Six Elements of a Contract

Contracts are legal instruments that govern business and personal transactions. They are legally binding agreements between two or more parties that outline the terms of the transaction. For a contract to be valid, it must contain six essential elements. These elements are:

We will briefly explore each of these elements so that we can get a general feel for these elements. Then in subsequent blog posts we will explore each element in more depth along with some relevant case material.

Offer and Acceptance

An offer is a proposal made by one party to another, indicating that they are willing to enter into a contract under certain terms. The acceptance is the other party’s agreement to those terms. For a contract to be valid, there must be an offer and acceptance.

An offer can only be the basis of a binding contract if it contains the key terms of the contract. For example, as a minimum requirement for sale of goods contracts, a valid offer must include at least the following four (4) terms: Delivery date, price, detail description of the item(s) including a fair description of the condition or type of service and the terms of payment which includes the payment date. Unless the minimum requirements are met, an offer of sale is not classified by the courts as a legal offer but is instead seen as an advertisement.

Consideration

Consideration is something of value that each party gives to the other as part of the contract. It can be in the form of money, goods, or services. For a contract to be valid, there must be consideration. The courts have held that the consideration must be sufficient but need not be adequate.

Essentially sufficient consideration means that each party must provide something of real value. I can rent my fishing boat to a friend for an afternoon and in return he can agree to clean the decks, give me 10% of the catch and fill the fuel tank on his return. In this agreement, there is consideration of real value on both sides. Whether each consideration is adequate, constituting a fair deal, is not something that the courts will decide upon.

Intention to Create Legal Relations

Both parties must intend for their agreement to be legally binding. This means that they must have a genuine intention to create legal relations. The contract should be made with the understanding that if one party fails to fulfill his/her responsibilities, the other party may file a lawsuit to hold the defaulting party accountable.

However, there are contracts that include language where the parties to the contract agree to binding private arbitration. These contracts are still legally binding as the arbitration ruling is enforced by the courts. If the arbitration is not legally binding, then either party may ignore the arbitration ruling and take the other party to court as though the arbitration never took place.

Capacity to Contract

For a contract to be valid, all parties must have the legal capacity to enter into the agreement. This means that they must be of legal age, not under duress, and not under the influence of drugs or alcohol.

In most states, minors under the age of 18 lack the capacity to make a contract and may therefore either honor an agreement or void the contract. However, there are a few exceptions to this rule. In most states, a contract for necessities (i.e. food and clothing) may not be voided. Also, in most states, the contract can no longer be voided when the minor turns 18.

If a person lacks the mental capacity to enter a contract, then either he or she, or his or her legal guardian, may void it, except in cases where the contract involves necessities (such as food or shelter). In most states, mental capacity is measured against the “cognitive standard” of whether the party understood its meaning and effect.

When a party to a contract is intoxicated at the time of signing or negotiation the courts generally do not find that party lacking in capacity. Courts have found that individuals should not be allowed to side-step their contractual obligations by virtue of their self-induced states. However, courts also seek to avoid the result of allowing a sober party to take advantage of the other party’s inebriated condition. Therefore, if a party is so impaired that he or she is unable to understand the nature and consequences of the agreement, then the contract may be voided in favor of the impaired party.

Consent

Both parties must give their consent to the terms of the agreement freely and without coercion. If one party is forced or coerced into entering into the contract, it may be invalid.

Consent is a very contentious and complicated. For this reason, many companies have created very detailed consent forms or consent agreements in order to eliminate potential liabilities surrounding their services. Prominent examples of these consent agreements are medical consent forms, school activity consent forms, martial arts consent forms, etc. These agreements attempt to disclose all of the risks and dangers of the activity, operation, treatment, physical training, etc. that one or more parties will be exposed to or participate in. When you sign one of these agreements, you are in effect consenting to expose yourself to these risks / dangers and generally agree to hold the other party harmless if you are injured unless it can be proved that the other party was negligent.

Legality of Object

The sixth element of a contract is the legality of object, which means that the subject matter of the contract must be legal and not against public policy. In other words, the purpose of the contract cannot be illegal, and the contract cannot be used to engage in illegal activities. If a contract violates this element, it will be deemed unenforceable. Obviously, a contract cannot contain language that binds parties to perform an illegal act, like murder, or rape. But, a contract also cannot violate public policy.

So what is public policy? According to Black’s Law Dictionary 6^th Edition, public policy is:

“That principle of the law which holds that no subject can lawfully do that which has a tendency to be injurious to the public or against the public good… The term “policy,” as applied to a statute, regulation, rule of law, course of action, or the like, refers to its probable effect, tendency, or object, considered with reference to the social or political well-being of the state.”

Now this public policy as the definition shows is very subjective and open to interpretation depending on what department of government is making the rules and what party affiliation a judge holds. Which is why there are contract remedies (trusts, PMAs) to get around egregious legal or public policy stipulations.

Trusts divide the ownership of the trust corpus (assets within the trust) into legal title and equitable title and assigns various parties to each. A PMA or Private Membership Association creates an association of individuals who are members that are contractually bound by the PMA agreement terms. The PMA is private and the activities are for its private members only. Therefore public policy does not apply.

Trusts and PMAs are very complex instruments and will be subjects for future blogs.

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