Because contracts form the basis of most business relationships, it is helpful to know what makes a contract valid. Several different elements need to be included in a valid contract. Understanding how a contract is formed can help business owners understand what happens when a contract has been breached and what they can do about it.
A valid contract creates a legal agreement between the parties to the contract and typically outlines the obligations and responsibilities of the parties to one another. The elements of a contract include:
- Offer – the first element of a contract is an offer. The offer may generally be for goods or services.
- Acceptance – the second element of a contract is acceptance. The party in receipt of the offer must accept the offer. The offer and acceptance should generally be mirror images of one another to demonstrate that there was a meeting of the minds between the parties as to what they were contracting for.
- Consideration – another important element of a contract is consideration. Consideration is essentially the value each of the parties stands to gain from the contract and does not necessarily have to money.
- Terms and conditions – the contract between the parties should contain the terms and conditions of the contact. The terms and conditions should be as specific as possible. In addition, the contract must have a legal purpose in order to be valid and enforceable. Contracts should be in writing whenever possible.
Additional requirements for a valid contract include that the parties have capacity to contract, which typically refers to their age and ability to enter into a contract, and that there is no undue influence of duress in the formation of the contract. If one of the key elements of the contract has been breached, or the obligations outlined in it violated, there may be a breach of contract.
When there has been a breach of contract, the parties have specific legal remedies available to them depending on the circumstances. Understanding what makes a contract valid can help the parties negotiate, draft and execute a contract that protects their interests but they should also be aware of the legal remedies available to them if the contract has been breached to further protect their interests.
