Essential elements of a contract are important ensure enforceability and validity

Six Essential Elements That Make a Valid Contract

The business world today functions in a codependent ecosystem. Multiple parties join hands to ensure smooth operations and achieve the ultimate goal of meeting customer needs. But what makes these parties hold to their original offers?

A stable business relationship frequently seeks to rely on formal documents called contracts. It lists the obligation of specific performances agreed between the parties. Only when the parties accept the terms of the offer and sign, the deal becomes a legally binding contract.

Why is it essential to have a written contract?

Contracts can be written or verbal. Oral contracts are usually formed on the basis of mutual understanding. Enforcing these contracts can be a challenging task. A reasonable person might find it difficult to prove any contract breach in a court of law within a reasonable time. Therefore, it is often advised to avoid verbal agreements if possible.

Whereas contracts in the form of written documents record each and every term and provision agreed by the parties. This assures certainty and instills a sense of security that the transaction will be completed as per the binding agreement. In case of any breach, the written document can be used as a reference point to claim for any damages or losses.

Six essential elements to be included in a contract

Simply agreeing to the terms and signing the dotted line does not validate a contract’s enforceability. Under the common law, it is proof of the mutual agreement. Therefore, it is critical that a contract is drafted keeping in mind all the essential terms that make it valid. The contract becomes a point of reference throughout the deal term.

For example, if there is a breach of contract, the aggrieved party will reach out to the court and seek compensation for the damages & losses by holding the other party liable. But to do so, they will have to provide proof that there exists a valid contract between the two of them.

Here are some essential elements of a contract that must be included to prove its enforceability, legality, and validity –

1.Contractual Offer

The most basic element of any contract is established on the idea of want and fulfillment. Someone wants something, and someone else has the capability to fulfill it. This forms the basis of an offer. It includes the duties and responsibilities that the offeror (the one making an offer) complies to abide by. Only when the offeree (to whom the offer is made) accepts it, that the agreement becomes a binding contract. Most of these offerings are promised in exchange for value that can either be money or a desired action or outcome.

An offer can be rejected directly or by making a counteroffer which automatically invalidates the initial offer. If there is no rejection, then the contract goes on unless insanity or death strikes either party.

The contract can also be revoked by an offeror when either of the condition is met –

  • It is done before the offeree accepts it
  • The offeree must be informed that the order is getting revoked

If the offeree accepts the offer, then the promise needs to be fulfilled as per the agreed terms.

2.Acceptance

This action is required from the offeree when they must decide whether to accept or reject the offer. By accepting it, they willingly agree to abide by the terms of the offer. But there are a few things to keep in mind to ensure that the acceptance is valid –

  • The offeree knows and accepts the offer on their own without any undue influence
  • They have the intent to get into the contract
  • Their acceptance is expressed through words, deeds, or performance

The offer must be accepted within a reasonable time as there are chances of it getting revoked. While some offers are accepted only when the offeree performs certain obligations like they need to make the payment before availing a particular service or product. These are called unilateral contracts. Whereas a bilateral contract includes promises of both parties to perform. Sales agreements are a good example of a bilateral contract.

Can inaction or silence to an offer be treated as acceptance?

This usually depends on how the terms have been discussed between the parties. If it is agreed in their prior dealings, then silence will be taken as an acceptance. In another way, when a silent party acts upon the offer without any response, it is considered as acceptance. For example – If Mr. Y delivers food to you and you eat it, this means you have acted upon the offer without a response which makes the contract valid. Now you must comply and pay for the food as per the terms.

3. Consideration

The exchange of offer and acceptance is the main subject matter of any agreement. The product or the service offered is the consideration for a promisee. Whereas a certain sum of money from the sale of goods or an agreed action or outcome is the desired consideration for a promisor.

There are certain agreements where one of the parties might induce forbearance to provide immediate consideration but rather promise to provide value at a future date. When the other party performs an obligation based on such promises, they can enforce promissory estoppel. This states that the promise is enforceable by law even if it lacks formal consideration.

Only when an act is done voluntarily that it may not include consideration. For example, You voluntarily helped your elderly neighbor to mow her lawn and she paid you $5 for it. If you do that same thing next week, she is not legally bound to pay you for it.

The six critical elements that makes a binding contract

4. Legality

This essential element is critical to ensure that the terms of the contract are compliant with the contract laws. These documents are subject to jurisdiction-specific law, where the parties perform their obligations.

The purpose of a contract should be legal for it to be valid. For example – If you get into a contract with someone and ask them to steal a car in exchange for a considerable amount of money. This will not constitute a valid contract due to the illegality in the intent. This makes the proposed contract null and void.

5. Capacity

The party you get into an agreement with must have the contractual and legal capacity to sign on the dotted line. Contractual capacity or competency means that the person is legally capable and does not belong to this particular group which consists of – a minor, mentally disabled, or intoxicated person. This set of people lack the capacity to get into an agreement.

Even if you do get into a contract with someone who does not qualify, the contract will be termed voidable from inception as there are chances of an agreement taking place due to undue influence. The person who does have the contractual capacity can end the contract or allow it to move forward.

6. Mutuality

Mutuality, also referred to as mutual assent or meeting of the minds, confirms that the parties to the contract clearly understand and agree to the terms of the contract. This helps to counter the issues of misrepresentation and ensures that both parties are bound to the agreement. Even if one party is not bound, the contract becomes void.

Keep in mind these six essential elements of a contract to ensure validity and enforceability. When you are drafting different types of contracts, be mindful to manage your own legal obligations assuming that the other party will hold up their end of a deal that is favorable to them.

What is the purpose of drafting a contract including all the essential elements?

The purpose of drafting a contract can be viewed from different perspectives. The seller or the service provider would expect the contract to be structured with clauses that ensure value return for their offerings. Whereas the customer might draft an enforceable contract that gives them confidence.

Here are some reasons for drafting a legal contract –

  • Clearly outline the expectations – A contract is a give and take relationship that clearly lists the expectations both parties have from each other, i.e., what the seller must provide, when and where should it be delivered, how must the customer pay, when is the due date, etc. This keeps them in the same boat and helps set up the best deal possible.
  • A record of certainty and commitment – It is a written proof of a business relationship. They are legally binding and enforceable in the court of law. It provides certainty that both the parties will comply with their obligations as agreed upon.
  • Reference document in case of disagreements – There are high chances of disagreements when multiple parties work together on a project. Having the expected tasks listed down in one place becomes a quick reference point. It also helps in case of a dispute as separate legal provisions are laid down to help resolve disagreements in the best way possible.

The purpose of a contract is to act as a tool that structures relationships and build foundations for key business alliances. Read this contract guide to know about the contract types and parts of a contract.

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Want to take the hard work out of drafting contracts? Try Revv’s contract templates

Know the purpose of drafting a contract

Give contract drafting a head start with templates

As discussed above, having a written contract is always beneficial but drafting it can be a challenge. An ideal contract must contain all the essential elements, ensure that the offerings are conveyed clearly to the customer and is easy to read and understand.

In order to simplify the contract creation process and empower teams and businesses to churn out perfect documents quickly, they should try and leverage templates. Document management tools like Revv offer a plethora of templates available for use in their template library.

Here are some benefits that you can enjoy –

  • Less prone to error & omissions – These ready-to-use templates are drafted and vetted after taking considerable legal advice from professionals. This ensures minimal errors. If you draft a contract from scratch, you might miss out on critical clauses, but a standard template will have all the necessary details in place. You just need to add basic information and customize it as per your company’s brand guidelines.
  • Ensures consistency and standardization – Multiple teams and resources usually end up creating different contracts, if not in terms of content but from a visual perspective. They might change the sequence of components or don’t follow the suggested brand guidelines. This creates confusion. A template helps to standardize the contract layout. This makes it easier to share documents across the organization for consultations, reviews, feedbacks, and approvals.
  • Faster contract churn out – Using templates save you from undertaking a rigorous review process and go through multiple iterations. This helps save time and let you focus on other priority tasks.

Draft your next valid contract

Signing a contract is not the only activity that makes a successful contract. There are multiple factors to depend on for a contract to be valid. When working on your next contract, ensure to include these essential elements. Empower your teams with document management tools that make the overall process simpler and faster.

With Revv you can –
1. Create business contracts & documents and email it
2. Integrate google sheets into your contracts and documents
3. Create your own templates and use it

Leverage contract templates and other feature that Revv has to offer and be on top of your contract game!

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Diksha

Diksha

Diksha is a Product Expert at Revv. She works with the creative marketing team to come up with new and exciting content for you. When not working, she can be found engrossed in the world of fiction novels while foot-tapping to Coldplay's tunes.

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