Elements of a Legally Binding Contract
An agreement/contract must contain essential elements to be regarded as a contract. If any one of them is missing, the agreement will not be legally binding.
Moreover, the parties to a legally binding contract must be considered "competent persons" having legal capacity who exchange "consideration" to create "mutuality of obligation".
Offer
There must be a definite, clearly stated offer to do something. For example: A quotation by sub-contractor to the main contractor and an offer to lease.
An offer does not include ballpark estimates, requests for proposals, expressions of interest, or letters of intent.
An offer will lapse:
- when the time for acceptance expires;
- if theoffer is withdrawn before it is accepted; or
- after a reasonable time inthe circumstances (generally the greater the value of the contract, thelonger the life of the offer).
Acceptance
Only what is offered can be accepted. This means that the offer must be accepted exactly as offered without conditions. If any new terms are suggested this is regarded as a counter offer which can be accepted or rejected.
There can be many offers and counter offers before there is an agreement. It is not important who makes the final offer, it is the acceptance of that offer that brings the negotiations to an end by establishing the terms and conditions of the contract.
Acceptance can be given verbally, in writing, or inferred by action, which clearly indicates acceptance (performance of the contract). In any case, the acceptance must conform to the method prescribed by the one who made the offer for it to be effective.
Intention of Legal Consequences
A contract requires that the parties intend to enter into a legally binding agreement. That is, the parties entering into the contract must intend to create legal relations and must understand that the agreement can be enforced by law.
The intention to create legal relations is presumed, so the contract does not have to expressly state that you understand and intend legal consequences to follow.
If the parties to a contract decide not to be legally bound, this must be clearly stated in the contract for it not to be legally enforceable.
Consideration
In order for a contract to be binding, it must be supported by valuable consideration. That is to say, one party promises to do something in return for a promise from the other party to provide a benefit of value (the consideration).
Consideration is what each party gives to the other as the agreed price for the other's promises. Usually the consideration is the payment of money but it need not be; it can be anything of value including the promise not to do something, or to refrain from exercising some right.
The payment does not need to be a fair payment. The courts will not intervene where one party has made a hard bargain unless fraud, duress, or unconscionable conduct is involved.
Formation
In addition to the elements of a contract:
- A party must have capacity to contract
- The purpose of the contract must be lawful
- The form of the contract must be legal
- The parties must intend to create a legal relationship
- The parties must consent
As a result, there are a variety of affirmative defenses that a party may assert to avoid his obligation.
Contracts May Be Bilateral or Unilateral
A bilateral contract is an agreement in which each of the parties to the contract makes a promise or set of promises to each other. For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000 in exchange for the seller's promise to deliver title to the property. These common contracts take place in the daily flow of commerce transactions, and in cases with sophisticated or expensive promises may involve extensive negotiation and various condition precedent requirements, which are requirements that must be met for the contract to be fulfilled.
Less common are unilateral contracts in which one party makes a promise, but the other side does not promise anything. In these cases, those accepting the offer are not required to communicate their acceptance to the offeror. In a reward contract, for example, a person who has lost a dog could promise a reward if the dog is found, through publication or orally. The payment could be additionally conditioned on the dog being returned alive. Those who learn of the reward are not required to search for the dog, but if someone finds the dog and delivers it, the promisor is required to pay. In the similar case of advertisements of deals or bargains, a general rule is that these are not contractual offers but merely an "invitation to treat" (or bargain), but the applicability of this rule is disputed and contains various exceptions.
In certain circumstances, an implied contract may be created. A contract is implied in fact if the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, a patient may implicitly enter a contract by visiting a doctor and being examined; if the patient refuses to pay after being examined, the patient has breached a contract implied in fact. A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other. Quantum meruit claims are an example.
