What is Required in a Contract? Learn The 6 Elements of a Contract.

Topics: Contract Management Software, Contract Requirements, Contract Creation, Contract Elements

Written by Lindsey Paulk

Building a compliant and accurate contract can prove to be a difficult task if you’re unaware of exactly what is required to create a legally valid contract. And at the core of any business transaction and business partnership is a contract. Whether you’re closing a deal or developing an agreement, a contract serves to lay the foundation for the rights of each party, as well as what they are contractually obligated to deliver upon.

design legally valid contracts by understanding these 6 contract requirements.

While contracts vary in scope, term length, and party involvement, every contract must include the following six required elements:

  1. Offer
  2. Acceptance
  3. Signatory Awareness
  4. Consideration
  5. Capacity
  6. Legality

With the presence of these six requirements, a document goes from an abstract agreement to a legally binding contract. If you miss one of these requirements, your contract may fail to be enforced by law.

1. Offer

Every contract begins with an offer, encompassing the responsibilities of each party and the exchange of a product, good, or service. An offer exists once the requesting party receives the offer, but keep in mind, the offer can be modified and even terminated prior to acceptance. The party extending the offer can also provide a counteroffer. In this case, the beginning offer is canceled and the parties will negotiate a different result.

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2. Acceptance

After an offer is provided, the recipient can accept or reject the offer. In the case the recipient desires to accept the offer, they can make their acceptance known via verbal acceptance or written acceptance. In the context of a counteroffer, the counteroffer serves as a termination of the initial offer. However, some scenarios allow a conditional acceptance where new conditions are considered valid so long as the conditions are made clearly known to each party.

Failing to act upon the offer does not mean the offer is accepted, and contract acceptance must be clear to each party. An acceptance will demonstrate the willingness of one party to follow contracted terms and conditions. Each offer will contain parameters and actions that determine an official acceptance. In order for an offer to be accepted, the offeree must have awareness of exactly what is contained in the offer. The offeree must also demonstrate their intention to formally accept the offer, and then they must express the acceptance in accordance with the guidelines provided in the offer.

Learn how to build accurate and complaint contracts with the assistance of a contract template library and a library full of preapproved clauses by reading these blogs.

3. Signatory Awareness

To consider a contract valid in a court of law, each party must be fully aware of the intent to enter in the agreement. Each party must be a willing and active participant to the contract at hand, recognizing the existence of the contract and agreeing to be legally bound to the containing obligations and responsibilities.

In the case that signatory awareness is not clearly established, then a contract can be voided. If one party signs a contract under circumstances that compromise their awareness, then the agreement will be discarded and invalidated. To prevent against this phenomenon, it’s essential that each party entering the contract ensures that they establish a mutual and consensual agreement to the contents of the contract.

Basically, know what you’re getting into before signing the dotted line.

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To learn more about the benefits of adopting an electronic signature solution into your contract management strategy, click here.

4. Consideration

In the context of contracts, consideration includes an agreed value (item, action, etc.) Some common examples of contractual consideration are services and property. It’s also necessary to understand that a financial element is not required for valid contract consideration, and simply agreeing to the exchange of products or services meets the legal requirements of consideration. The most important factor to keep in mind is that consideration includes a mutually agreed upon value between the contract’s signatories.

5. Capacity

The signing party must sign the agreement without signing off their rights. This means that according to contract law, each signer must understand the terms, consequences, and responsibilities of each contract prior to signing. This understanding is known as the “legal capacity” of the signatory – a requirement of any contract to be considered valid.

People who might not possess legal capacity include the following:

  • Minors
  • Individuals with brain disorders
  • Individuals under the influence
  • Individuals who fail to understand contractual language

There are a few steps that can be taken to support these individuals on a case-by-case basis. For example, the court may appoint a representative to assist a minor.

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6. Legality

Every contract is subject to the laws and regulations of the jurisdiction they are located in, including laws on the local, state, and federal level. If an agreement does not align with local laws for example, the contract will not be considered legally valid. However, the legality principle is very nuanced. Contracts must adhere to the laws within the jurisdiction of where the contract is signed. And if federal and state laws clash, then the Constitution’s Contract Clause will guide the contract in question.

There are a few scenarios that invalidate a contract’s legality:

  • Duress and misrepresentation – when a contract party signs the agreement as a result of threats or coercion
  • Unconscionability – when a contract’s outcome initiates unfair obligations and consequences that create a sense of shock within the court
  • Illegality – when a contract threatens public wellbeing
  • Mistake – when a contractual error impacts obligations that each party initially agreed upon
  • Force Majeure – when conditions extend past the control of each party, resulting in the failure to deliver upon contractual obligations because it’s simply impossible to do so

To learn more about the importance of an efficient contract intake and request process for your legal department, click here.

Bonus: Mutuality

Mutuality refers to the manner in which each party agrees to being legally bound to carrying-out the obligations contracted to them. Without mutuality of parties, then the law determines that neither party can be held legally responsible to the agreement. Both parties must be bound to the contract to ensure that the agreement isn’t one-sided. A contract without the element of mutuality will be considered void.

This is particularly critical when one party to the contract isn’t provided the opportunity to terminate and cancel the contract. In some of these scenarios, one party can fulfill their contracted obligations without taking away the opportunity for the other party to perform upon contracted requirements. The court oftentimes voids these contracts, as they fail to contain mutuality of contracted obligation. In order to prevent your contract from being considered invalid due to a lack of mutuality, then you should take steps to restrict each party’s ability to void the agreement.

Conclusion

Contracts are an essential tool for any business. In this way, it’s critical that you establish legally valid contracts with clearly defined responsibilities and terms, ensuring that each party is willing and able to enter agreements with a clear conscience. We recommend reviewing your contracts through the lens of theses six required contract elements to support you in developing legally valid and enforceable agreements.

Learn more about our Dock 365 Contract Management System here.

Learn more about Contract Lifecyle Management (CLM) Software here.

For more information, we would like to welcome you to schedule a free demo with us today.

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