What are the Essential Elements of a Contract?
If you have entered into an agreement with another party, it is important to ensure your contract is valid, and will protect you in any circumstance. Although an agreement can be made through oral conversation, emails, or letters, a written contract will not only confirm the existence of an agreement but set out exactly what the terms of the agreement are. Should disputes regarding the agreement arise, a clearly set out, written contract will act as an essential avenue in protecting you and your business.
There are several contract elements that must be addressed to ensure that the contract is enforceable.
Offer and Acceptance
The foundation for an agreement is an offer and acceptance between involved parties.
An offer is simply an enticement by one party to provide something to another party in exchange for something else.
An offer may be terminated under five circumstances:
- Where an offer is withdrawn prior to acceptance;
- Failure to accept on time;
- Rejection of offer by the offeree;
- Death of the offeror; or
- Failure of consideration.
The person to whom an offer is made (“the offeree”) may accept an offer in multiple ways, whether it be orally, written or accepted by conduct. However, for the acceptance to be valid it must be clearly communicated to the offeree. It is not presumed that a party has accepted an offer merely because they have not explicitly rejected it. Generally, an acceptance is sufficient when it is deemed to be received by the offeror, whether they have read it or not. In terms of non-instantaneous communication, such as by post, acceptance is deemed sufficient from the moment the acceptance is posted.
Consideration is another essential term of a contract. At its most basic, consideration is an exchange of promises between the person making the offer and the person accepting the offer. For example, a promise by the offeror to do something in exchange for a payment by the person accepting the offer.
Intention to Create Legal Relations
A contract between parties will only exist if, from the perspective of the ordinary reasonable person, there was intent between both parties to form a legally binding agreement.
Usually, if there is consideration this will establish such intent, however other factors, such as the relationship between parties, must also be considered. While the relationship between parties will not carry a legal presumption in court, it is generally considered that domestic and social agreements will not have an intention to create legal relations, while a commercial agreement will.
Sometimes there may be a question as to whether a party to a contract has legal capacity. Some examples of whether a party to a contract has legal capacity:
A contract made by a minor (a person under the age of 18 years) is voidable unless it is beneficial to the minor or a contract for necessities which is binding on both parties.
- Mentally Impaired Individuals
A contract will be voidable where a party, as a result of mental disability or incapacity, is unable to understand the nature of the contract, provided that the other party either knew, or ought to have known the existence of such impairment.
Another essential element of a contract is consent, that is, parties must have entered into the contract on their own free will. Genuine consent may be impacted by several factors.
- Undue Influence, where one dominant party takes advantage of a weaker party to pressure them to enter into a legally binding contract;
- Mistake regarding the terms and identity of parties;
- Misrepresentations and false information exchanged between parties before the contract is formed;
- Duress, referring to threatened or actual violence from one party to another for the purpose of forcing a party to enter contractual obligations; and
- Unconscionable conduct, referring to transactions which take place between parties with an imbalance of power, dominant and weaker parties.
Lastly it is important to remember that different contracts may require certain formalities to be considered legally binding. For example, while oral contracts are generally considered to be legally binding, contracts for the sale of land, and contracts of guarantee must be in writing.
For a contract to be binding the three essential elements must be satisfied. Best practice will always be to have an agreement in writing which clearly shows the fundamental contractual elements. For more reading, click here.
We can help, we have reviewed every type of contract from various industries and sectors, which has provided us a deep understanding of where and when problems can occur. If you have any questions regarding the essential elements of a contract, please contact Lord Commercial Lawyers on (03) 9600 0162 or email us at firstname.lastname@example.org
Lord Commercial Lawyers is a commercial and business-focused law firm based in the Melbourne CBD. We work with businesses and individuals to help them achieve their legal and commercial goals.