The Necessary Elements of a Contract | What Are the 7 Elements of a Contract?
Whenever you conduct business, you’ll probably want to rely on legally-binding contracts! An active and up-to-date contract acts as a sort of shield that protects your business from unwanted vulnerabilities. You need to protect your valuable interests and property! How do you draw up a contract that’s binding and legal? You need to be sure it has several essential components. Let’s tackle this question: What are the 7 elements of a contract?
- Offer
- Acceptance
- Capacity
- Intention
- Consideration
- Certainty
- Legality
These are the necessary elements of a contract! If your contract isn’t drafted appropriately, or doesn’t align with the law, you may face issues. The parties who are entering into the contract could dispute the legality or binding nature of the contract. You could also have trouble when it comes time to enforce the terms of the contract in a court of law! During the initial process of crafting your contract, you should include all of these elements in your contract. The goal is to achieve the completion of a contract that is ideally 100% capable of being enforced, if need be.
Offer, Acceptance, Capacity | Elements of a Contract
Offer
Every piece of information pertaining to the exchange between the signing parties has to be crystal clear. The contract must include a promise or proposal agreed upon by the parties named in the agreement. The “what” and “how” of the exchange needs to be outlined. Another way to say this is the contract has to contain an explanation of the nature of the offer. So, what goods or services are being exchanged. When and how those services or goods will be exchanged. The costs associated with the exchange. The responsibility of each party regarding the transaction. And, what the ramifications are for a failure to fulfill the contract’s obligations. All of these should be detailed in the contract! By detailing this information, you’ll more effectively avoid misunderstandings once you start conducting business.
Acceptance
Once the contract has been signed by the involved parties, the acceptance of the terms within the contract are indisputable. Each party’s acceptance of the terms of the agreement should be clear! If not, the inability to prove what’s called “mutual assent” might render the contract unenforceable. As you may know, acceptance is usually established by the signatures of the parties. But, if a contract lacks the necessary elemental formalities, acceptance of the terms could be called into question.
Capacity – Of Sound Mind, Appropriate Age, and/or An Authorized Representative
Capacity
It’s required that any person signing a contract is at least 18 years of age or older. Plus, the signatory has to be of sound mind. That is, they are in possession of a mental capacity to fully comprehend their actions/commitments. You need to figure out if the parties are actually fit to enter into the contract! The signatories must be able to understand the responsibilities in the agreement. Needless to say, you can’t be unconscious or intoxicated by way of any substances at the time you sign the contract.
You’ll also want to be aware of the fact that in many instances representatives of a company sign a contract on their behalf. The capacity element applies to these folks, too! So, if applicable, be positive that the representative is authorized to sign any contract on a company’s behalf, such as by reviewing a Power of Attorney document.
Intention and Consideration | What Are the 7 Elements of a Contract?
Intention
Your written contract should demonstrate clearly the legitimate desire of the parties to enter into a business agreement. This is also called “mutuality.” The parties have to show that they undoubtedly have a wish to conduct business. In association with intention, the contract has to demonstrate that the parties who agree to the terms are fully consenting to the transaction of either goods or services. By having a written contract, you are creating a record of the terms of your agreement which allows you to then prove intention should you need to do so.
Consideration
The contract should contain an explanation of the exact amount of profit each of the parties will receive once their obligations, as described in the contract, are completed. Legal consideration refers to the benefits the parties will receive once their obligations are met. Without consideration, a contract just isn’t valid! If a contract doesn’t have consideration, the agreement is deemed applicable only on a voluntary basis – so you couldn’t enforce the contract in a court of law. Definitely establish the consideration in your contract so that each party knows what they’re going to receive.
Some exceptions do exist, such as deeds, wherein the parties are merely bound to a promise, without consideration. In that case, two parties agree to a transfer of property ownership, but the validity of the transfer doesn’t depend on an exchange of money.
Certainty and Legality – Extremely Important Contract Components
Certainty
The identities of the parties and their obligations are stated in the contract, with clarity. The essential terms of the agreement must be created with certainty to avoid any potential breach of contract. The key parties should be identified along with the commitments they are bound to by the contract. A description of the goods or services being exchanged or provided should be included, for example. You’ll not want to allow room for a “lack of privity,” meaning the contract is only enforceable against or by the parties named on the document, so be sure to state the key parties!!
Legality
The parties are beholden to the laws that apply to the contract based on where the obligations described occur. You need to decide on which laws will apply to the parties! Because different states have different laws, and varying ways of addressing any disputes, this is a big deal! The manner in which the contract is written will be determined by the legality. Typically, a contract is drafted and signed based on the location where the obligations will take place. This is so that the agreement is appropriately safeguarded by the proper local contract law.
If you need anything in the realm of contracts, our team at Stockman & Poropat, PLLC has got you covered! Contact us today for a free consultation.
