The Elements that Make an Agreement Binding
In the business world and in everyday life, people make statements, offers and proposals on a regular basis. In many instances, those conversations and communications are intended to create binding commitments, but often they are not. What, then, differentiates mere words from contract? Here are the fundamental elements that must be present to make a communication or action a binding contract.
Requirement #1 — There must be an agreement—There must be at least two parties to an agreement (there may be more) and there must be an offer and an acceptance. The offer must be specific enough that the party accepting it knows that it’s an invitation to enter into a contract and understands the terms of the agreement. The acceptance must not change the terms of the offer. If it does, it is considered a rejection of the offer and a counter-offer, which may be accepted.
Requirement #2 — There must be mutual consideration—In a legal context, consideration means something of value. It can consist of something given to the other party (which is not legally required) or refraining to do something a party has a legal right to do. Consideration must run both ways. An offer of a gift generally does not create a contract.
Requirement #3 — The subject matter of the contract must be legal—The courts will not enforce agreements to engage in illegal activity and may not enforce contracts that are contrary to public policy.
Requirement #4 — The parties must have contractual capacity—Both parties must have the ability to understand that they are entering into a binding contract, and to understand the terms of the agreement. Factors that may lead a court to conclude that party lacks contractual capacity include age (minors may be able to void an agreement), intoxication and mental deficiency or incompetency.
Requirement #5 — The parties must voluntarily enter into the agreement—Contracts entered into under duress, undue influence, coercion, fraud or misrepresentation are generally voidable.
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