The Required Elements of a Contract: Why You Need to Understand and Include Them in Your Business Dealings
Contracts are a central component of the business world. They deal with partnerships, employment, licensing, sales, and more. In fact, most modern companies deal with contractual arrangements on a daily basis. If your business regularly handles agreements, you must have a deep understanding of the elements of a contract to ensure that all of your arrangements are valid and legally enforceable.
The importance of understanding the elements of a contract
It’s crucial to understand all of the required elements of a contract because creating valid agreements is one of the best ways to protect your business and mitigate legal liability. Apart from protection and avoiding liability, formal contracts also make agreements between parties legally binding, can be used for future reference, and will serve as proof in case of disputes needing litigation proceedings. However, to be enforceable, all of the essential elements of a contract must be present.
The essential elements of a valid contract include:
- Identification of all parties involved in the agreement
- An offer to exchange something
- Acceptance of the proposed offer by the other party
- The exchange of something valuable
- Mutuality of obligation, or an agreement between the parties
- Parties who are both competent or have the capacity to enter a legal agreement
- A written instrument to formalize the arrangement
- A dispute resolution clause outlining clear steps to take in case of a disagreement
With all of these elements of a contract present, your formal business agreement will be considered legally valid, allowing you to enforce your rights and hold the other party accountable for their agreed-upon obligations. Additionally, when the elements of a contract are understood, you can focus on negotiating the most beneficial deal for both parties rather than worrying about the technicalities of the agreement.
Common examples of legally binding contracts
Dealing with contracts is one of the responsibilities of owning a business. When you have a thorough understanding of the elements of a valid contract, it will be easier to identify each type of business contract and understand what kind you’re dealing with.
Here are the most common business agreements that companies enter:
- Employment contracts
- Agreements of purchase or sale of goods and services
- Business and real estate investment contracts
- Licensing agreement
- Property and equipment leasing agreement
- Bill of sale
- Nondisclosure agreement
- Promissory Note
Contract law is one of the most crucial divisions of law. Industrialists run the US economy, and contract law ensures that the industry and laborers are safe and trading deals are secure.
Contract law governs over the:
Formation of a contract
One of the most crucial characteristics of contract law is it’s the only set of governmental rules and regulations about legal agreements. For example, the essential elements of a valid contract in business law are the only provisions in which all business contracts are created and dictate the penalties that people are served in case of a breach or if a party backs out without notice.
Terms and conditions of a contract
All legally binding agreements are based on a set of terms and conditions. Without these, any activity or future action of a business contract would probably not take place. The terms and conditions are derived from the essential elements of a valid contract that are stated under contract law.
Discharge and vitiating factors
When one party wants to get out of the arrangement before its official end date, they either must discharge or vitiate. The justified reasons for doing this are laid out in contract law, ensuring there’s no confusion between the parties about whether or not the discharge was a breach of the terms.
What are the required elements of a contract?
As mentioned above, contract law lays out the essential elements of a valid contract. Following these elements of a contract are what makes it enforceable and legally binding. Without these aspects, it’s challenging to enforce an arrangement with another party. Additionally, if the essential elements of a contract are absent, the contract might not get legal recognition, meaning it will not hold up in court.
Explaining the essential elements required for the formation of a valid contract
|Identification||Parties involved in an agreement must be clearly identified. A contracting party is an individual or company who enters a legal agreement with another, accepting the full terms of the agreement.||Businesses should be identified using their:|
-Full legal name
-Register office address
-Country of practice
Individuals should be identified using their:
-Full legal name
-And ID number
|Contracts typically contain a contractual parties clause that’s written as:|
“This contract is made on [date] between [Business 1] and [Business 2]
|Offer||An offer is a promise to do or not do something in exchange for something else. It’s extended as an attempt to form an agreement with another party.||The offer must include details of the arrangement and its terms and conditions. Additionally, an offer is not enforceable if it is illegal, ambiguous, lacks consideration, or fraudulent.||Types of offers include:|
-Express and implied offers
|Acceptance||After an offer is extended, the offeree can either accept or reject the proposal. Many people opt for writing a formal letter of acceptance when agreeing to enter a contract as it shows appreciation.||A valid acceptance must:|
-Agree to all of the contract’s terms without any conditions or changes.
-Only be made by the recipient of the offer.
-Be conscious. A party cannot unknowingly accept an offer.
-Be communicated clearly to the offerer.
-Occur within a prescribed time frame, or a reasonable amount of time.
|Features of a valid acceptance of an offer:|
-Proper grammar and spelling.
-Open with an acceptance statement of the contract.
-Restate the key terms to show that you understand the arrangement.
-Disclose anything you may need from the other party.
-Close by thanking the other party for making you an advantageous offer.
|Consideration||To have a valid legal contract, the parties must exchange something of value.||If neither side is exchanging money, the parties must ensure that the court would consider their consideration as valuable.||Common considerations in exchange for money include:|
|Mutuality of obligation||Also referred to as a meeting of the minds, or consensus ad idem, this is when both parties officially accept the offered obligations. For a contract to be enforceable, there must be this element.||To officially reach a consensus ad idem, a contract requires:|
-A consideration to be exchanged between the parties
-An acceptance of the offer
-All terms and conditions to be accepted
|After a contract is agreed upon, there are a few different ways in which it can be voided: |
-A breaching party may claim that there was never an enforceable contract because there was no meeting of the minds about the terms.
-The terminology gets confused by the parties, as the agreement does not have the same meaning to each side.
|Competency and capacity||When entering a contract, both parties must have the total capacity or legal ability to enter into an agreement to be considered valid and enforceable.||You cannot form a valid contract with people who:|
-are under 18
-have mental disabilities affecting their decision making and cognitive abilities
-are under the influence of mind-altering substances such as drugs or alcohol
-have been coerced to enter the agreement
|If a contract is breached due to incapacity, the breaching party may be deemed not liable if they can defend themselves. Valid defenses include:|
-Repudiation, where one side will not fulfill their obligations in cases of abandonment, renouncement, and contractual refusal
-Revocation, where one side rescinds an offer before it’s accepted
-Lack of capacity that shows the party entering the contract is not permitted to do so.
|A written instrument||An instrument is a legal document that records the execution of an agreement or legally enforceable acts and secures the parties’ legal rights.||Execution of a written instrument requires the deal to be:|
-In writing on anything that is easily transferable and somewhat permanent.
-Signed by the maker anywhere on the instrument.
-A definite order or promise to pay.
-Payable in money on demand or at a definite time to order or bearer.
|Written instruments include:|
|Dispute Resolution||Most legal agreements feature a dispute resolution clause in case of a disagreement between the parties.||The clause needs to set out a precise process for the parties to follow. Every step must be well-defined, with the parties agreeing to each.||A standard dispute resolution clause typically contains the following:|
-How the parties initiate a conversation about the dispute (usually written).
-How the parties start the resolution process and a timeframe to solve the disagreement before arbitration.
-Hiring a mediator if the previous attempt fails.
-If arbitration is necessary, what is the jurisdiction that will hear the proceedings, and who will cover the costs of litigation.
Why it’s advantageous to memorialize contracts in writing
Even though it’s not required to get a legally binding agreement in writing, there are many downsides of entering an oral agreement that become apparent when there’s disputes or breaches. With oral contracts, nothing is “formally” documented, so the terms can easily be skewed if someone’s memory fails or they lie about the terms and obligations of the arrangement.
Here are the reasons why it’s beneficial to obtain a legal instrument rather than an oral agreement:
Proper documentation in case of disputes
Even though oral contracts are considered legally binding, they often aren’t justifiable in case of a breach of the agreement or if the confusion of the terms arises. Having all of the key elements of a valid contract in writing allows you to reference your agreement in case of violations or confusion. A written instrument is also much easier to defend in court than an oral one since it gives you better evidence of the terms than the parties conflicting statements about the agreement.
Add legal protection clauses
When you write down an agreement, you can add legal protections into its terms. For example, a dispute settlement clause is one of the elements of a contract that you cannot include in a spoken agreement. Legal protections can also require the parties to provide adequate notice of any action to enforce the terms of the agreement. They might also exclude certain items covered under the agreement, including specific locations and types of products being sold.
Additionally, you can attach documents or photos to a written instrument to highlight an essential aspect of the arrangement. Therefore, writing everything down gives both parties necessary legal protection if things take a turn for the worst.
Keep everything in one place
Details of an agreement often get lost or overlooked when it’s scattered throughout emails, phone calls, and letters. However, writing down an agreement allows you to collect all of your information in one place. Additionally, written agreements will enable you to insert a clause stating that the contract is the final, complete agreement and that it supersedes any previous arrangements (oral or written) between the parties.
The benefits of reviewing contracts with an eye towards the key elements of a valid contract
Trust in business partners
When your agreements between business partners contain all of the elements of a contract, it brings a sense of transparency among the parties. Additionally, both are clear on what the other party’s intent is and what they expect out of the agreement.
Clarity of your legal rights
Because a contract is a legal agreement between two parties promising to fulfill a set of responsibilities and obligations, it’s crucial to know your rights so the other party doesn’t take advantage of you without realizing it. One of the best ways to know your contractual rights is when you take the time to understand the elements that make up a valid contract.
Mitigate unnecessary disputes and lawsuits
Almost everyone wants to avoid going to court when they can. A contract that contains all of the elements of a valid contract clearly lays out all of the roles, promises, and rights. A legally valid contract doesn’t leave room for misunderstanding or blame.
Protect intellectual property
Every business has a set of IP assets that are a significant determining factor in the business’s value. IP can include logos, brand names, inventions, and literary pieces. When you have all of the elements to form a valid contract written down, you can safeguard the IP rights of all participating parties.
Improved contract management
Forming, managing, and enforcing contracts is a strenuous process. However, when you have all of the elements of a contract written down in one place, it becomes far easier to manage your agreements. Since you won’t have to rely on your memory or piecing the agreement together through various forms of communication, you can ensure that you and your partner get the most benefits you can out of the arrangement.
Using contract management tools to include all the elements of a contract
Investing in a contract management platform is critical to ensure that you have all of the elements that make up a valid contract in the body of your agreements. You can easily manage all of your agreements in one place, making it faster to close valid and enforceable deals.
Here are some of the beneficial tools included in CMS that help you have all of the elements to form a valid contract:
Advanced notifications and emails
Time is of the essence in any agreement. If the process is delayed for too long, the offerer may withdrawal their offer and allow another business to take it. Intelligent management software will help you stick to a timeline by sending you notifications and emails about deadlines, sent offers, and renewal dates so you don’t miss any critical dates.
A centralized repository
Having all of your agreements stored in one place is essential to organize and keep track of the progress of your business deals. A repository allows you to gain quick and easy access to any agreement to ensure that they’re error-free and contain all of the elements of a contract. You can even sort the repository by businesses, dates, tasks, and lifecycle stages.
Contract management platforms also allow you to search for specific information within an agreement. You can type whatever you’re looking for and get fast results. Search capabilities will enable you to quickly scan through the elements of a contract and ensure that it’s valid.
Save previous document versions
Contracts are susceptible to change as the negotiation process goes back and forth between you and the other party. This means that you may lose specific terms, or edits can be made without someone noticing. When this happens, it threatens the permissibility of an agreement since one party may not be aware of what they agree to. CMS saves all previous versions of a contract for you so that nothing is lost during negotiations.
Contract template libraries
One of the easiest ways to ensure that you include all of the elements of a contract is by utilizing a contract template. Templates are standardized, pre-made agreements with all of the necessary terms, details, and clauses, ensuring that you don’t leave out anything that will affect the validity of your contract.
Redlining, approval, and collaboration tools
For a contract to be permissible, all parties must agree to the proposed terms and conditions. An automated system will streamline the negotiation and approval process by allowing both parties to simultaneously make edits, comments, and adjustments to the document. Collaboration tools help ensure that both sides approve of the finalized arrangement.
Finally, after you include all of the essential elements of a contract and both sides approve of the arrangement, both parties must sign off on the contract before it becomes valid. It’s often difficult for business professionals to coordinate their schedules, leading to delays in signing. A contract management platform with eSignature capabilities allows both parties to remotely sign the agreement to be finalized with little to no delays.