What are the essentials of a valid contract?
You are curious to learn more about the elements of a valid contract?
Perhaps, you heard that there are four essentials of a valid contract, 5 essential or 6 elements of a valid contract and now you are confused.
In this article, we will go over the essentials of a valid contract so you know exactly what is required for a contract to be legally formed and produce binding effects.
Are you ready?
Let’s get started!
The essentials of a valid contract
A contract is a legally binding agreement between two or more parties outlining their rights and obligations.
Contracts must respect the contract laws for it to be validly formed and produce legal effects between the parties.
No matter where you are, for a contract to be properly formed and product legal effects, you must observe certain essential requisites of a contract.
So what are the essential elements of a valid contract?
There are 5 essentials of a valid contract and we will discuss them in detail.
We will also present to you a sixth element we consider crucial when entering into a contract.
Continue reading to find why we say there are 6 elements of a valid contract.
Offer
What is an offer to contract
The element of a valid contract is the offer.
For a contract to come into existence and produce legal effects, a party needs to make an offer containing the essential elements of a contract to be formed to another party.
The person making an offer is called the “offeror” and the person receiving the offer is the “offeree”.
When the offer is accepted by the offeree, at the moment of the acceptance, the contract is legally formed.
Example of an offer to contract
Let’s look at an offer using an example.
Let’s say you are looking to renovate your house.
You will contact a contractor to do the job for you.
To do the job, the contractor will consider your plans, the time and work needed for the job, the cost of material and so on.
Ultimately, the contractor tells you that he can do the job for a total price of $20,000 and it will take about 4 weeks to get the job done.
Right there, you have an offer.
You have an offer as you have the essential elements of a contract to be formed.
Let’s sum up the contractor’s offer:
- Who are the parties: you and contractor
- What is the consideration of the contract: $20,000
- What is the object of the contract: renovation project
- Do you and contractor have legal capacity: yes as you are both of legal age and sound of mind
Based on the above, we have a valid contract.
All we are missing to conclude the contract is your acceptance.
If you accept the offer, you will have a formal and legally binding contract to have your house renovated for $20,000.
What is a promise to contract
You may have heard people talking about a promise to contract.
Is the promise to contract the same as an offer to contract?
The answer is no.
A promise to contract is a type of contractual obligation and not a feature of a valid contract.
In other words, an offer is an essential element to produce a legally binding contract while a promise to contract is an obligation the parties undertake to comply with during the execution of a contract.
Example of a promise to contract
We come across a promise to contract in the context of the purchase of a home or property.
A person looking to buy a property will first make a promise to purchase.
Once the promise to purchase is accepted, the parties will then work on any conditions they’ve outlined in their promise to purchase such as an inspection and bank financing.
Once the conditions are lifted, the parties will have a legal obligation to conclude a purchase or sale agreement.
The promise to purchase imposes an obligation on the parties to enter into a purchase agreement.
Acceptance
The acceptance is when the party receiving an offer accepts the offer.
When there is acceptance of an offer containing all the legal components of a potential contract, the contract is legally formed.
The offer must be accepted as-is or with very minor changes for the contract to be formed.
If I offer you my used computer for $1,000, you must accept to pay me $1,000 for the contract to be formed.
If you say that you’ll accept to buy for $1,000 provided that the latest version of the Windows operating system is installed on it, then we still do not have offer and acceptance.
In fact, in this example, you made a counter-offer.
You, as the initial offeree, become the new offeror and I, the initial offeror, became the new offeree.
If I accept your counter-offer, we will have valid offer and acceptance and therefore a legally binding contract.
When there is an offer and acceptance, we say that there has been a “meeting of the minds” or a “mutual agreement”.
This is to suggest that we have agreed on the terms of a legally binding contract.
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
The consideration of the contract is what the parties obligate themselves to do or to accomplish.
It’s like saying, what’s in it for you and what’s in it for me.
Often, we enter into a contract because we are looking to exchange something of value that we have for something of value that someone has to offer.
For example, if I want to renovate my kitchen, I will hire a contractor who has experience, knowledge and tools in doing such renovation work.
A renovation contract is signed, both parties get something of value in the exchange.
In this example, I have $20,000 but I do not have a renovated kitchen.
The contractor has the knowledge, tools and experience to renovate a kitchen and wants to earn money for it.
By concluding a deal, we each give something of value that we have in exchange for something of value the other has to offer.
Object
The object of the contract is another essential of a valid contract as it relates to contract formation.
When we talk about the object of the contract, we are referring to the purpose or the objective of the contract.
You can have a contract validly formed but violating the law, the object of that contract is therefore illegal.
When the object is illegal, that contract is not valid even though the formation formalities have been respected.
For example, if you purchase a property or a house, the object of the contract is the sale or transfer of the property.
That’s a perfectly legal object.
On the other hand, if someone signs a contract to rob a bank, you’ll quickly see that the object of this contract is certainly not legal.
The contract may have all its essentials to be valid but the law prohibits its object.
Capacity
Element 5 of a valid contract is the capacity of the parties to enter into a contract.
In every jurisdiction, the law defines who has the legal capacity to sign contracts.
Legal capacity is generally acquired to enter into contracts as of the age of majority.
In most countries, it’s the age of 18.
This means that a minor will not have the capacity to enter into a contract unless the law specifically permits it.
However, some countries can set the age of majority to 19, 20 or even 21.
Capacity also includes someone’s mental capacity to enter into a contract.
A person will have the capacity to enter into a contract if he or she is sound of mind.
Someone who is medically inept or is unsound of mind does not have the legal capacity to enter into a contract.
For example, if you just had an important surgery and you are highly medicated, you will not have the capacity at that moment to enter into a contract.
Someone cannot show up at the hospital and have you sign contracts and paperwork.
6 elements of a valid contract
So far, we’ve talked about five elements essential for a valid contract.
If you recall, at the beginning of this article, we talked about a sixth element to consider for a valid contract.
Although this sixth item is not legally essential for a contract to be formed in all cases, in most cases, companies and businesses consider it to be essential and other cases imposed by a specific law.
Written contract
The sixth element we are talking about is to have a written contract.
Legally, a contract can be formed verbally or in writing.
The written form is not essential in most cases unless the law imposes it as a formation requirement.
Otherwise, you can have a valid and legally binding verbal contract.
Nonetheless, in most business transactions, parties will enter into a written contract to protect themselves and ensure it is clear what they are obligating themselves for and what they will be getting in return.
Complex contracts
Simple contracts may not need to be in writing all the time.
Complex contracts will most certainly need to be put in writing to protect the parties even though the written form is not an essential of a valid contract.
Imagine the city entering into a contract to build a bridge.
It will make no sense for the city to enter into a verbal contract with the company offering to build the bridge.
Due to the complexity of this business transaction, companies will not start any work unless they have a contract in place.
Statutorily imposed formalities
So far, we’ve looked at the elements of a valid contract based on general contract laws.
However, you can have specific laws and additional statutory requirements imposing additional elements essential to have a valid and legally binding contract.
For example, consumer laws or consumer protection laws define specific obligations on companies dealing with consumers.
The consumer laws may dictate what a merchant must disclose in a consumer contract for the contract to be valid.
Consumer laws can also require the contract to be in writing for it to be valid.
In other words, consumer laws will expressly rule out the possibility of verbal contracts to protect consumers.
Another example where a law imposes the written contract form for its validity is for registering a lien against a real estate property.
In most jurisdictions, a mortgage, hypothec or lien against a property must be contracted in writing.
Often, the mortgage agreement must also be attested by a lawyer or notary.
Depending on the nature of the contract you are entering into, you’ll need to observe the main elements of a valid contract from a contract law perspective.
You will also need to be mindful of any additional legal obligations imposed by special and specific laws.
Takeaways
In this article, we’ve looked at the essentials of a valid contract.
For a contract to be formed and produce legally binding effects, you’ll need to have the following elements:
- An offer
- Acceptance of the offer
- A consideration
- A legal object
- Partis with legal capacity
We’ve also talked about the written form to be another essential of a valid contract although generally contracts can be legally formed in writing or verbally.
In most business dealings, although the law may not impose the written form as essential for a contract to be formed, businesses will only enter into a commercial transaction upon execution of a signed contract.
In business, the written form of a contract is an essential element.
In other situations, the law will impose the written form of the contract for it to be a valid contract.
For example, consumer protection laws will generally impose contracts to be in writing to protect consumers.
In this context, the contract must be in writing for it to be valid and produce legal effects.
The written form will be an essential requisite of a contract.
We hope this article answered your question as to what are the elements of a valid contract.
Have you entered into a contract where the law imposed a special condition for its formation and validity?
We would love to hear from you.
Drop us a comment!
