There are more aspects to a valid contract than just agreeing to some terms and signing a piece of paper. In fact, a valid contract is made up of several elements and, if any of the required elements are missed, the contract could be considered invalid and incapable of being enforced.
A contract is an exchange of an act or promise between two or more individuals or business entities. It involves one party (or a group of parties) offering something of value to another party (or group) as payment for a service, item, action, etc. For instance, a Residential Lease is a contract between a landlord and tenant in which the tenant pays the landlord rent in exchange for a place to live.
In this post, we help prepare you for signing your next legal document by exploring the elements of a valid contract.
Offer and Acceptance
An offer occurs when one party presents something of value that they wish to exchange for something else of value. The offer is usually the terms that make up the contract.
For instance, when a caterer wishes to create a Catering Contract with a client, the offer is the terms of the catering service, which includes the catering schedule and the cost of the service.
After an offer is presented, it can be accepted or declined. Acceptance simply means that the offer presented was accepted.
Offer and acceptance go hand-in-hand, and although acceptance may seem redundant, it is an important element that ensures contracts are not formed without being properly acknowledged, agreed, and accepted.
The interesting thing about acceptance is that it doesn’t need to be said or written to be conveyed; it can be determined through conduct. For instance, if I offered my neighbor $40 to mow my lawn and he mowed my lawn without verbally accepting my agreement, his action suggests he agreed, and I would have to pay him the $40 as promised.
Consideration is essentially the benefit both parties receive for performing the contract (i.e. a service for money). Oftentimes, consideration is money, but it can be a service, an object, or anything else of value. In fact, consideration can even be a right, interest, or benefit.
For instance, if you and your neighbor agree to share access to each other’s backyards, you and your neighbor are offering a right to each other (i.e. the ability to use each other’s backyards). In this case, the consideration is a right, which is being exchanged for another right.
With consideration, remember that past consideration (meaning money, services, or something else that was provided before the offer was made) is typically not valid when forming a contract.
Mutuality or Intention
At some point, you may have heard the phrase “meeting of the minds”. This phrase is typically applied to mutuality or intention and simply means all the parties involved in the contract actually intended to create a valid, enforceable contract.
In business dealings, it is often understood that the parties expected to be bound to a contract, but things can get tricky with promises formed between family and/or friends.
For instance, a son tells his mother that he will tile his mother’s floor over the weekend in exchange for one of her old cars. After the son tiles the floor, the mother refuses to transfer the car’s Bill of Sale to him.
In this example, there is a chance that the mother was joking or humoring her son when she agreed to trade her car as payment. So, although there was an accepted offer and consideration, a court may still be unsure if the mother intended to form an actual contract with her son.
Most often, individuals can avoid uncertainty surrounding intention by putting their contract in writing. In the example above, the son could have created a written Sales Agreement with his mother, which would have demonstrated his mother’s intention regarding the contract.
Legality refers to the subject matter of the contract and whether it is legal. This element may seem unnecessary; however, it simply prevents individuals from trying to form contracts involving unlawful promises or consideration.
For instance, in states where online gambling is illegal, like Utah, an individual would likely be unable to form a contract where they pay someone’s online gambling debts in exchange for a service.
Not everyone is eligible to form a contract, which is where capacity comes in. Capacity means that a person has the legal ability to sign the contract.
It can involve mental capacity, as in the ability to understand the contents of the document (i.e. a sound mind). This can include individuals with cognitive impairments, individuals who are incapacitated, and more.
This does not include individuals who fail to understand the document for no legitimate reason. For example, someone can’t claim they did not have the capacity to sign a contract simply because they didn’t understand a word used in the document.
Capacity can also refer to someone’s ineligibility for other reasons, such as a person’s age, declaration of bankruptcy, or past or current incarceration.
Creating Your Next Contract
It would be easy to think a contract was formed when it was signed, but, as you’ve learned, it’s more complex than that.
When preparing to sign your next contract, ensure you’ve checked off all the essential elements, so you can have peace of mind knowing your contract was formed legitimately.