What are the elements of a contract?
How many elements are there?
In this article, we will break down the elements of a contract so you know all there is about it.
Are you ready?
Let’s get started!
What does “element of a contract” mean?
A contract is a legally binding agreement between private parties creating mutually enforceable obligations.
For a contract to be legally binding, it must respect certain essential elements.
The basic elements of a contract are:
- Written document (in some cases)
You have a legally enforceable and binding contract when its formation elements observe the application contract laws.
What are the elements of a contract?
The USLegal defines elements of a valid contract as follows:
“The requisite elements that must be established to demonstrate the formation of a legally binding contract are (1) offer; (2) acceptance; (3) consideration; (4) mutuality of obligation; (5) competency and capacity; and, in certain circumstances, (6) a written instrument.”
There are five elements required at all times to form a contract and in some cases there are 6 elements of a contract if we consider the written document or instrument.
Let’s look at the basic elements of a contract one by one.
The offer is one of the first components of a contract.
A contract will always start with a party making an offer to another.
The offer to contract is the proposal made by one person or company to another showing the intention of entering into a valid contract.
Essentially, when a person or company makes an offer to another person, they are demonstrating their willingness to enter into a contract and be bound by the terms and conditions they’ve outlined in their offer.
The person making the offer is generally called the “offeror”.
It’s important that an offer be clear as to its purpose and objective so that there is no ambiguity of the parties’ obligation should the offer be accepted.
Let’s look at a few legal concepts related to an offer.
Invitation to treat
An invitation to treat is not the same thing as an offer.
For example, a person listing his or her car for sale online is not making an offer, you are making an offer to treat.
What you are doing is inviting people interested in your car to make you an offer to buy.
When you are making an invitation to treat, someone can make you an offer to buy but you do not have any obligation to accept the offer.
On the other hand, if you make an offer to someone and the other party accepts, you are legally bound in a contract.
A counter-offer is when a person who receives an offer rejects the offer made, modifies the offer terms and makes an offer to the original offeror.
From a legal perspective, the original offeror is freed from his or her offer, the original offeree becomes the new offeror.
With a counter-offer, the original offeror becoming the offeree now has the ability to accept the counter-offer or reject it.
For example, a person makes an offer to purchase a house for $300,000, the offeree rejects the offer and makes a counter-offer at $325,000.
Now the original offeror has become the offeree and can accept to purchase the house for $325,000.
In business, contractual parties may have many pre-offer negotiations.
A pre-offer negotiation is a process where parties are learning about one another, understanding their products and services and are exchange information or material with respect to what they can do or even potentially commit to.
The parties can even exchange contract drafts to read and comment.
The pre-offer negotiations do not represent a formal offer as the parties do not have a clear and unambiguous intention to form a legally binding contract.
They are in discussion to eventually reach a point where they sign a contract.
The acceptance of the offer is when the offeree accepts the offer made by the offeror.
The acceptance is generally on the entire elements of the offer and does not have any conditions associated to it.
When the offeree accepts the offer, from a legal point of view, the contract is formed.
A contract cannot legally exist without the offeree accepting the terms of the offer.
There are three elements to a proper acceptance:
- The offeree must be made aware of the offer
- The offeree communicates his or her intention to accept the offer
- The offeree confirms his or her acceptance of the offer
When you have a meeting of the minds, it means that the offeror understood what he or she was offering, understood that the offer was to demonstrate a willingness to be legally bound by a contract, the offeree understood the offer and accepted to be legally bound by its terms as well.
Acceptance should be clearly communicated to the offeror.
When you have mutual consent, you have a valid contract.
Mirror Image Rule
Be sure to check out our article on the mirror image rule representing a common law principle that a contract is formed when the acceptance is the “mirror” of the offer.
Consideration is an important element for a contract to be considered valid and enforceable.
Consideration is the reason why the parties entered into the contract.
What is the value or benefit that each party receives in contracting with the other?
For example, when you purchase an automobile, you agree to pay $30,000 in exchange for an automobile that suits your needs.
For you, the consideration is the automobile.
For the car dealer, the consideration is $30,000 or the cash value of the car.
Each party to this contract will benefit by performing hir or her obligations.
The car dealer will benefit by getting $30,000 provided it delivers a car and you will benefit by getting a car provided you pay $30,000.
The consideration can be anything really.
Consideration can be the purpose, price, object, service, a commitment to do something, a commitment not to do something or anything a party gets value from.
It’s important to note that past considerations or things that a party may have done in the past for another on a voluntary basis cannot form a consideration of a contract.
When a contract is formed, the consideration that is outlined in the offer is the sole consideration of the contract.
A party cannot accept the offer and include past considerations.
If past considerations are important to a party, they must reject the offer and make a counter-claim to include past considerations.
Promissory estoppel is when a party induces another party to do something and the other party performs an obligation on the basis of the reasonable promise made by the other party.
If the party making a promise fails to act on that promise, the party who performed an obligation can invoke the theory of promissory estoppel to enforce the original promise or get damages.
Contractual capacity is also referred to as contractual competence.
Capacity is one of the essential elements of a contract.
To enter into a contract, the person or contractual parties must have the legal capacity to do so.
In other words, you have legal capacity when you are of legal age (in many jurisdictions the age of majority is 18).
You have legal capacity when you are mentally sound of mind.
A person having a mental incapacity or mental illness will not have the legal capacity to enter into a contract.
This is evident as the person may not have the ability to properly assess the benefits and risks associated to the contract.
For example, if a person is mentally inept and in the hospital, even if he or she signs a proper contract with all the essential elements observed under contract law, the contract will not be legally enforceable as the person did not have the mental capacity to sign the contract.
Proper mental capacity is required to enter into a contract.
Contracts with minors will not be enforceable in law.
A minor child does not have the legal capacity to enter into a contract.
Generally, the child’s guardian or tutor will need to act on behalf of the child.
In each jurisdiction, the law may allow a minor to enter into a contract in limited situations.
For example, in the United States, some states will allow a minor child to enter into a contract for goods and services necessary for the child’s health, education, comfort and subsistence.
Technically speaking, a person under the influence of drugs or alcohol does not have the mental capacity to enter into a contract.
What happens if a person was voluntarily intoxicated and enters into a contract?
Can that contract be cancelled or voided?
It may not be possible.
The courts must balance the enforceability of contracts on the one hand and protect individuals against abuse on the other hand.
When a person is mentally inept due to an illness, the courts will have less hesitation in voiding the contract.
However, if a person was voluntarily intoxicated, the courts may confirm the contract as valid so that people take responsibility and accountability for their actions.
If the courts allow an intoxicated person to easily cancel a contract, the courts may get flooded with contract cancellation claims thereby undermining the enforceability of contracts.
The contract can be valid and legally enforceable when its purpose is lawful.
In other words, the subject-matter of the contract must be for a legal purpose.
For example, if you are selling your automobile, that purpose is perfectly legal.
However, if you enter into a contract to sell illegal drugs or important illegal products into the country, the purpose of the contract is not legal.
The written document can be considered as the sixth element of a legally binding contract.
Fundamentally, contracts can be verbal or in writing.
The written instrument is normally not an essential element of a contract.
However, we outline the written document as an essential element for two reasons.
The first reason is that for some type of contract the law imposes the written instrument.
For example, the sale of a house requires a written instrument.
You cannot sell your house based on a verbal agreement.
To officialize a sale of your house, you must ensure that the buyer and the seller enter into a written instrument.
The second reason why we consider the written document as part of the 6 elements of a contract is that in business, most companies will transact with one another on the basis of a written contract.
It’s a good practice to enter into a contract when you have complex obligations or long-term commitments.
Having a written contract is also crucial for being able to make the evidence of the contract in court should there be a breach of contract.
Frequently asked questions
When does a contract exist?
A contract will legally exist when the offeree accepts the offer made by the offeror.
At the precise moment when the acceptance of the offeree is communicated to the offeror, you have a legal contract.
The offeree must communicate his or her acceptance in a clear and unambiguous way.
In other words, the silence of a person does not imply acceptance for a contract to be formed.
What is the contractual intent?
The contractual intent is a person’s intention to enter into a contract.
For a contract to be valid, both parties must have a mutual understanding that they are committing themselves to certain obligations under a contract.
For example, if you are looking to sell your automobile and a person is truly interested in buying your automobile, a contract between the two of you will be valid and enforceable.
However, if a person threatens another person to sign a contract failure of which they will hurt someone or cause damages to them, the person signing under duress or pressure does not have a contractual intent.
As a result, even if the contract is signed, the contract is voidable due to the lack of proper “acceptance”.
There is contractual intent when there is a real and genuine acceptance of an offer.
Unilateral contract versus bilateral contracts
A bilateral contract is when both parties to a contract commit to correlative obligations towards one another.
Party A will do something in exchange for Party B to do something in return.
Most of the time, contracts are bilateral or the obligations are mutual.
There may be varying degrees of mutuality of obligations but the moment both parties have obligations towards one another, you can consider that contract to be bilateral.
A unilateral contract is when one party to a contract has an obligation towards the other without getting anything in return.
For example, a person may sign a unilateral non-disclosure agreement.
Under this agreement, only one party has confidentiality obligations towards the other.
This is an example of a unilateral contract as one party will have legal obligations towards the other.
Does a contract have to be in writing?
In most cases, a contract does not have to be in writing.
However, in some cases, the law requires that the parties enter into a contract in written contract.
For example, under most consumer protection laws, a merchant must enter into a written contract with a consumer.
The failure to observe the requirements of the consumer protection laws will result in the consumer having the ability to void the contract.
What are the 7 elements of a contract?
In some cases, some consider that there are 7 elements of a contract although we are referring to 6 elements in this article.
The seventh element is essentially the “meeting of the minds”, “consent” or “mutual assent”.
When a party makes an offer to another, the offeree must truly accept the offer so the parties end up in a proper and legally binding contract.
The intention of both parties to accept to enter into a contract is what’s referred to as the mutual asset or the mutual agreement.
However, if a party was forced to enter into a contract or was threatened to be killed, even if the person signed a contract, the person did not have a true, sincere and clear intention to enter into a contract.
In the absence of mutual agreement (consensus ad idem), a contract is voidable.
As a result, if you consider the parties “intention” to enter into a contract, you can consider that there are 7 elements to form a contract.