Signing a contract is an essential part of any business, regardless of how small the company is. A contract gives you confidence and minimizes risks. 

But what is a contract, and how do you know if you have all the essential elements of a valid contract?

In this guide, you’ll learn the nuances of what makes a valid contract and the various essential elements of a contract. 

Equipped with this information, you can confidently create legally binding agreements even if you don’t have a lawyer on standby.

What is a contract – really?

What is a valid contract

A contract is a verbal or written agreement that enables parties, organizations, and society to work together and jointly pursue their unique goals and objectives. 

They are formally binding agreements that the law will uphold. A contract, then, creates a binding legal commitment.

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Contracts are used by companies to lay the foundation for their business connections and to provide the processes that will govern those interactions. 

With the help of a contract, the parties involved can specify how they will collaborate and how their respective obligations will be upheld.

Essential elements of a valid contract

There are multiple elements that every valid contract must have. If these elements are missing, a contract can be deemed invalid or unenforceable. 

Offer

An offer is the disclosure of conditions to which the person or organization making the offer is ready to be bound. 

When the recipient accepts the offer, it conveys their readiness to abide by certain conditions that will become legally enforceable.

While some offers will propose a promise to act or not act in a particular way for a commitment to serve in the same way.

Others will expect a promise for a distinct form of action.

Simply put, an offer is a pledge, made orally or in writing, to do something or refrain from doing something in return for some conditions. 

In any case, the offer should be a good one so that people will be interested in coming to the bargaining table.

Pre-offer negotiations are distinguished from genuine offers by the courts according to whether or not there was an intention to create a contract. 

When parties reply to each other’s inquiries or invites, a contract is not made.

When discussing how to distinguish between pre-offer negotiations and offers, advertisements come up frequently. 

A company is not legally obligated to get into a deal with anybody who might have seen its advertisement.

Only when an offer has essential contract elements can it be legally binding. These things will change based on the issue. 

But as an illustration, if you were planning to sell your house and create a contract for yourself and the purchaser.

It would need information such as the transaction date, the house’s cost, the terms of payment, and a complete description of the house. 

The “contract” can be regarded as an advertisement if the conditions of a particular contract are not satisfied in the offer.

Someone may withdraw their offer under the following conditions: 

  • It must be canceled before the offer is accepted. 
  • The recipient of the offer must be informed before it’s withdrawn.

If an offer is withdrawn or rejected, the recipient loses the right to accept it, and the one making the offer is released from responsibility for the terms set forth. 

If the recipient makes a counteroffer, rejection may be inferred or manifest as an apparent refusal.

The offer will last until its end date or for a long time if an offer is not rejected. 

This is decided by how long a sensible individual would take to accept or reject the offer. 

Irrespective of how much time has passed, an offer is terminated upon the demise or insanity of any of the parties.

Acceptance of offer

Although it may appear redundant, acceptance is a crucial component that guarantees contracts are not made without being adequately acknowledged, agreed upon, and accepted. 

Acceptance of an offer signifies agreement to abide by all key clauses of the contract. The offer must be accepted in the way that is indicated in the offer. 

The offer must be accepted in a manner deemed acceptable for that particular circumstance if no precise measures are provided.

Offers can be accepted through conduct as well as verbal acceptance. 

If an individual accepts an offer but does so under conditions that differ from those of the initial offer, it’s considered a counteroffer

For an acceptance to be valid, three conditions must be met: 

  • The recipient is aware of it. 
  • The recipient conveys their desire to accept the proposal. 
  • Acceptance is defined as agreement with the terms of the offer.

Certain offers can only be accepted if the offeree does or does not do a particular act. These are referred to as unilateral contracts. 

A unilateral contract is a legally enforceable agreement where the one making an offer keeps their promise (often payment) upon completing a specific act. 

Bilateral agreements, in contrast, contain obligations for both parties to carry out.

It’s also crucial to consider the timing of the offer when it comes to the offeror’s right to rescind it. On this topic, courts are divided. 

The minority contends that the acceptance of the offer is valid at the time of approval.

Whereas the majority maintains that it is valid when transmitted to the offeree.

Accepting a proposal means approving it on its whole, exactly as it is. A counteroffer is made if the offeree modifies the initial offer. 

As a result, they would send a counteroffer instead of accepting the initial one, rendering the first offer invalid.

Consideration

Consideration is the benefit received by both parties for upholding the terms of the agreement). Consideration is often cash. 

However, it can also be a good, a service, or something of worth (worth as defined by the signatories to the contract).

valid contracts

Consideration is simply the exchange of an item for another. A contract requires that both parties exchange something of worth that compels the other to accept it. 

Consideration does not include voluntary action. Let’s say your neighbor decided to help you clear your garbage when they were full. 

You thank them and give them fifteen dollars for their help. 

If your neighbor repeats the same behavior the following week, they cannot lawfully demand payment from you since they are acting voluntarily.

The court will also not regard someone’s activities as a consideration if they only carry out one of their regular responsibilities.

In some situations, one party may merely depend on a prior promise to supply value instead of providing compensation. 

Promissory estoppel is a legal theory that indicates a promise can be enforceable by law. 

Legality

Legality relates to the contract’s focus and its legitimacy. 

This clause might appear needless, but it prevents people from trying to get into agreements with false promises or payment.

This section is relatively simple. The validity of a contract is determined by how closely the terms and conditions adhere to the law. 

The contract is not enforceable if the subject matter is unlawful. Only legally valid purposes may be used to draft legally binding agreements.

For instance, you and Tony could create a binding agreement in which you agree to pay Tony to tile your home. 

But you cannot agree with Tony to pay him to rob a store in a contract. The contract is invalid due to the illegal nature of its focus. 

Keep in mind that some contracts may be technically legal but they’re not enforceable in court. There are many factors that can come into play here such as the request being impossible. 

For example, a contract stating that one party would need to fly the other party to Mars would be impossible due to our current technology. 

Something more reasonable would be a shipment that was lost at sea due to sudden severe weather. There would be no way for the person or organization shipping the goods to get them to the recipient because they were destroyed in the storm. 

Another unenforceable contract could be an employer making an employee sign that they will never take leave/vacation. This isn’t impossible but goes against public policy or the laws of the land. 

Signer’s capacity

The signer’s capacity is a crucial element of a valid contract since not everyone is qualified to get into a contract. 

Capacity denotes the possession of the ability to enter into the contract.

Minors, people with mental disabilities, and those who are intoxicated are among the groups who are not legally capable of agreeing. 

An individual lacks contractual capacity if they fit into any of these categories.

Not having a signer’s capacity isn’t limited to the parties mentioned above, a legally incompetent party also doesn’t have a signer’s capacity. 

This indicates that they are unqualified to carry out the activities for which they are contracting.

An agreement entered into by an individual who doesn’t have contractual capacity is voidable.

This implies that the individual who doesn’t have contractual capacity has the right to revoke the contract at any moment or choose to let it continue. 

The right to nullify an agreement shields someone without legal authority from being obligated to the party they entered a contract.

Meeting of the minds

A contract requires a meeting of minds between the parties to be enforceable or valid. 

Meetings of the minds is when the parties are aware of the agreements made in the contract and have reached a consensus.

Once a consensus has been reached, and a contract has been made after a meeting of the minds, it might be challenging to question it. 

The court may be asked to interpret the terms of a contract and its objectives if there are any contract-related questions, disputes, or legal actions.

You should consult a professional and understand the terms of a contract before signing it.

Is a written contract required?

A contract requires the following two elements to be enforceable and valid: 

  • All parties agree; that is, the other party accepts the offer the first party made. 
  • A valuable item must be exchanged.

In a few circumstances, an agreement must be in writing to be enforceable. 

Real estate contracts and agreements lasting over a year must be in writing, according to some laws. 

Review your state’s regulations before establishing a contract to discover if written paperwork is required for it to be enforceable.

It’s always a good idea to have a contract in written form and signed, even if your state law allows oral agreements. 

Most times, you could miss out on crucial information in a verbal agreement, and this seldom happens in a written agreement.

Elements of a valid contract

Final thoughts

We hope you grasp what makes up the elements of a valid contract valid and can identify the essentials of a valid contract from this guide. 

If you are trying to create a valid contract for your organization, you can use our free contract templates, which span dozens of categories and can help you slash the time it takes to draft your agreement. Also, take advantage of our electronic signature software to ensure your valid contract is signed with a valid signature.