Contract Elements: Everything You Need to Know
Specific contract elements are imperative for a formal and legally binding agreement between two parties as they specifically define an offer and detailed expectations. 3 min read
5. Mutuality of Obligation
6. Competency and Capacity
Specific contract elements are imperative for a formal and legally binding agreement between two parties as they specifically define an offer and detailed expectations.
Elements of a Contract
In the business world, written contracts are crucial, as they are binding for both parties entering into this agreement and clearly state expectations, as well as define how specific situations should be handled.
Benefits of a contract are both the enforcement of rights each party has and its responsibilities. In order to create a clear and valid formal agreement, a contract should include these elements. They are crucial to a binding agreement.
- An offer
- Mutuality of obligation
- Competency and capacity
- A written instrument, if applicable
An offer is referred to as one party promising to deliver services and products in return for the other party to act the same way. There is a difference between formal legal offers and preliminary negotiations, for parties of the latter usually do not intend to enter into a legally binding contract.
- Advertisements and brochures are examples of preliminary negotiations.
- This is so sellers are not being held liable for several contracts with customers who read the advertisements but are not aware that there may be limited supplies.
Rejection of an offer occurs when the offeror is not liable for the offer any longer due to the fact that the offeree's power of acceptance was terminated. There can be a so-called express refusal by the offeree or rejection in form of the offeree making a proposal to the offeror that is completely different than the initial proposition.
Apart from that, there are more elements associated with contract offers.
If a party accepts an offer, it automatically agrees to the terms and conditions of the contract. The acceptance will have to take place the way it is outlined in the offer. If specifications on how to formally accept an offer are missing, it will have to be accepted in a way that is legitimate within the given circumstances.
The validity of an offer acceptance is only given if:
- The offeree is aware of the current offer.
- He or she is intending to accept it.
- Acceptance takes place based on unconditionally agreeing to the terms and conditions of the contract and hence its offer.
Depending on the contract and its details, what constitutes a legitimate or reasonable acceptance can vary.
There can be misunderstandings and problems when it is unclear if acceptance of an offer should come in form of a return promise or actual performance. This exact problem is covered by Section 32 of the Restatement of Contracts by stating "in case of doubt, an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering performance, as the offeree chooses."
Consideration refers to the act of both parties who intend to enter into a formal agreement to provide something of value as an incentive for the other party to agree to the contract.
Exchanging those values is legally defined as consideration. However, this does not necessarily entail an exchange of currency. Alternatively, those can be promises to perform certain actions.
When a court evaluates whether a contract is entailing enough consideration, it places more value on the offer and hence promise of the offeree than that of the offeror.
Mutuality of Obligation
Mutuality of obligation means that both parties are required to stick to their responsibilities as stated in the contract, otherwise the law sees the contract as non-binding for either of them.
When it comes to the promise exchange of both parties, there may be the case that one of them might not have the full right to terminate the formal agreement.
Competency and Capacity
If a person who is neither a minor, nor intoxicated or mentally impaired, has lawfully entered into a contract, he or she can be held fully liable for their responsibilities as per contract.
- Depending on the law, a minor is defined as someone being younger than 18 or 21.
- Courts do not distinguish between people who are mentally impaired or intoxicated from prescription medication at the time they sign a contract, but usually, they are more easily discharged from their contract duties than people who have been intoxicated by over the counter medication or alcohol.
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