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Updated June 2022
Contracts are part and parcel of our everyday life. Everything from buying groceries to closing on a house involves some form of a contract. However, the term contract has a broader meaning than the modern interpretation.
While some contracts are formal, others are implied and unwritten. Knowing the difference is key to navigating through business, employment, and social life. This article explores the subject of contracts and explains the essential elements of a contract.
What Is a Contract?
A contract is a spoken or written agreement between two or more parties that is enforceable. However, for a contract to be legally binding, it must have all the essential elements. A legal contract creates obligations and provides rights for each of the parties involved. Should anyone violate the agreement, the breach is enforceable. Legal contracts can be written, verbal, or a mix of the two. While they are all legally binding, oral agreements are harder to enforce in case of a dispute. It may not be possible to determine the rights and obligations of each party.
Types of Contracts
Today, contracts come in all shapes and forms. Tenancy agreements, employment, and purchase contracts are the most common ones. Although the types are numerous, all contracts you’ll ever encounter fall into one of the following categories before we can dive into the elements of a contract.
1. Bilateral vs. Unilateral
A unilateral contract involves one party making a promise to do something or provide an item of value. The party offering agrees to fulfill the contract when the other party performs the necessary action under the terms. A great example of a unilateral contract is when someone offers a reward for finding a lost person, animal, or item.
On the other hand, a bilateral contract involves two parties agreeing to exchange an item of value or service. Unlike in a unilateral contract, both parties must fulfill their end of the deal. This is why it is sometimes known as a two-sided contract. Bilateral contracts are the most common in business dealings.
2. Executory vs. Executed
An executory contract is one where both parties still have outstanding obligations. It also applies to agreements where there are continuing obligations on both sides.
A lease agreement is a prime example of an executory contract. The tenant has to continue paying rent while the landlord has to keep providing shelter and amenities.
An executed contract is the opposite. Here, both parties have fulfilled their obligations. In other words, they have done everything they promised to do. A buyer paying for an item and walking away with it is an example of such a contract.
3. Void vs. Voidable
Void and voidable contracts may sound similar but mean two different things. A void contract is not legally binding. In short, it is not enforceable in a court of law. It is equivalent to not having a contract at all.
In contrast, a voidable contract is legally binding and fully enforceable. However, either party can opt out of it under certain circumstances. The reasons for voiding may include fraud, dishonesty, or legal disability. Should that happen, the contract is treated like it never existed.
4. Express vs. Implied Contracts
An express contract spells out all the terms of the agreement. Each party knows its rights and obligations before agreeing to it. The terms of the contract can either be written or verbal. A standard warranty is an example of an express contract. An implied contract is where the terms of the agreement are implied. The terms are inferred based on actions, circumstances, or facts that indicate intent to form a contract. Although implied contracts are legally enforceable, they may be voided if it wasn’t clear for either party.
5. Aleatory Contracts
Aleatory contracts are a mutual agreement that is only triggered by the occurrence of an uncertain event.
For this contract to work, at least one party must assume the risk. A prime example of such an arrangement is an insurance policy. The insured doesn’t get compensation unless the insured event occurs.
6. Adhesion Contracts
An adhesion contract is applicable in agreements where one party has more bargaining power than the other.
The weaker party doesn’t get a chance to negotiate the terms. Their only options are to either take it or leave it. However, it doesn’t mean the terms are unfair as such adhesion contracts are legally enforceable.
7. Option Contracts
As the name suggests, options contracts allow the parties to keep their options open. Such contracts will enable a party to enter a similar contract with a separate party later. The parties involved are free to exercise their option. Options contracts are more common in real estate.
8. Unconscionable Contracts
Unconscionable contracts are considered unjust or unfair against one party. Whether a contract is unconscionable or not is a matter often left to the interpretation of the courts. In most cases, the courts will void a contract if a mentally sane person wouldn’t sign.
The Essential Elements of a Contract
If there is a dispute over the fulfillment of a contract, the aggrieved party can seek help from the courts. For an agreement to be enforceable, it must have all the essential elements of a contract.
So what are the characteristics of a binding contract? Here is a comprehensive breakdown of what makes a legally binding contract.
1. The Offer
A contract begins when the other party accepts an offer. An offer is a promise that is to be upheld provided both parties accept the terms. The proposal demonstrates the willingness to enter into negotiations. It is an invitation to the other party to enter into a contract by accepting the offer.
The party that makes the offer is known as the ‘offerer’ while the receiving party is the offeree. In contract law, determining whether there has been an offer can be challenging. The standard is that an offer has to be reasonable enough that the receiving party believes an offer.
The Essentials of an Offer
Offers can be specific or general. It is easy to confuse an offer and an invitation to offer. For instance, an advertisement generally doesn’t contain intentions to form a contract.
Here are the elements of a contract offer that must be present for an offer to be valid:
- The offer must be communicated to the potential offered.
- The intention must be to obtain an asset or service provided by the receiving party.
- There must be a statement that expresses an intention to enter into a contract.
- The language must be clear and contain no uncertainties.
Responding to an Offer
The party receiving the offer can choose to either accept it, reject it, or renegotiate the terms. The minute you accept an offer, you are bound by the terms of the contract. More on acceptance later. But if you are unhappy with the offer, your options are rejecting it or renegotiating.
Negotiating is a give-and-take exercise. When a negotiation changes the terms, the original offer is terminated. The new proposal is presented as a counteroffer. Once everyone is happy with the terms, then they can accept the counteroffer. However, there are situations where negotiations are not an option. In such a situation, the aggrieved party has no choice but to reject it. Termination can also happen if the person does not accept the offer in the stipulated time frame.
Acceptance in contract law refers to the unconditional agreement to the terms of an offer. For an acceptance to be valid, it must be made in the manner requested by the offering party. It may be oral or written, depending on the nature of the contract.
The parties can also convey acceptance through actions. For instance, when handing over cash at the store, you accept an offer. The same goes for when you “confirm an order” from an online store. However, disputes are still possible in acceptance. So what constitutes an acceptance?
Elements of an Acceptance
An acceptance is valid if it meets a certain threshold. Either of the parties can go to court to argue their side of the story. While each situation is different, there is a basic that cuts across the board. Here are the requirements for acceptance.
- Unconditional acceptance: The parties must agree to the terms as they are. If one party suggests alterations, they are no longer accepting the original offer. Such a contract is now in the counteroffer territory.
- The intended offeree must accept it: For an acceptance to be binding, the intended target must agree to it. For instance, someone else cannot accept an offer on your behalf. The only exception is when you give your authority to an agent or representative to act on your behalf.
- Must be communicated: The acceptance has to be expressed either in writing or verbally to the person offering. The form of mode communication should be within the agreed-upon channels.
- Fortunately, with modern tools like Sizle, you can share documents securely and set permissions. Additionally, you can always tell when someone has viewed the contract.
- It must be intentional: The party accepting the offer must be fully aware of their actions. As such, you cannot accidentally accept an offer. You must have been aware of the offer and then knowingly accepted it.
Consideration refers to the act of exchanging something of value. It is the price paid in exchange for fulfilling the promise. For a contract to be valid, the parties must exchange something of value. In most cases, it involves the exchange of money for goods or services. However, consideration doesn’t always have to be monetary.
The contract is still valid one parties exchange rights, responsibilities, and promises. In a unilateral contract, the performance by one party is considered enough consideration. When litigating disputes, courts rarely look at the fairness of consideration.
When Does a Contract Lack Consideration?
However, there are situations when the courts can void a contract due to a lack of considerations. Here are a few examples of situations that don’t count as consideration.
- Past considerations: If the exchange is for past consideration, the contract is automatically void.
A good example is when you voluntarily do something, and later on, someone promises to pay you for it. Should they fail to honor their promise, the court cannot enforce it because they hadn’t told you they would pay you when you did it.
- An existing duty: You cannot exchange something of value if one party already has a current duty. For instance, the guard cannot claim a price for catching a burglar. They are already obligated to do it in their employment contract.
- The promise amounts to a gift: If one is promised something with no strings attached, that is a gift and not a consideration. A good example is if your father promises to buy you a car. If, for whatever reason, they change their mind, such a contract is not enforceable.
4. Legal Capacity
Legal capacity refers to an individual’s ability to act under the law. For a contract to be legally binding, both parties must have the legal capacity to enter into that contract. Generally, anyone whose judgment is not questionable is allowed to enter into a contract. It is assumed that anyone who reached the age of majority has legal capacity unless proven otherwise. In almost every contract, the parties must demonstrate that they understand the terms, consequences, and obligations that come with signing the contract.
Additionally, the person agreeing must do so freely without coercion. The law exempts a group of people from getting into contracts to protect the vulnerable among us. Partly because they may not understand it, or maybe easily coerced or duped into unfair situations. These include;
- Children who are too young to understand, i.e., minors
- People suffering from mental illnesses
- Someone under the influence of drugs
- People who can’t understand the language of the contract.
5. Meeting of The Minds
Under contract law, meeting of the minds is sometimes called signatory awareness or mutually. It simply means that both parties are fully aware that they are entering into a contract. Additionally, they are also aware of the obligations that come with entering the contract.
Courts also look at how the parties entered the contract. For a contract to be binding, each party must have voluntarily agreed to the terms. It is essential that both parties acknowledge that the contract is mutually genuine and each party consents to the terms.
Although signatory awareness seems straightforward, parties can still dispute or even void contracts if they have a different meaning of a word or phrase. In such situations, it is up to the courts to determine if there’s ambiguity.
They determine ambiguity by examining the typical usage of the terms or phrases. If the words can be understood by a reasonable person, then the contract stands. If the use of words and phrases is unusual, the accused party is allowed to explain their intent. The oral explanation is known as parole evidence.
Most contracts today come with an integration clause to avoid such disputes. The clause explains that words used in the contract have no outside meaning. As a result, no party can claim that they misunderstood a word or phrase.
6. Legal elements of a contract
Although everyone is free to enter into a contract with whoever they choose, these contracts don’t exist in a vacuum.
For a contract to be valid, it must obey the laws of the jurisdiction in which they operate. For this reason, any contract on illegal substances or actions is not enforceable.
It doesn’t matter if the parties were not aware of the law banning the action or product. All contracts involving criminal activities are null and void. Contract legality includes both federal and state laws. In most cases, these laws are in alignment.
However, there are unique situations where the state and federal laws don’t agree. In these unique situations, the courts are guided by Article 1 Section 10 Clause 1 of the Constitution. Apart from criminal acts, contracts can be voided for the following reasons.
- Coercion, undue influence: When a party to the contract signs because they were forced, misled, or threatened, such contracts are not enforceable.
- Mistakes: A mistake in the contract causes a loss in value for one of the parties involved in the contract.
- Unconscionability: The terms of the contracts subject a party to oppressive obligations.
- Force Majeure: Circumstance beyond anybody’s reach makes it impossible for one of the parties to fulfill their end of the contract.
Summarising the elements of a contract
Contracts are inevitable no matter your profession. Some like marriage, mortgage, employment, and leases are obvious well-known contracts. Others like verbal contracts are harder to discern.
In most cases, people get into contracts to get something out of it. While it is nice to trust the other party, it is even better to know that the contract is enforceable by the courts, so educate yourself on the elements of a valid contract.
For that to happen, a contract must have all the essential elements including, offer, acceptance, mutuality, capacity, consideration, and legality. Hopefully, this article helps know the vital elements of a contract. Remember, not all agreements are contracts.
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