August 16, 2019

Essentials of a Contract

Disclaimer: This post does not constitute legal advice. For legal advice, please contact an attorney directly.

Essentials of a Contract

A valid contract is one that complies with the provisions of contract law and contains four essential elements:

Contractual capacity of the parties (competent parties)
Offer and acceptance (mutual assent)
Legality of object (legal purpose)
Consideration

Contractual Capacity of the Parties

Not all persons have the ability or capacity to make a valid contract. A person who is insane, intoxicated, or legally a minor may have only limited contractual capacity. The parties to a contract are competent if they have the legal capacity to contract, meaning they have no mental defects or insanity and are of legal age to contract.

Offer and Acceptance

The parties must come to a meeting of the minds, meaning they must reach an agreement on all terms in the contract. One party (the offeror) makes an offer, and the other party (the offeree) accepts that offer. A complete and mutual understanding must exist to produce a meeting of the minds. The contract is formed at the instant that acceptance of the offer is communicated to the offeror. Therefore, a contract is formed on the acceptance of an offer and communication of the acceptance.

Legality of Object

The provisions spelled out in a contract must be for a legal purpose. For example, a sale and purchase contract (or sale contract) that provides for payment of commission to an unlicensed person is a contract w/ an illegal purpose. The contract is unenforceable in a court of law.

Consideration

Consideration is whatever is given in exchange for something else. People often think of consideration as the money exchanged by the parties. Legally, however, consideration is the obligation that each party makes to the other to make the contract enforceable. The parties to the contract must obligate themselves individually by placing some consideration in the agreement. A promise undertaken by one party must be supported by a promise undertaken by the other party. Mutual promises to do or not to do some specific actions are sufficient consideration, even though the benefit or sacrifice may not be equal. A common misconception is that the good-faith deposit (earnest money) in a real estate sale contract is the consideration. The good-faith deposit is made by a buyer to assure the seller that the buyer is serious about the transaction and the buyer intends to purchase the property. In real estate sale contracts, the seller normally promises to sell and convey, and they purchaser promises to pay for the property. There are two types of consideration:

Valuable consideration is the money or a promise of something that can be measured in terms of money.
Good consideration is a promise that cannot be measured in terms of money, such as love and affection.

Either type of consideration is sufficient to enforce a contract. The law generally does not concern itself with the relative fairness of consideration. What is exchanged need not have the same measurable value. The law will accept that the parties thought the consideration to be fair because they freely agreed to the exchange.

Disclaimer: This post does not constitute legal advice. For legal advice, please contact an attorney directly.