where one proposes and other accepts. ...
- Lawful Consideration. ...
- Intention Of Giving Rise To Legal Obligations. ...
- Capacity. ...
- Free Consent. ...
- Lawful Object. ...
- Agreements Not Expressly Declared Void. ...
- Possibility Of Performance.
Characteristics of a contract. There are three essential components of any contract: the offer, the acceptance, and the consideration. If all three of these characteristics aren't present, a document is not considered a contract.
What are the contents of a contract? ›
Certain essential elements must be present before a written contract is binding, including: identification (names) of the parties, the purpose of the agreement, a detailed statement of the rights and obligations of each party, what each party is giving (e.g., money, products, or services) in exchange for what they're ...
What are the 3 most important elements requirements for forming a contract? ›
The Three Elements of an Enforceable Business Contract
- The Offer. The first element of a valid contract is an offer. One party makes an offer to another party. ...
- The Acceptance. When an offer is made by one party, the offer must be accepted by the other party for the contract to be valid. ...
- Consideration.
Contract Types Comparison
| Party 1 offers |
|---|
| Bilateral | Services or goods that are of value to the other party |
| Unilateral | Services or goods that the other party requested, usually in an open request |
| Implied | Services or goods |
| Express | Anything |
9 more rowsJan 26, 2022
- Lump Sum or Fixed Price Contract Type.
- Cost Plus Contracts.
- Time and Material Contracts When Scope is Not Clear.
- Unit Pricing Contracts.
- Bilateral Contract.
- Unilateral Contract.
- Implied Contracts.
- Express Contracts.
For example, a grocery store might enter into a contract with the farmer who grows oranges under which the farmer would supply the grocery store with as many oranges as the store could sell.
What are the 7 essential elements of a contract everything you need to know? ›
There are 7 essential elements an agreement must have to be considered a valid contract. The elements of a contract include identification, offer, acceptance, consideration, meeting of the minds, competency and capacity, and legality. Preferably, the document will be in writing.
What can make a contract null and void? ›
Coercion or undue influence. Withheld or misrepresented information. Breach of contract by one or more parties. One or more parties lacks the capacity to enter into the contract.
The right to transfer ownership rights. The right to be the exclusive purchaser or seller. The right to exclusive ownership or use of a brand, product, or material. The right to timely and full monetary payment.
What are the 3 most basic elements requirements of a contract? ›
Elements of a Contract
- Offer - One of the parties made a promise to do or refrain from doing some specified action in the future.
- Consideration - Something of value was promised in exchange for the specified action or nonaction. ...
- Acceptance - The offer was accepted unambiguously.
Contracts are made up of three basic parts – an offer, an acceptance and consideration. The offer and acceptance are what the purpose of the agreement is between the parties.
What makes a contract not valid? ›
If the subject matter is illegal, the contract will not be valid. All terms of your contract must not contravene any federal or state law. If the formation or performance of the contract will require a party to break the law, the contract is invalid.
What makes a contract unenforceable? ›
A contract can be declared unenforceable if a court is convinced that coercion was used to facilitate the signing. An example would be if blackmail was used as leverage to facilitate the contract. Courts can also declare a contract unenforceable when one of the parties to the contract has undue influence on the other.
What makes a contract legally binding? ›
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality. In some states, elements of consideration can be satisfied by a valid substitute.
What makes a contract void? ›
A contract may be deemed void if the agreement is not enforceable as it was originally written. In such instances, void contracts (also referred to as "void agreements"), involve agreements that are either illegal in nature or in violation of fairness or public policy.
What are the 7 law of contract? ›
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.
Which rights Cannot be waived? ›
Reminder: Statutory Wage and Hour Rights Cannot Be Waived.
