Contracts are legally binding agreements between two or more parties that consist of a mutual exchange of promises with terms and conditions that are understood by both parties. They are a part of most commercial transactions so it is important that they are constructed with all the necessary information to make sure they are legally valid. While they very in terms and complexity, the formation of a valid contract must include specific essential elements. These specific elements are:

• Offer
• Acceptance
• Meeting of the Minds
• Consideration
• Capacity
• Legality

Offer

The offer is the first element of a contract. It is a proposal from one party to another that lays out the duties and responsibilities of each party entering into the contract. The offer element sets the foundation of the contract, and the terms should be clear and definite.

Acceptance

The second essential element of a contract is acceptance. Without acceptance, there will be no contract. This element means the parties have come to an agreement and will be legally bound by the contract terms. Generally speaking, for the contract to be binding, the offeree must accept the offer. If the offeree counter-offers, the original offer is void. Acceptance can be either written, oral, or inferred by the offeree’s actions.

Meeting of the Minds

Both parties must have a clear understanding of all the material terms and conditions they are agreeing to in the contract. They must both be active participants in the contract and fully understand what they are both getting into. If this is not established, then a contract may not be enforceable. Both parties must freely agree to the contract otherwise the contract could be considered invalid if one of the parties can prove that they were made to sign under duress, fraud, or misrepresentation.

Consideration

Contractual consideration is an essential part of a contract because it is the value exchanged between both parties which they have agreed upon. The value could be money, goods, services, or property. It is essentially what both parties promise to do (or not to do) and something both parties bargained for. There are two types of consideration. They are:

*Executed Consideration: This is when the promises of the contract are delivered immediately. As in delivery of goods or services at the time of payment.

*Executory Consideration: These are the promises performed in the future. For example, you pay an amount to a seller with the promise that they will transfer ownership to you.

Capacity

All parties signing the contract must demonstrate that they are legally able to enter into the contract before they sign it. This is considered “legal capacity” and if one of the parties does not have the capacity to enter into the contract, the document may be void. Individuals that may not have the legal capacity to enter a contract could fall under the following categories:

• Being a minor;
• An individual under the influence of drugs or alcohol;
• An individual with a mental disability; and/or,
• An individual that is unable to understand the language in the contract.

Legality

All contracts are subject to the laws of the jurisdiction that controls their enforcement. Contracts must be legal and not violate any laws including federal, state, or local laws. A contract whose subject matter involves an illegal activity is not legally valid.

It is imperative to understand these essential elements of a contract when entering into any transaction. It would be advisable to seek legal counsel when entering into a contract to ensure the agreement is enforceable.

Written by Beier Howlett

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