Elements of a Contract

A contract is a promise or an agreement between two or more parties that is enforceable in a court of law. The elements of a contract are certain features that must be present within a contract for a court to consider it legally enforceable. In general, the required elements of a contract include the following: offer, consideration, acceptance, mutual agreement, competency, and genuine assent. In addition, for a contract to be enforceable, it must be based on a legal purpose, and in many—but not all—cases, it must be in writing.

Background

A contract is a legally binding agreement between two or more consenting parties who promise to perform a particular action or series of actions. For example, Marcy, an office manager, and Bob, the owner of a catering company, sign an agreement stipulating that Bob's company will provide food for an event at Marcy's office, and Marcy will pay Bob's company an agreed-upon price for the food. This agreement is a contract. In it, each party makes a promise to fulfill a particular obligation in exchange for some type of benefit. Contracts play a pivotal role in the day-to-day operations of business enterprises—from the completion of work to the distribution of goods and services—around the world. Without them, these enterprises would not be able to function. As a result, millions of contracts are created every day.

Although contracts are essential to modern life, they are by no means a modern invention. People have been crafting contracts since ancient times. Tablets from ancient Mesopotamia, dating as far back as about 2300 BCE, contain contracts for everything from the sale of goods, such as dates or wheat, to the adoption of children. The earliest contracts in ancient Rome were founded in religion and basically amounted to oaths sworn to the gods. Over time, ancient Roman contracts transformed from religious oaths to civil legal acts. Roman laws required people to identify a specific reason or purpose for the formation of a contract, and much emphasis was placed on the fulfillment of obligations. During the sixth century CE, Byzantine emperor Justinian set about ordering, revising, and simplifying past laws and opinions of Roman jurists. The result was a reference work known as Corpus Juris Civilis (Body of Civil Law), often called the Code of Justinian.

Not long after its creation, the Code of Justinian was lost for several centuries. It was rediscovered in the eleventh century, and as a result, Roman civil law became the basis for much legal scholarship throughout Europe during the Middle Ages. As European society began to shift from an agrarian society, where informal agreements were commonplace, to more commercial and industrial endeavors, the need for formal, legally enforceable contracts arose. By the sixteenth century, English courts had developed an action known as assumpsit, which could be used to enforce informal agreements. Basically, if two people agreed to certain terms and one of those people breached the agreement by failing to follow through on an obligation, the other person could use assumpsit to recover damages. The courts limited the use of assumpsit to cases involving consideration, or cases in which each party to a contract agreed to give up something of value in exchange for something else (e.g., money in exchange for work). The Roman Catholic Church also influenced contract law, with many jurists indicating that contracts had to be based on moral principles.

During the seventeenth century, common law became the primary legal system in England. Common law emphasized the principle of equity in contracts. As a result, if a court determined that one party benefited more greatly from a contract than another, the court could adjust the contract to make the terms more equal. When the first English colonists traveled to the New World, they brought their legal traditions with them. For this reason, many laws in colonial America and eventually in the United States were based on English common law. Since then, the American legal system, including contract law, has continued to evolve.

In the twenty-first century, contracts have become a fact of life for people worldwide. People encounter contracts all the time, such as when they buy a new cell phone or subscribe to a cable service. Contracts have become so ingrained in the fabric of modern society that some lawyers devote their entire careers to processes related to the review, research, and writing of contracts. One aspect of their job is to ensure that contracts contain certain elements that courts of law require for their enforcement.

Overview

For a contract to be enforceable, it must serve a legal purpose. This means that the purpose of a contract cannot be to carry out an illicit activity. For example, Steve and Cheryl sign a contract. In the contract, Cheryl agrees to rob a bank for Steve. In turn, Steve agrees to pay Cheryl a certain percentage of whatever she steals from the bank. Even though both parties have agreed to the terms and signed it, the contract is not enforceable because it serves an illegal purpose.

In addition to serving a legal purpose, some contracts must be in writing. Oral contracts may be upheld in courts of law, but most states have laws defining circumstances that warrant a written contract. For example, real estate transactions and promises to pay another's debt are situations that almost always require written contracts. Other agreements that may require written contracts are long-term lease agreements, certain insurance contracts, and contracts for the sale of goods that exceed a particular value.

The following are elements that must be present within a contract for a court to consider it legally enforceable.

A contract must include an offer. An offer is one party's promise to do something or to refrain from doing something. The party who makes an offer is known as the offeror. The party to whom the offer is made is known as the offeree. An offer is usually conditional, meaning that the offeror will carry out their obligation on the condition that the offeree carries out some obligation in return. For example, Priya wants to install a central air system in her home. Adam examines the house, calculates the amount of materials and number of workers necessary for the job, and offers to complete the job for $12,000. When Adam makes this offer, he expects that if Priya contracts him for the work, she will uphold her obligation to pay him when the work is finished.

Once an offer has been made, the offeree has a few options. They can accept the offer, in which case the parties can move toward creating a contract. They can completely reject the offer, in which case no contract is formed. They also can make a counteroffer. In this case, the offeree makes some type of change to the initial offer. For example, Priya counters by offering to pay Adam $10,000 instead of $12,000 to install a central air system in her home. When a counteroffer is made, it is up to the original offeror to decide whether to accept, reject, or counter the new terms.

If an offer does not include a time limit (e.g., response within two weeks), it is considered valid for a "reasonable" amount of time. To the courts, this means the amount of time that a reasonable person would deem appropriate for making a decision on an offer.

A contract must include acceptance. Acceptance is agreement to the terms of an offer. For example, if Adam decides that Priya's counteroffer is fair and agrees to install her central air system for $10,000, then acceptance has occurred. People can accept offers in many ways. Sometimes a handshake and an oral agreement to the terms are all that is necessary. Other times a formal, written acceptance is required. If an offer stipulates how acceptance should be made, then the offeree must accept via those terms or the acceptance will be invalid.

A contract must include consideration. Consideration is an act or a promise of one party to fulfill a particular obligation in exchange for an act or a promise from another party. In other words, each party must agree to give up something of value for the benefit of the other. For example, Adam agrees to give time and resources to install a central air system in Priya's house. In return, Priya agrees to give money to Adam to pay for his work.

It is important to note that in a contract, consideration does not have to involve money. For example, a generous aunt may offer to allow her niece, a struggling college student, to live in her house rent free as long as her niece promises to help around the house.

A contract must include mutuality of obligation. Simply put, mutuality of obligation is a "meeting of the minds." It basically means that the parties to the contract understand and agree to the terms of the contract and that each party recognizes that they have an obligation to perform under those terms. For example, Adam's obligation under his contract with Priya is to install a central air system in Priya's house. Priya's obligation is to pay Adam $10,000 when he finishes installing the central air system.

Based on the doctrine of mutuality of obligation, a contract may not include a provision that grants one party or the other unlimited power to cancel the contract. Such a provision would create an imbalance that would likely cause a court to rule the contract null and void. In some cases, however, a contract may include a provision that describes a limited set of circumstances under which one party's cancellation of the contract is permitted.

The parties to a contract must demonstrate competency and capacity. This means that they must have the mental capacity to understand and agree to the contract. The courts have identified a number of individuals whom they consider incompetent, or lacking the mental capacity to create legally binding contracts. Contracts involving minors are not legally binding because minors lack the maturity and experience of competent adults. Depending on where they live, minors are people under the age of eighteen or twenty-one. The courts consider people who are under the influence of alcohol or drugs incompetent. Both alcohol and drugs, including prescription drugs, can interfere with a person's ability to think clearly. For this reason, a person who enters a contract while under the influence of a mind-altering substance typically cannot be held liable for a breach of that contract. Finally, a person who has a mental illness or an intellectual disability cannot enter into a legally binding contract.

In addition to competency and capacity, the parties to a contract must demonstrate genuine assent. Genuine assent means that the parties entered into the contract freely. Instances in which genuine assent do not exist include when one party misrepresents themselves to the other party; when one party attempts to defraud the other party in some way; and when one or more parties commit to a contract as a result of a mistake. In addition, genuine assent does not exist if parties agreed to the terms of a contract while under duress. For example, if Sondra agreed to sign over the title of her car to Jeremy because Jeremy was threatening to harm Sondra in some way at the time of the signing, the courts will consider the contract invalid. Sondra's assent was not genuine. Under normal circumstances, Sondra would not have signed over the title to her car. She agreed to do so only because she feared what Jeremy might do if she did not sign.

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