The 6 Key Elements of a Contract

Lease agreements, waivers, employment agreements, and even the terms and conditions you “agree to” while subscribing to your online streaming platform are all forms of contracts that silently define most of our personal and professional relationships. 

While contracts are designed to protect our rights, clarify responsibilities, and prevent misunderstandings, their effectiveness depends on their legality and enforceability. 

In order to be valid and legally enforceable, each contract must contain six elements: Offer, acceptance, awareness, consideration, capacity, and legality. Understanding what makes a contract legally binding will help you draft enforceable agreements that offer maximum protection.

What is a contract? 

A contract is a legally binding agreement between two or more parties. It sets expectations and establishes what is required from each involved. In legal terms, a contract creates an obligation or promise to perform (or not perform) a particular duty. 

For instance, a commercial lease agreement is a contract in which a tenant promises to pay a specific amount to the landlord in exchange for using the space.

Any oversight or mistake in a contract can lead to disputes, present financial risks, and put you in a vulnerable situation.

6 essential elements of a contract

The presence of six essential elements: offer, acceptance, awareness, considerations, capacity, and legality transform a contract from a simple agreement to a legally binding agreement. Let’s take a closer look at each. 

1. Offer

The starting point and foundation of all legally binding contracts is “the offer.” One party wants something (desire), like a good or service, and the other can fulfill that request (responsibility). 

The offer must be specific and include details of each party’s role and responsibility. It should also include details about the exchange of value so that everyone knows how the offer benefits each party. The value can be money or something else like an action, service, or outcome. 

The offer must be clearly communicated to the other party. Once the offer has been made, it can be revoked or altered before acceptance. 

Here’s an example of an offer. A freelance writer agrees to write “x” articles for a company in exchange for a flat fee per article. The offer will include essential details like blog topics, length of each article, deadline, and payment terms. 

2. Acceptance 

Once the offer has been presented, it’s the contract acceptance or the “yes” to the specific conditions that transforms the agreement into a legally binding one. Contract acceptance can be either explicit or implicit. 

Explicit acceptance occurs when the other party makes a clear and direct statement, either written, oral, or electronic, that says, “I accept the terms.” In our freelancer example, explicit acceptance would be if the freelancer sends an email saying, “I agree to the terms.” 

Implicit acceptance, or “acceptance by action,” is when the parties involved take a step to demonstrate their acceptance of the offer. If the freelancer starts and submits a blog by the deadline, her action shows that she accepted the company’s offer, even though she didn’t explicitly say, “I agree.” 

Any conditional acceptance, like a counteroffer or modification to the terms, is considered a rejection of the original offer. For example, the company offers the freelancer $200 per blog, but the freelancer counteroffers $400 or just accepts certain terms. This is a conditional acceptance, as the original contract's terms are no longer valid.

3. Consideration

In contract law, consideration refers to something of value, like money, goods, services, or promises that are exchanged between the parties. Think of it as a “quid pro quo” scenario that categorically makes the contract valid.

The consideration for our freelance writer would be their promise to complete the company's blogs. The company’s contractual consideration would be the amount they promise to pay the writer. 

One thing to remember is that consideration has to be something that both parties bargained for and agreed to. For example, free items are perceived as gifts and not counted as consideration because something needs to be given in return. 

4. Legal Capacity 

Capacity alludes to a person’s contractual capacity to enter and comprehend a contract.

As per contract law, anyone who falls under the following categories is considered not to have the mental or legal capacity to validate a contract and, therefore, can't enter binding agreements:

• Minors, and those under age of majority, don’t have the legal capacity to sign contracts. 
• Someone with a mental illness or cognitive disorder like dementia or Alzheimer's that impedes their understanding of the terms and their implications.
• Someone under the heavy influence of alcohol, drugs, or illicit substances may not fully comprehend the contract's terms. 
• Someone who doesn’t genuinely doesn't understand the language used in the contract. Like a foreign national with limited knowledge of English. 
• Someone under a legal guardianship or those declared incompetent by the court. 

5. Mutual awareness and assent

The mutual assent and awareness elements of a contract, often called a "meeting of the minds," refer to the fact that both parties know a contract exists and willingly agree to be bound by the agreement’s general terms. This element makes a contract enforceable.

Let’s go back to our freelancer. Mutual assent of the contract is established by both parties agreeing to the scope of work, payment terms, and deadlines. The awareness element occurs when both parties know they are entering a contract and understand their responsibilities. 

If intent or awareness is lacking, for instance, the freelancer is coerced into accepting a lower pay or the company misrepresents the assignment, the contract could become null and void in court.

6. Legality

All contracts are subject to the jurisdiction in which it’s signed and operates from. Your contract must meet the applicable federal, state, or local laws. For instance, a company can't give a freelancer the same contract as a W-2 employee because it violates federal guidelines. 

The following scenarios also render a contract as automatically illegal: 

• Undue influence, duress, or coercion. One party was pressured or misrepresented during the signing.
• Illegality: The contract involves criminal and illegal activities such as drug trafficking or gambling.
• Public policy violation: The contract undermines established laws and harms public welfare. 
• Unconscionability. A legal concept arises when a contract triggers oppressive obligations or produces shockingly unfair results because it puts one party at a significant disadvantage. Examples of an unconscionable contract would be unequal risk allocation or exorbitantly high interest rates that an ordinary person can't afford to pay.
• Mistake. An error, committed by either or both parties, that significantly changes the contract's obligations, promises, and responsibilities initially agreed to. An example would be a contract for purchasing a limited-edition handbag, and both parties discover that the sought-after bag is not an original, but a counterfeit.
• Force majeure. Circumstances no one could have predicted which make it difficult for parties involved to enforce terms. Examples could be a war, pandemic, or severe weather conditions.

Additional factors to consider

The above six elements are contract must-haves. But there are still other considerations you should be aware of as you attempt to build a comprehensive legally binding contract.

• Intention. Both parties should demonstrate the intention to create legal relations and want it to be enforceable by the court of law. Without legal intention, the contract is more of a promise.
• Certainty. The terms must be precise and clear so that each party understands their duty. There should be no ambiguity or vagueness. Provide definitions within the contract for technical or industry-specific terms. For instance, in a warranty deed, the seller must identify the property being sold, include a description, and specify the selling price.
• Possibility. Terms should be possible to perform. If the condition is impossible (legally or physically), the contract will be void. An example would be a seller trying to sell a piece of land they don't own or asking an employee to sell a product that's no longer in the market.
• Timeline. There must be a defined time period for when the obligations have to be fulfilled. 
• Enforcement. The contract should include guidelines around the legal remedies a party can take if the other party breaches the contract by not upholding their part of the deal. 
• The Statute of Frauds. Statute of Frauds is a state law requiring certain contracts to be written to be legally binding. It is commonly applied to real estate contracts and sold goods over $500. The Statute of Frauds varies by state. 

Why should a contract be legally reviewed?

You may think you are set because you have included the six essential elements in your contract, and skimming the terms will suffice. However, contracts are complex legal documents, and a lot can go awry if you don’t have a legal background. Let’s understand why getting legal counsel during your contract management process is a must. 

Ensure compliance and enforceability

Not all contracts automatically hold up in court; they must meet specific criteria. A contract attorney, with their in-depth knowledge of state and federal laws, can ensure your contract meets these criteria, making it legally binding. Their role in ensuring compliance and enforceability is crucial, as, without it, your document holds limited legal value and could lead to a costly battle if things go sour. 

Identify ambiguities and gaps

Language clarity is paramount while drafting contractual agreements. Language ambiguities, inconsistencies, or altered conditions can mask the real intent and lead to disputes. A lawyer will review the document, highlight areas of concern, and identify vague language and gaps that can impact your legal rights and liability coverage.

Protect your interests

Always remember that when someone presents you with a contract, they are usually prioritizing their interests first. When you get an attorney to review the proposed contract, that attorney will look at the contract from your perspective and will specifically look for any terms that may be disadvantageous or unfair to you. 

Handle disputes

Because of their experience, lawyers are experts in predicting and handling potential contract disputes. Only a lawyer will be able to suggest modifications to a clause that will reduce the occurrence of conflict down the road. They might also advise incorporating streamlined conflict resolution methods like arbitration or mediation as a proactive way to reduce lengthy legal battles. 

Customize contract to your needs

Online contract templates, although affordable and convenient, can’t be tailored to your specific needs. A lawyer has the ability to draft a tailored contract that represents your unique circumstances, ensuring the contract complies with the jurisdiction it’s going to operate in. A customized contract provides the highest level of protection—something a template can’t do. 

Save time, money, and stress

Without an attorney, you might sign a contract that misrepresents your interests and have no way to rectify the situation because you willingly signed the agreement. The upfront investment in an attorney will save you from future anxiety and costly litigation. 

FAQs 

What happens if one element is missing from the contract? 

Failure to include all essential elements required in a valid contract can render the contract unenforceable. For example, failing to specify a time frame for project delivery or forgetting to identify the parties involved will result in a void contract. 

What do I do if I don’t understand the contract terms? 

Don’t sign any legal document where you don’t understand the contract's words. For instance, if English is not your first language, and you are signing a written contract before medical surgery, ask the medical team for a translation so you can understand the document's obligations. Whenever you face a situation where you don’t understand the terms, nothing beats getting advice from legal professionals.

What is a breach of contract? 

A breach of contract occurs when either party fails to or denies performing the duties mentioned in the contract. 

How can a contract be legally terminated?

A contract can be terminated if there are legal grounds for termination, such as breach of contract or impossibility of performance. The contract can also be terminated if the original contract includes termination clauses. To terminate a contract, one party has to send the other a written contract termination notice.