Contracts can be created from simple “meeting of the minds” between two individuals but can go as far as requiring complicated documentation to be legally enforceable. Understandably the essential elements of a valid contract will be determined by the nature of the contract. That said we can identify elements which are commonly found and expected in all legally binding contractual agreements. These include an offer, acceptance, intent, capacity, legality, consideration and possibility of performance.
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What Is a Contract?
A contract is a legally binding agreement, verbal or written, that recognises and governs the rights and duties of the parties to the agreement. A contract is legally enforceable because it meets the requirements and approval of the law. An agreement typically involves the exchange of goods, services, money, or promises of any of those. Our definition of a contract gives us a glimpse into some of the essential elements of a valid contract. Let’s take a look at them to gain a deeper understanding of the elements of a valid contract.
Offer And Acceptance
A contract comes in to place when one party makes an offer to another party that is then accepted by the second party. For the offer to be indeed valid it needs to be clear, definite, complete and final. This means it must be communicated to the offeree. Acceptance, on the other hand, must also be clear. Acceptance can be conditional or contingent on another event. As essential elements of a valid contract, the offer and acceptance must when put together constitute a meeting of the minds or consensus ad idem.
Intention To Create a Legal Relationship
Another essential element of a valid contract is the intention of the parties concerned to create a legal relationship. This means that when both the aforementioned offer and acceptance are made there must be clear intent of the parties to create a legally binding relationship. This is, of course, difficult to measure in verbal contracts however a clear intention to perform the what was mentioned must be evident. To understand this we would use what is called the reasonable person assumption; would a reasonable person of sound mind take the words that were expressed (written or verbal) to mean there was intent?
Capacity To Contract
It is an essential element of a contract that the parties involved in the contract possess the capacity to contract. Minors, for example, cannot legally enter into contracts. So a contract entered into with a person under the age of 18 is invalid. Other cases of capacity have to do with the lack of duress when entering into the contract. Duress is when threats, violence, constraints, or other action used to coerce someone into doing something against their will or better judgement. This includes people who are under the influence of drugs or lack mental capacity for other reasons. One must be of sound mind and legal capacity to enter into a valid contract.
Genuine And Free Consent
Genuine consent is an essential element of a valid contract. The consent must be given freely and genuinely so in addition to the lack of duress as mentioned earlier, the consent of both parties must be given freely. There must be no extenuating circumstances whether caused by the other contracting party or an external third party present. Desperate circumstances may cause people to rush into decisions and contracting parties must be certain that other contracting parties are genuinely and freely consenting when entering into a contract.
The intentions of contracting parties must be lawful. It is an essential element of a valid contract whether verbal or written that the purposes of the contract be legal. Parties can therefore not enforce objects in contracts that are illegal and they can render the entire contract void. The earlier example of entering into a contract with a minor illustrates this. The terms of the contract must be such that the intended actions of both contracting parties are legal.
Consideration is also an essential element of a valid contract. Consideration is the provision of something of value in exchange for the object of the contact. The price paid for a car in a car sale contract is an example of consideration. Consideration needs to be legal, paying with prohibited drugs, for example, does not constitute legal consideration. Consideration need not be immediately exchanged, it can be delayed. An example of this is credit sales or hire purchase agreements which spread the payments for the item over future periods. There is no requirement for the value of the consideration to be equivalent to the value of the item being exchanged what is required is the existence of consideration.
Certainty And Possibility Of Performance
A valid contract must have certainty and possibility of performance among its essential elements. Certainty means that a contract must be within the grasp of the reasonable person to understand it. A convoluted contract may be deemed void because it is difficult or impossible to discern the objective of the contract. For the contract to be legally binding the objectives of the parties must be something they can perform. It would not be valid if the contract required one or both of the parties to do something they were not capable of. This includes terms and conditions of contracts which must be clear and understandable.
By law, certain formalities need to be in place for a contract to be considered valid. Property lease agreements, for example, must be in writing. The same goes for sale contracts for motor vehicles which must also be in writing. A contract that does not meet the legal formality threshold for its intention will not be considered valid because it lacks an essential element of a valid contract of its type. Other essential elements of a valid contract of this type include being witnessed by a commissioner of oaths or notary public and registration. In the absence of these legal formalities contracts are void.
These essential elements of valid contracts must be present in all contracts that hold up to the law.