Three Key Elements of a Binding Contract
There are three key elements of a binding contract, and they are what are known as the offer, the acceptance, and the consideration.3 min read
Contract Elements Overview
There are three key elements of a binding contract, and they are what are known as the offer, the acceptance, and the consideration. The offer is the proposal that is made by one party outlining the terms of the contract, the acceptance is the approval of the proposal (sometimes after negotiation) by another party, and the consideration is the exchange of value as stipulated in the contract. All three elements must be present for a contract to be considered complete and binding by a court of law.
The offer is the initial step in the completion of a contract. In it, the offerer will present a proposal containing certain terms–the terms of the contract–for a party to accept or reject. The offer can be made in many ways, including by writing, the spoken word, or even by mere actions. For an offer to exist, what is not so important is how the offer is made (although written offers are always preferable) but rather that the offer contains the necessary elements to make it acceptable by another party. Such elements are:
- A statement of intent by the offerer to form a contract.
- A specific proposal made in specific terms.
- A communication identifying the party for which the contract is offered.
If any three of these elements are not present in the offer to a satisfying degree, then the offer will not be acceptable.
The acceptance is the part of the contract process most dependent on the second party involved. In it, the party will consider the offer on hand, then choose to accept or reject it, usually in writing or orally (with spoken acceptance). If acceptance is made, it will be considered to be an absolute and unqualified consent to the terms proposed in the offer. Such acceptance may only be made by the party to whom the offer is directed unless that party has designated an agent to accept the offer on their behalf.
Acceptance must also be made in accordance with the manner request by the offering party; if changes are suggested, then the initial offer will have been rejected and a counteroffer will have been proposed. At this point, contract negotiations will have been entered into.
The consideration is the final stage of the contract, in which both parties play an equal part and without which the contract cannot be completed. The consideration involves exchanging items of consideration (items of value) to one another, as was stipulated in the accepted terms of the offer. Considerations that may be exchanged can include, but are not limited to:
- Tangible items of value.
- Promissory notes.
- Intellectual property (IP).
- Mineral rights.
Essentially, any item that is agreed upon by both parties to have value may be exchanged in a contract. These items for consideration need not be of the same type, either: land could be exchanged for stock or mineral rights could be exchanged for services, just so long as both parties agree that the value of the exchange is essentially equal. The only limits on such exchanges is that they cannot be for be for illegal goods, services, or other items of value and they cannot involve criminal activity. Examples of contracts thus made illegal include:
- Contracts that involve crime.
- Contracts that put limits on consumer protections.
- Contracts that cause interference with family relationships.
- Contracts that excuse a party liability for harm caused by reckless or intentional conduct.
Other Contract Necessities
In addition to the offer, acceptance, and consideration, as well as there being no illegal activity involved, a contract must also involve parties that are allowed to enter into contracts. This will include almost all people except the following:
- Minors. Under most circumstances, those under the age of 18 cannot enter into contracts. If they do, they must do so with the consent of their legal guardian.
- The mentally incompetent. Those who are judged to lack the understanding of the full implications of the contract they are signing are also barred from entering into contracts. This could include both the mentally handicapped and those who are under the influence of any mind-altering drugs, although in the latter instance the contract will only be void if the mentally competent party knew the other party was not of sound mind when they agreed to the contract.
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