Essential Contract Elements and Formation Components
Last Updated January 27, 2015
The importance of contracts in the business environment cannot be overstated. Contracts, especially written ones, define expectations of both parties and how negative situations will be resolved. Formal written contracts are legally enforceable and they can ensure the protection of rights and resources for everyone involved.
Not all contracts, however, are solidly constructed. Courts can void a contract not only when they suspect deliberate malfeasance by one or more parties, but also when there is a lack of clarity or when errors are found in the stipulations.
To help ensure your contract is ironclad, consider the following elements commonly associated with formal agreements.
Offer and acceptance
A contract is formed when an offer by one party is accepted by the other party. This offer must not be mistaken with a willingness to deal or negotiate. An offer is a definite promise to be upheld, provided the precise terms of the offer are accepted.
A person can withdraw the offer that has been proposed before that offer is accepted. For withdrawal to be effective, the person who has proposed the offer must communicate to the other party that the offer has been withdrawn. Conversely, acceptance must be unequivocal and communicated to the other party.
Intention to create legal relations
A contract would be a mere informal agreement without the intention of both parties to enter into a legally binding relationship. While rarely stated explicitly, this can generally be presumed from the circumstances in which the agreement was made. Contracts by their nature are disputable in a court of law, whereas a simple agreement is not considered rebuttable unless it can be proved that both parties did intend to enter into a legally binding agreement.
Consideration is the price paid for the promise of the other party. The price may not involve money; it may be some right, interest or benefit going to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party. Courts will not question the adequacy of the consideration in a contract, as long as it is something of some value and is not illegal or impossible to provide.
Valid contracts involve parties whose judgments are not categorically questioned. The following list represents groups of people whose consent, and therefore legal capacity, could be challenged:
- People with mental impairments
- Young people (minors under the age of 18)
- Corporations (people acting on behalf of a company)
Only where proper consent has been given is there a contract that is binding upon the parties. Proper consent can be compromised by any of the following matters:
- False statements
- Undue influence (taking unfair advantage of an exposed weakness)
Illegal and void contracts
The extent to which a contract is illegal can affect how enforceable it is. Contracts absolutely prohibited by law are void and therefore not enforced by courts, but there are many less decisive ways in which a contract can be in breach of the law, including cases where an otherwise legal contract is performed by one of the parties in an illegal manner.
In common law, certain types of contracts are illegal because they are contrary to the public good. These are not severable and are generally unenforceable by either party. They include contracts:
- to commit a crime, a tort or a fraud
- that are sexually immoral
- that prejudice public safety, including good relations with other states or countries
- that prejudice the administration of justice
- that tend to promote corruption in public life
- to defraud the revenue
Other types of contracts are considered void in common law, which are severable so other valid parts of the contract might be saved. These include contracts:
- to oust the jurisdictions of the courts
- prejudicial to the status of marriage
- in restraint of trade (unless the restraint is reasonable both between the parties and in the public interest)
Other kinds of conduct that could affect the enforceability of a contract are covered by the American Civil Liberties Union, which prohibits misleading or deceptive conduct, unconscionable conduct and misrepresentation in particular matters.
Proper deference to these considerations, by all parties involved, will help ensure a contract does what all good arrangements should do: keep people out of the courtroom, because each party is satisfied with the agreement and focused on accomplishing mutual goals that prompted the contract in the first place.