Contracts – Elements and Formation

Contracts – Elements and Formation

A contract is simply an agreement between two or more persons to do or not to do a particular thing. However, as with most legal concepts the devil is in the details.

In most jurisdictions a contract is enforceable if it contains four basic elements:

(1)   competent parties;

(2)  proper subject matter;

(3)  offer and acceptance; and

(4)  consideration.

Competent Parties: The individual making the contract must have authority to bid themselves or the party represented. For businesses this authority can be express (actual or implied) or apparent (view from the standpoint of the third person). (See: http://www.pazarlaw.com/authority-to-bind-you-did-what/)

Incompetent parties can include minors and those suffering from mental deficiencies or intoxication. Contracts made between one or more incompetent parties will be deemed unenforceable.

Proper Subject Matter:  The subject matter must be definite and lawful. This part contains the what, when and where of the agreement. A definite subject matter is generally contained in a detailed scope or work or scope of services. The subject matter must be complete and unambiguous.

The purpose must be lawful; an agreement to commit a criminal act or one that is contrary to public policy will be deemed not only illegal but unenforceable.

Offer and Acceptance: This element is sometimes referred to as the “meeting of the minds”.

An offer is the signification by one party of the willingness to contract with another on certain specified terms; it must be clear, complete and communicated to the other party.

Acceptance is the element that binds the parties. It should be absolute and unambiguous. Acceptance is not conditional or a counteroffer. Silence is generally not enough to constitute acceptance except in some circumstances related to the sale of goods under the Uniform Commercial Code.

Consideration:  Consideration is the inducement. It is the cause, motive, price or impelling influence which convinces a party to enter into an agreement. A promise to pay in the future is adequate consideration.

When all four elements are present an enforceable contract is formed. There are instances where these elements can be proven without a written document, indeed, this may be the case more often than not. It is therefore important to understand the basis of contract formation, enforcement and interpretation in your jurisdiction.

 

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