Contracts form the backbone of society by establishing trust and minimising risks between parties. A contract is the exchange of an act or promise between two or more individuals where one individual offers the other some form of value in exchange for something in return. Contracts are not always money related, as they often relate to the specific performance of certain obligations or agreements not to carry out certain acts (e.g., non-compete undertakings). A contract is a binding agreement that creates legal obligation(s) recognised by law, meaning that a party can bring a civil claim (or even criminal if fraud is involved) against another party to the contract for breach of contract. To provide a full picture of what makes a valid agreement, we will cover two important areas in contract law: (A) essential elements of a contract, and (B) privity of the contract.
A. 6 Essential elements of a valid contract
Most people assume that once one party has made an offer and the other party has accepted, a contract has been formed. However, there is more to a valid contract than this, and it has nothing to do with how formal the agreement is. A contract can be formal or informal, written or even oral.
What are the 6 elements of a valid contract?
A contract is valid and legally binding if the following 6 essential elements are present
Intention to create legal relations
Legality and capacity
Offer and acceptance analysis form the basis of contract law and the formation of a valid contract. Developed in the 19th century, the offer and acceptance formula identifies the point of formation, where the parties are of 'one mind'.
An offer is a proposal constituting specific terms for one party to enter into an agreement with another party, which is essential to the formation of an enforceable contract.
What is the difference between an 'Offer' and an 'Invitation to Treat'?
It is important to distinguish between an offer and an invitation to treat. A valid contract requires an offer to be accepted, whereas an invitation to treat is not an essential element of a contract.
Whilst an offer can be accepted, an invitation to treat is merely an invitation or willingness to negotiate that one party makes to the other. This is not an offer as it does not show a willingness to be bound on specific terms once accepted.
An invitation to treat gives the party who issues the invitation control over whether the contract should be made or when it should be made. An invitation to treat only constitutes an offer when the wordings are clear, definite and explicit, which leaves nothing open for further negotiation.
Examples of an 'Offer' and an 'Invitation to Treat'
In general, an invitation to tender is an invitation to treat. However, if the invitation is addressed to everyone known to the inviter and the invitation contains an agreement to accept the most competitive bid or states that at least one of the tenders will be considered, then that invitation can be regarded as an offer.
Another example of an invitation to treat would be a restaurant menu that displays prices.
Below is an example of an internship opportunity offer:
Acceptance is an agreement to the specific terms of an offer. Mario Iveljic, a partner at Mag Mile Law, LLC explains that there is not one way of validly accepting a contract - generally, an offeree can accept an offer in any reasonable medium as long as the country or state does not require any specific form.
Offers do not have to be accepted through words; they can be accepted through conduct. If someone purports to accept an offer but accepts on different terms than that of the original offer, that will constitute a counteroffer rather than an acceptance.
The acceptance must normally be communicated to the offeror – silence cannot be treated as an acceptance.
In exceptional circumstances (for example, where the offeree has been given terms of dealing and proceeds with the dealing without formally communicating acceptance), silence may be treated as acceptance.
Below is an example of a letter to accept an employment offer:
3. Intention to Create Legal Relations
An agreement does not need to be worked out in meticulous detail to become a contract. However, an agreement may be incomplete where the parties have agreed on essential matters of detail but have not agreed on other important points.
The question of whether the parties have reached an agreement is normally tested by asking whether a party has made an offer which the other party has accepted. Agreements may not give rise to a binding contract if they are incomplete or not sufficiently certain. There will usually be no contract if the parties agree ‘subject to contract’ but never quite agree on the terms of the contract.
If the agreement is a stepping stone for a future contract or is an agreement to agree, then the agreement might be void for a lack of intention to create legal relations. Moreover, a domestic contract is presumed not to be legally binding in common law jurisdictions.
For an example of a memorandum of understanding (MOU) concerning a joint venture, please see the link below:
As Nelson Johnson, an attorney at Griffith, Lowry & Meherg, LLC puts it: if there is no consideration, there is no contract. Without consideration, the contract is both unenforceable at equity and in law.
Consideration constitutes something of benefit to the person who has the obligation or who makes a promise to do something (the promisor). It can also be something detrimental to the person who wants to enforce the obligation, or who has the benefit of the promise (the promisee). There is no need for an 'adequate' value: if some value is given for the promise, it would be sufficient consideration.
Where the consideration of one party is not absolutely clear, the agreement will generally include language such as ‘FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged’ in the recital.
Alternatively, one can make the document in a deed without the need for consideration.
What is a deed?
If there is a promise to do something but the agreement lacks any consideration, then the agreement must be made in a deed. A deed is a document under seal that either (i) transfers an interest, right or property or (ii) creates an obligation which is binding on someone or some persons or (iii) confirms an act that transferred an interest, right or property.
Not all documents under seal are deeds. There are special requirements for the execution and delivery of deeds. For instance, a contract under seal is a deed. A contract contained in a deed does not require considerations. A person identified in the deed as someone to benefit from a promise can enforce a promise to pay money or can seek damages if the promise is not performed.
However, equitable remedies (e.g. specific performance of obligations other than to pay money) are not available if there is no consideration.
For example, where a party would like to join an existing agreement without clear consideration, the party would enter a deed of adherence: https://docpro.com/doc379/deed-of-adherence-to-agreement-general
5. Legality and Capacity
What would render a contract illegal?
A contract is illegal if the agreement relates to an illegal purpose. For instance, a contract for murder or a contract to defraud the Inland Revenue Department is both illegal and would therefore void contracts that are unenforceable.
Certain contracts may also be unenforceable because they are immoral and against public policy. For example, contracts for sexual services may be unenforceable or even illegal contracts in certain jurisdictions:
To avoid the whole contract being rendered unenforceable due to illegality, a boilerplate severability clause can be added to say that if and to the extent that any provision of the contract is held to be illegal, void or unenforceable, such provision shall be given no effect and shall be deemed not to be included in the contract but without invalidating any of the remaining provisions of the contract.
For examples of a boilerplate clause, please see below:
Whether the other party has the capacity to contract?
The law presumes that a party to a contract has the capacity to contract. However, minors (children under 18) and mentally disordered people do not have the full capacity to contract. It is for the person claiming the incapacity to prove their incapability to enter a contract.
There are special rules which apply to corporations (including companies), unincorporated associations (including clubs and trade unions), the government (including any government department or officer), public authorities (including local government bodies, state-owned enterprises), organisations and charities.
In what circumstances can a minor enter into a contract?
A minor is capable to enter a contract for 'necessaries' (goods or services that are suitable to the condition of life of a minor). A minor who fails to pay for the goods or services can be sued for a breach of contract.
How about a mentally incapable person?
In general, an agreement entered by a mentally incapable person will be void.
However, a person that becomes mentally incapable later on can authorise another person to make legal decisions on behalf of them by granting the other person the power of attorney (POA).
For an example of a POA document, please see the link below:
A valid contract requires reasonable certainty for the essential terms. If the parties fail to reach an agreement on the essential terms with reasonable certainty, then it may be contract void even if all other essential elements are present.
What is an essential term?
The definition of essential terms depends on what the parties have set out to achieve. In general, under common law, there are two essential terms: (i) consideration or price of a bargain, and (ii) price to be paid for the promised obligation.
Whether the term is essential is determined by asking whether the term is so important and fundamental to the contract that any breach of such a term will justify termination.
For commercial contracts, provided that the parties have shown an intention to be legally bound, the court can fill in the gaps through five special rules:
Constructing an essential term by referencing the agreed mechanism
Constructing an essential term by referencing the contract as a whole
Imply an essential term by referencing to prior course of dealings
Imply an essential term by referencing the parties' post-contractual conduct
Imply an essential term by law
For example, a sales and consignment agreement is a commercial contract :
Above are the six essential elements of a valid contract. You should note, however, that the classic doctrine of contract formation has been modified by developments in the law of estoppel, misleading conduct, misrepresentation, unjust enrichment, and power of acceptance.
Since contractual obligations are only binding to the parties of the contract, the issue of third-party contractual enforcement raises the topic of privity of contract. This will now be discussed.
B. Privity of Contract
What is the Privity of Contract?
Privity of Contract is a common law doctrine that provides that a contract cannot confer rights or impose obligations that arise under the contract on anyone other than one of the parties to the contract. As such, the only parties who should be able to sue to enforce their rights or claim damages are the parties to the contract.
However, there are issues associated with contracts made for the benefit of third parties who are unable to enforce the contractual rights as they are not the contracting parties under the contract.
For example, Andrew and Ben entered a contract under which Andrew agreed with Ben to give a valuable diamond to Carrie. Both Andrew and Ben fully intended for Carrie to take the benefit of Andrew’s promise. Under the doctrine of privity of contract, if Andrew for some reason does not give the diamond to Carrie, Carrie cannot sue Andrew as she is not a party to the contract. Ben can sue Andrew for breach of contract, but Ben will only be entitled to nominal damages as Ben has not suffered any actual loss.
Right of Third Parties
In certain common law jurisdictions such as England, some states in Australia, New Zealand, Hong Kong, Singapore, and some provinces in Canada, the parties to a contract can agree that someone who is not a party to the contract can enforce a term of the contract.
This will apply to give a third party a statutory right to enforce a contract term where the term of the contract:
Expressly provides that the third party may enforce a term of the contract; or
Purports to confer a benefit on that third party
It is also possible to expressly contract out of such statutory right in these jurisdictions by including a term along the line of:
"No Rights under Contracts for Third Parties
A person who is not a party to this Agreement shall have no right under any law to enforce any of its terms."
It is not possible to use a contract to impose an enforceable obligation on someone who is not a party to the contract. However, a similar effect may be achieved by conferring a benefit subject to the third party meeting a condition.
Joint and Several Liability
Joint liability arises when two or more people jointly agree to do the same thing. If either (or any) of the joint obligors (i.e. the people who have the obligation) perform the obligation, the others are discharged from their obligations.
There are strict technical rules of law that apply to joint liability. Liability can also be joint and several. This is where two or more people jointly promise to do the same thing or severally agree to do the same thing.
Performance by one will discharge the liability of all of them. It is presumed that liability is joint where a promise is made by two or more people. If this is not the intention, express wording should be included to make the obligation several.
For further tips on drafting a valid and enforceable contract, you can learn more here: https://docpro.com/blog/valid-enforceable-contract
Frequently Asked Questions (FAQs)
1. Is it possible to enforce a contract that lacks consideration?
No. A contract lacking consideration is unenforceable in law and in equity, as consideration is one of the main and essential requirements of any legal contract.
Mario Iveljic, a founding partner of Mag Mile Law gives a helpful example of an unenforceable contract lacking consideration - one where one party promises to do something it had previously been obligated to do. Since this does not constitute a detriment to the offeror or benefit to the offeree, it cannot be a valid contract.
2. What constitutes valid acceptance of a contract?
Valid acceptance is an acceptance that is unconditional and not qualified . It also has to be communicated in a way that is clear and concise. Further, both parties must be able to understand the terms of acceptance without difficulty.
3. How do you avoid ambiguity in a contract?
Andrew J. Contiguglia, an attorney at The Contiguglia Law Firm, P.C. sums this up: parties must create a contract that truly reflects both parties’ wishes. Ultimately, a contract is a meeting of the mind. To help increase the chances of success, there should be a checklist of clauses and terms that the agreement should include.
Avoiding ambiguity is crucial as contracts are construed against the person who drafted them - as attorney Nelson Johnson emphasises.
4. Is a contract entered by an Intoxicated person valid?
To be valid, a contract must be entered into by individuals with capacity. This is because it has a significant impact on the extent to which an individual understands the terms of the contract. Whether or not such a contract is valid depends on whether the intoxication actually impaired the person's ability to make a legitimate offer or acceptance .
If it did impair the person's ability, the contract will in turn become voidable. Note that voidable contracts are not the same as void contracts: the intoxicated individual will have to take action to revoke the contract to make it invalid.
 Mario Iveljic, Partner and one of the Founders of Mag Mile Law, LLC
 Mark Sadaka, trial lawyer and Founder at Sadaka Law
 Nelson Johnson, attorney at Griffith, Lowry & Meherg, LLC
 Douglas E. Noll, Attorney at Noll Associates
 Andrew J. Contiguglia, owner and president of The Contiguglia Law Firm, P.C.
We hope you found this Blog helpful! Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your lawyer.
What are the 6 essential elements of a valid contract? ›
There are 7 essential elements an agreement must have to be considered a valid contract. The elements of a contract include identification, offer, acceptance, consideration, meeting of the minds, competency and capacity, and legality.What are the essential elements of contract with example? ›
For a contract to be valid and recognized by the common law, it must include certain elements— offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.What is valid contract with example? ›
Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair. This contract would be valid, the only problem is that person B is a minor and can't legally enter a contract. So this contract is a valid contract from the point of view of A and a “voidable” contract from the point of view of B.What are the essentials of valid contract explain? ›
A contract has six important elements so that it will be valid which is offer, acceptance, consideration, intention to create legal relation, certainty and capacity. If the main elements are not in contract, it would be an invalid contract.What are the six elements of a contract quizlet? ›
- Agreement. Includes an offer and an acceptance.
- Consideration. ...
- Contractual Capacity. ...
- Legality. ...
- Genuineness of Assent, or Voluntary Consent. ...
- Offer and Acceptance (Mutual Assent)
- Legally Competent Parties.
- Reality of Consent.
- Legal Purpose.
Certain essential elements must be present before a written contract is binding, including: identification (names) of the parties, the purpose of the agreement, a detailed statement of the rights and obligations of each party, what each party is giving (e.g., money, products, or services) in exchange for what they're ...What is an example of offer and acceptance? ›
For example, if you offer a contractor to paint your home for a certain sum of money and make some advance payment to him, the receiving of advance payment itself amounts to an acceptance by the contractor.What are the 6 types of contracts? ›
- Written contracts.
- Verbal contracts.
- Part verbal, part written contracts.
- Standard form contracts.
- Period contracts.
- Getting contract advice.
With a void contract, the contract can't become valid just by both parties agreeing, as you can't commit to doing something illegal. Voidable contracts can be made valid if the party who isn't bound agrees to give up their rights to rescission. Examples of void contracts could include prostitution or gambling.
What is a simple contract example? ›
For example, if a children's party entertainer and a parent have a written simple contract stating specific activities that the performer will provide on a certain date, but the event is canceled by one party, the other may choose to sue for damages.What are the 5 requirements of a valid contract? ›
The requirements of a contract are consideration, offer and acceptance, legal purpose, capable parties, and mutual assent. When any of the required elements is lacking, vitiated, or irregular, the contract may become void, voidable, or unenforceable.What are the six 6 elements of a contract define? ›
Generally, where it is proven that an agreement was made, the agreement will be deemed as a legally binding contract if the six elements to a contract are present. The six elements are Offer, Acceptance, Consideration, Intention, Capacity, and Legality.What are the 6 elements of contract definitions? ›
If it is proven that an agreement has been reached, the agreement is generally considered a legally binding contract if all six elements of a contract are present. The six elements are offer, acceptance, consideration, intent, legality and capacity.What are the 6 contract types that need to be in writing quizlet? ›
- Agreements by an executor or administrator to pay the debts of a deceased person.
- Agreements to answer for the debts of another.
- Agreements that cannot be completed in less than one year.
- Agreements made in contemplation of marriage.
- Agreements to sell any interest in real property.
A valid contract requires an offer to be accepted, whereas an invitation to treat is not an essential element of a contract.What are the essential elements of a valid contract PDF? ›
In order to create a valid contract, there must be a 'lawful offer' by one party and 'lawful acceptance' of the same by the other party. do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make an offer'.What are the 8 essential elements of a contract? ›
A valid contract should have all essential elements including offer, its communication, meeting of minds, acceptance, communication of acceptance, consideration, capacity, legality.What is a promissory estoppel? ›
Overview. Within contract law, promissory estoppel refers to the doctrine that a party may recover on the basis of a promise made when the party's reliance on that promise was reasonable, and the party attempting to recover detrimentally relied on the promise.What is a lawful consideration? ›
(a) A agrees to sell his house to B for 10,000 rupees. Here, B's promise to pay the sum of 10,000 rupees is the consideration for A's promise to sell the house and A's promise to sell the house is the consideration for B's promise to pay the 10,000 rupees. These are lawful considerations.
Do contracts have to be in writing to be legally binding? ›
It's a common belief that for a business contract to be legally binding, it must be in writing, but this is not necessarily the case. A contract can be spoken as long as the basic elements listed above are present. For example, a job offer and acceptance can be spoken and it's still considered lawful and enforceable.Can you put examples in a contract? ›
Here's my answer: Don't use for example in contracts to introduce lists of items, but by all means use it to introduce illustrative scenarios. First, let's consider including.What are examples of contracts in daily life? ›
Examples of contracts
You are entering an implied contract every time you make a purchase at your favorite store, order a meal at a restaurant, receive treatment from your doctor or even checkout a book at your library. Other examples of contracts are more concrete or express.
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality. In some states, elements of consideration can be satisfied by a valid substitute.What makes a contract invalid? ›
If the formation or performance of the contract will require a party to break the law, the contract is invalid. Examples of contracts with illegal subject matter: Agreement for the sale or distribution of prohibited substances, such as drugs. Contracts to engage in an illegal activity.What makes a contract unenforceable? ›
Additionally, there are eight specific criteria a court will use to determine whether or not a contract is unenforceable: lack of capacity, coercion, undue influence, misrepresentation and nondisclosure, unconscionability, and public policy, mistake, and impossibility.What is an example of voidable? ›
Examples of Voidable Contracts
Minors who have signed a contract can walk away at any time because they did not have the legal ability to enter this agreement. If one party was tricked or forced into signing, the contract is voidable.
- Offer And Acceptance. A Contract always involves two or more parties where one proposes and other accepts. ...
- Lawful Consideration. ...
- Intention Of Giving Rise To Legal Obligations. ...
- Capacity. ...
- Free Consent. ...
- Lawful Object. ...
- Agreements Not Expressly Declared Void. ...
- Possibility Of Performance.
- Offer - One of the parties made a promise to do or refrain from doing some specified action in the future.
- Consideration - Something of value was promised in exchange for the specified action or nonaction. ...
- Acceptance - The offer was accepted unambiguously.
- Failure by one or both parties to disclose a material fact.
- A mistake, misrepresentation, or fraud.
- Undue influence or duress.
- One party's legal incapacity to enter a contract (e.g., a minor)
- One or more terms that are unconscionable.
- A breach of contract.
What are the 5 elements of a valid contract? ›
A contract is a legal agreement between two or more parties in which they agree to each other's rights and responsibilities. Offer, acceptance, awareness, consideration, and capacity are the five elements of an enforceable contract.What do you mean by contract and explain any six different types of contracts? ›
Contracts can be of different types, including unilateral, bilateral, contingent, voidable, express, implied, executed, and executory contracts. It can be broadly classified based on quasi-contract.What are the main contract types? ›
- Fixed-Price Contract.
- Cost-Reimbursement Contract.
- Cost-Plus Contract.
- Time and Materials Contract.
- Unit Price Contract.
- Bilateral Contract.
- Unilateral Contract.
- Implied Contract.
Updated October 7,2020: A null and void contract is a formal agreement that is illegitimate and, thus, unenforceable from the moment it was created. Such a contract never comes into effect because it misses essential elements of a properly designed legal contract or violates contract laws altogether.What makes a contract void or illegal? ›
Illegal contracts are those that require either party to engage in an illegal activity to fulfill the contract. This would not be considered a legal contract by the court and could not be enforced. Thus, illegal contracts are void and neither party will be entitled to relief if the other party breaks the contract.What are the example of void and voidable contract? ›
With a void contract, the contract can't become valid just by both parties agreeing, as you can't commit to doing something illegal. Voidable contracts can be made valid if the party who isn't bound agrees to give up their rights to rescission. Examples of void contracts could include prostitution or gambling.What is required for legal or valid contract? ›
The parties must agree on all the rights and obligations created by the terms of the contract. These rights and obligations must be communicated in the form of an offer and acceptance. The offer must be made with the intention to be bound by the acceptance.