Helpful summary
- Overview: The article explains the six essential elements of a legally binding contract: offer, acceptance, awareness, consideration, capacity, and legality.
- Why you can trust us: SignWell has facilitated contract management for over 61,000 businesses, streamlining processes and enhancing productivity.
- Why it matters: Understanding these elements ensures your contracts are enforceable, protecting against legal issues and invalid agreements.
- Action points: Ensure your contracts include all six elements to be legally binding. Utilize SignWell’s e-signature solutions for efficient contract management.
- Further research: Learn more about specific contract law in your jurisdiction and seek out legal advice before signing or creating contracts if you’re unsure about anything.
A checklist of the essential elements of a legal and enforceable contract
At the center of professional relationships is the contract. Whether you’re closing a deal or arriving at an agreement, your contract is the foundation of all parties’ obligations and rights.
There are several different types of contracts, from fixed-price and aleatory contracts to adhesion and cost-reimbursement contracts.
But each of them must have these six essential elements:
- Offer
- Acceptance
- Awareness
- Consideration
- Capacity
- Legality
Make sure all these elements are present, and your contract will become a binding legal document, not just a simple agreement. Forget to include even one of these elements and it may not hold up in a court of law.
This SignWell guide examines each of these contract elements in depth to ensure a solid understanding of their role and importance.
Why Listen to Us?
At SignWell, we’ve helped over 61,000 businesses and individuals streamline their contract management process with our e-signature solution. Our platform has helped clients close deals faster, save time and money, and enhance contract security.
By addressing common contract pain points, like a time-consuming signing process and difficulties tracking documents, we help businesses focus on core tasks.
What Is a Contract?
A contract is a legally binding agreement between two (or more) parties.
It outlines the who, what, when, and how of the agreement in a way that makes it legally enforceable if one of the parties decides not to uphold their end of the deal. If this happens, a legally binding contract is a smoking gun that can be used to protect the other party’s rights.
But… in order for a contract to be legally binding, it needs certain elements.
6 Key Elements of a Contract
1. Offer
A contract isn’t a contract without an offer. There’s nothing to accept without this essential element, and without it, the contract won’t be legally binding. An offer communicates the offeror’s terms to the offeree, essentially stating, “These are the terms my party is willing to be responsible for in a legally binding agreement.”
Once the offer is received, the contract process begins. With the offer in hand, the offeree, such as a real estate buyer, can choose to accept, negotiate, clarify, or reject it.
It’s also crucial to understand the contract processes of the offeror and the other party involved. For example, one offeror might view a counteroffer as an automatic termination of the original offer, while another might be more lenient and open to negotiation.
2. Acceptance
Acceptance is probably the most well-known contract element (and arguably the most significant).
In simple terms, acceptance means you’re okay with the offer being presented to you, and you’re willing to be legally bound by its terms. Accepting a contract can be done in several ways, from a verbal agreement (in some jurisdictions) to an e-signature.
There are a few requirements, though:
a. Acceptance should be unequivocal (meaning there’s a definite, documented approval).
To illustrate, imagine you’re accepting an offer at a tech company. The offer includes terms of employment—salary, job title, start date, benefits, etc. If you review the job offer, decide to accept it, sign the offer letter, and return it to the company quickly, they’d have a pretty difficult time convincing a judge that you weren’t actually accepting the offer.
b. Acceptance must correspond to the offer’s terms (meaning the terms cannot change after the offer is accepted).
Acceptance is also a one-time event—you’re accepting the version of the offer you received at that specific time. If a contract changes down the line, you’d need to re-accept the offer or negotiate new terms.
What About Implicit Acceptance?
One form of acceptance that often isn’t discussed? Implicit acceptance.
This happens when the offeree does things that imply their acceptance without ever explicitly accepting the offer. For example, let’s say you have a leaky sink. You call a plumber to fix it, let them into your home, watch them fix the sink, and then argue that you never agreed to pay them for their services.
In this case, the plumber may be able to demonstrate implicit acceptance to a judge.
3. Awareness
Awareness is often called “the meeting of the minds.”
The gist of the awareness requirement is that all parties must:
a. Know they are entering into an agreement.
b. Understand the terms of the agreement.
Contracts can be voided if awareness cannot be established, making them unenforceable.
For example, imagine you’re buying a house. You tour it with the seller, and they will give you the facts, such as square footage, property lines, etc. You’re happy with the property as it’s presented to you, and you’ve decided to sign the contract.
However, later on, you find out that the property is significantly smaller than advertised. This would give you a strong case for voiding the contract due to a lack of awareness—you didn’t understand the true terms of the agreement (in this case, because you were misled).
The main objective of this element is to protect signatories from fraud, deception, or undue influence.
4. Consideration
The next element is consideration—or what each party promises to do to fulfill the contract. These are the goods, services, and other things of value that each party agrees to exchange to make the contract valid.
An example:
When you buy a car, your consideration is the money you pay, while the dealer’s consideration is the car. In an employment contract, your consideration is the work you’re agreeing to do, while your employer’s consideration is the salary they’ll pay for that work.
This exchange of value is essential. It gives both parties a clear way to determine whether the other party met (or breached) the contract’s terms.
5. Capacity
Capacity and awareness are similar concepts.
Both elements aim to ensure all parties understand the contract’s terms. However, while awareness ensures that all parties have access to the same information, capacity ensures that all parties can understand it (from a purely legal perspective).
Examples of individuals who lack the legal capacity to sign a contract include:
- Minors
- Individuals who lack mental capacity due to a disability or illness
- Intoxicated individuals
- Individuals who have been coerced into signing
Why?
Well, according to U.S. law, these groups may be considered unable to fully comprehend the terms of a contract (and cannot be held legally responsible for breaches). That said, it’s often taken on a case-by-case basis.
6. Legality
The last element is legality—and it’s a pretty simple one. As you’d expect, a contract needs to be legal to be binding and enforceable. That means legal at the federal level and within the state(s) where the parties are located.
For example, imagine you’ve been hired by a company, and you’re asked to sign a non-compete contract restricting you from working for competitors for two years after leaving the company. But… you live in a state where non-competes can only be enforced for one year.
In this case, it doesn’t matter if you meet all the other elements of a contract. The non-compete would still be considered illegal and unenforceable (in your state, at least).
Sign Contracts Faster With SignWell
By understanding the six important elements of a contract, all signatories can be confident that the deal they are entering into is fair and legal. Knowing these essential elements can also help avoid the expenses, frustrations, and dilemmas that come with getting involved in agreements that later become invalid and need to be renegotiated.
Looking for a legally-binding e-signature solution to help close the deal? SignWell simplifies the contract-signing process so that you spend less time chasing signatures and more time growing your business. With advanced security, detailed audit reports, and international compliance, your contracts are in good hands.
Sign up now for free to get started.
Disclaimer: While we’re careful to provide accurate, up-to-date information, we always recommend that you consult with legal professionals before signing any contracts. This article is not intended as legal advice.
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