Contracts are an important part of your business. A good business contract will account for the risks of a business deal and provide mutual understanding and security for its parties.
You may rely more heavily on your legal counsel when it comes to the theoretical and practical elements of a contract. However, knowledge of these parts can give you a better understanding of the complexities of Florida contract law. A better understanding can increase your awareness of when a lawyer’s review can benefit a deal – preventing unnecessary conflict or expense in the future.
In this article, you’ll learn more about the basic elements of a binding contract and other key elements that can raise doubt about a contract's legality.
Table of Contents
What Are the Elements of a Contract in Law?
A valid and enforceable contract generally requires that certain elements exist between the parties. Some lawyers, professionals, courts, and states will characterize or label these elements in different ways. For example, some might present certain elements together or view elements as a defense or issue that can void a contract (e.g., it’s illegal, lack of capacity, etc.). For purposes of this article, the elements that form a bilateral contract include:
- Offer
- Consideration
- Acceptance
- Intent
- Capacity
- Legality
The article defines the elements of a legal contract as both individual concepts and in their relationship to the other contract elements.
Why Are These Contract Formation Elements Essential?
State common law and other statutes developed the 4 elements of contracts over the years to create a system that promotes fairness and equity for the parties involved. Without these elements, a meeting of the minds between the parties does not really exist. For example, a contract without consideration might just be a gift. To further illustrate, you can’t bind someone to a contract they didn’t accept. Without acceptance, you just have the potential for an agreement.
What Are the 4 Basic Elements of a Contract?
Regardless of the types of contracts you use, the 4 elements of a contract listed in this section are fundamental to creating a binding agreement. In another section, you'll read about the elements of capacity and legality that have more to do with reasons why a contract might not be enforceable. In a vacuum, a binding contract exists when the first four elements are present.
Let's now define the legal elements of a legal contract.
1. A Contract Begins with an Offer from One Party
Every legal contract starts with an offer from one party (the offeror) to another that can be verbal or written. Of course, written offers and contracts provide greater proof that a contract exists. The offer is a proposal of the terms of a deal. The terms of the offer can involve any number of rights, obligations, warranties, and conditions the parties must fulfill.
An offer does not formally exist until the intended counterparty – sometimes called an offeree – receives it. Before accepting the offer, the offeree can revoke or counter the offer. The offeror can also revoke the offer before the offeree accepts it. A party’s counteroffer will cancel the original offer – meaning the offeree cannot later accept it.
2. A Contract Must Have Consideration
Every contract needs valid consideration. The term consideration can sound like an abstract, hard-to-define concept. The reason being that every contract’s consideration can look a little different and present itself in unique ways. However, put simply, consideration is the idea that an exchange happens between the parties (i.e., each party gets something).
The nature of the exchange can take different forms depending on the scope of the deal and the motives of the parties. With a contract, consideration exists within the combination of rights and obligations of each party. Common forms of consideration include:
- The receipt of money, property, or some other interest (e.g., real estate, ownership in a company, etc.).
- The right or power to do something (e.g., a licensing agreement where you obtain rights to use certain trademarks or other intellectual property).
- A restriction or forbearance of the other party (e.g., a noncompete or nondisclosure).
The consideration must also be mutual – meaning each party must possess the power to perform under the contract. Without the aspect of mutuality, a contract’s consideration might be unenforceable as an illusory promise.
3. The Solicited Party Must Accept the Offer
The third element of a valid contract is the offeree’s acceptance of the offer. Acceptance, like an offer, can be verbal or written. Generally, acceptance requires some form of action from the offeree. In other words, a party’s inaction, silence, or other passiveness to indicate acceptance of a contract won’t be enough.
Some contracts can have conditional acceptances and offers – meaning the contract only exists when certain condition precedents are met. In some cases, you can have acceptance that creates a valid contract through a party’s performance (also known as a unilateral contract).
The classic example is the poster offering a reward for a lost dog. Rather than agreeing to find the dog in the future, a person might accept by finding the dog then seeking the reward as part of the agreement.
4. Both Parties Must Have the Intent to Enter into the Contract
The last basic element of a contract is that the involved parties must have an intent (i.e., mutual assent) to enter into the agreement. You can think of intent as each party’s awareness and willingness to agree to the contract. On the surface, this might seem like an odd requirement to state. However, issues of intent and whether the parties had a true meeting of the minds occur all the time in written agreements.
The issue of intent especially arises when the terms of the contract are vague or ambiguous (i.e. the wording of an integration clause), which can make it unclear to an objective outsider as to what the parties intended. Sometimes the issue of intent goes unnoticed until a conflict (i.e., breach of contract) occurs that raises doubt about the terms of the deal. A party’s fraud or other misrepresentations can also remove the element of intent from a contract. In contrast with fraud, a mistake that has a material effect on the contract can also make it unenforceable.
Unfortunately, intent can be an expensive issue to litigate when trying to enforce or void a contract. Experienced attorneys can help mitigate this risk by highlighting undefined, broad, or uncertain terms for clients.
Other Potential Elements of a Valid Contract
The existence of an offer, acceptance, consideration, and intent will generally create a valid contract. However, you should be aware of other elements that can influence the enforceability of a contract, and, in some cases, make it voidable by law.
What are the elements of a binding contract that are not always essential? Let's take a look.
All Parties to a Contract Must Have Legal Capacity
Parties to a contract must have the legal capacity to enter that contract. Capacity can be hard to define by law but can be thought of as having the ability to understand and commit to the terms of the agreement. Different situations can create doubt about a party’s capacity to contract such as:
- A medical condition (e.g., dementia and other disorders that affect cognitive abilities)
- Being under the influence of alcohol or drugs
- Language barriers (i.e., the language of the contract is not understood by the parties of the contract).
Additionally, state law will sometimes dictate who can or can’t have the capacity to contract. For example, most states agree that minors are not able to contract. Signing a contract while under duress or from undue influence can also undermine your capacity.
A Contract Cannot Violate the Law
Another potentially obvious requirement for an enforceable contract is that its terms cannot violate the law. Contracts that contradict public policy or endanger public welfare are also prone to issues of enforceability. For example, an agreement in which one party must commit murder or some other crime would not be enforceable. Other issues akin to legality can also void an otherwise valid contract.
Sometimes events can happen that make a contract impossible or futile to perform. A court might not enforce a contract in this situation to avoid an unjust result.
Bonus: Some Contracts Have to Be Written
On top of knowing about the 6 elements of a valid contract, you should also be aware that he statute of frauds is a legal doctrine within the uniform commercial code (UCC)that requires written contracts for certain transactions. Oral contracts concerning the below subject matter are likely voidable in states that follow some form of the statute of frauds. The contracts covered under the statute of frauds can vary from state to state but generally include:
- Marriage
- Contracts for a term length greater than a year
- Real estate
- The sale of goods greater than $500 in value
- Guarantees (when one party agrees to pay the debts of another)
Need Help Navigating the 6 Parts of a Contract?
Cueto Law Group is a Miami-based, boutique law firm whose attorneys handle matters involving commercial transactions and litigation. The firm – founded by international business attorney, Santiago Cueto – drafts and negotiates a range of different contracts for clients. This includes purchase agreements, entity formation contracts, employment contracts, licensing deals, and many other common contracts. The firm prides itself on the ability to guide clients through the contract process from an offer to acceptance.
If you need help with reviewing, drafting, or negotiating a contract, please do not hesitate to contact our office. We can schedule a consultation to learn more about your legal needs and how Cueto Law Group may help.
Contact Cueto Law Group today to schedule a consultation concerning a contract.
