What Are the Key Elements of a Binding Contract?

If you’re a business owner, making sure your contracts are properly prepared is the first step toward ensuring your company is protected. There are a number of ways in which a do-it-yourself approach can immensely backfire, so always be sure to work with an attorney when you need a contract drafted, reviewed, or negotiated.

A contract’s preparation is so important because whether or not the agreement is legally binding depends upon how certain elements of the contract are accounted for. Read more about these key elements below and reach out to A. Singer & Associates, Inc. if you need assistance preparing a business contract!

The Offer

First and foremost, a contract must involve an offer of some kind. An offer is a written or verbal promise that some action will be rendered or ceased in exchange for a series of agreed-upon terms. It’s important to note that while courts do recognize verbal contracts, they are often very difficult to prove in a dispute. A pretty basic example of this concept can be found in a lease. A lessor offers use of their property to a lessee in exchange for rent and compliance with rules for its use outlined in the contract.

Acceptance of the Offer

Both parties must expressly accept an offer, and typically do so by signing a clause stating that they understand and accept the terms and conditions of the contract. It should go without saying, but signing a contract implies that the signee accepts all of the contract’s provisions without issue. Should he or she adjust any of the contract’s provisions, then this is considered a counteroffer to which the other party must now agree or alter.

Consideration

This element of the contract deals with the exchange itself. Both parties must provide something of value to each other for the contract to be valid. Consideration often involves money, but it doesn’t have to: items, actions, or refraining from carrying out an action can amount to consideration if they provide value to one or both parties.

Providing something outside of what is described in a contract isn’t consideration. If you tried to pay your landlord with an item worth the same as your monthly rent, it probably wouldn’t go over well if your contract states that your rent must be paid with a check.

Mutuality of Obligation

A contract must provide that both parties are bound to perform obligations stated in the contract. In other words: If one party isn’t performing obligations within the agreement, then neither party is bound to perform obligations of the agreement.

An example of this might be an independent contractor working on a contract for a company. If the company stops paying the contractor on the schedule or in the amount agreed to in the contract, then the contractor could stop providing labor on the project until the proper pay is restored.

Competency & Capacity

Lastly, parties in a contract must have the competency and capacity to enter into a legal agreement. People younger than 18 cannot provide legal consent, so therefore they can’t participate in a legally binding agreement without the prior consent of their parents or guardian.

Likewise, certain individuals may lack capacity to enter into an agreement because of their mental or physical condition. These may be very elderly people dealing with memory and information processing issues, but they can also be adults of any age who grew up with certain developmental or cognitive disabilities.

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