Elements of a Contract
Contracts are an important part of developing business relationships. From a legal perspective, they also help both parties understand the requirements and commitments of the agreement and provide documentation for future reference. In addition, contracts, whether oral or written, form the basic parameters of agreements between individuals and businesses. This article discusses the elements of a contract, including a description of the concepts of offer, acceptance, and legal considerations.
In terms of a working definition of a contract, a contract is a legally enforceable promise or agreement, which in most circumstances involves a pair of mutual promises or an agreement by one party to do something in exchange for a particular action by another (Shefrin, 2006). In many cases, contracts involve two-sided agreements between parties, with each party committing to specific obligations. In addition, contracts immerge when parties agree on all terms, they intend to create a legal and contractual relationship, and consideration is promised in return for some provision of the agreement (Morrison, 2005).
Establishing a contractual relationship requires more than drafting a simple agreement promising business exchanges; it demands that the drafters account for key elements prior to drafting the agreement. Interestingly, valid and enforceable contracts include mutual consent, an offer, acceptance of the offer, consideration, and the capacity of both parties to understand the terms, consequences, and legal implications of the agreement (Shefrin, 2006). Furthermore, contracts need to cover all the details necessary for both parties to carry out their responsibilities as outlined in the contract (Ewasiuk, 2004).
Consent. Mutual consent is more than a simple agreement; it involves a meeting of the minds. For example, in a contract for the sale of a mustang, the buyer may think he is buying a car manufactured by Ford, although the seller is selling a horse; such a contract is likely to be unenforceable (Larson, 2003). Without mutual consent, the entire contract becomes invalid, making it vital to understand the details of a contract to protect its validity and enforceability.
Offer. An offer is the manifestation of a willingness to enter a bargain by one party that prompts another person to understand that his or her assent to the bargain is invited and will conclude it (Combs, 2000). The offer also outlines certain conditions of the contract so that the accepting party has an opportunity to make an informed decision. When people make an offer to purchase a house, they should include any conditions of the sale or special requests. For example, when I purchased my house, I made an offer of a particular amount in exchange for the house, the appliances, and the lawn equipment.
Acceptance. After an offer is made and both parties deem the offer acceptable, the contract moves into the acceptance phase. Acceptance refers to a willingness to be bound to the terms and conditions of the offer, which after accepted, must be absolute and unconditional with respect to the terms of the offer (Smith, 2010). For instance, the price of a house cannot change after the offer is accepted. Additionally, the original conditions of the offer are legally binding.
Consideration. Consideration refers to the inducement, price, or motive that causes someone to enter a contract; generally, either or both parties give something of value in exchange for receiving something in return (Ollek, 2010). The most common and almost universally accepted form of consideration is cash; however, other forms of consideration exist. For example, someone may enter a contract to do a particular project in exchange for free advertisement. Admittedly, free advertising has monetary value, yet because no money exchanged hands, this example constitutes another form of consideration.
Capacity. The last element discussed in this assessment is capacity, which refers to one’s ability to enter a legally contractual relationship. Capacity is important because if a party of a contract is deemed to lack the capacity to enter a binding contract, the contract is void or voidable, depending on the agreement and the party (Smith, 2008). For example, entering a contract with a minor or a mentally disabled person is likely to result in a void or voidable contract. Therefore, ensuring that all parties have legal capacity prior to entering a contract is paramount.
Legal Implications and Conclusion
A final note concerning contractual relationships is the legality of the relationships themselves. If a contract has all of the elements mentioned above, chances are that such contracts are legally enforceable and can result in legal troubles if breached. Because contracts are binding agreements, breaking a part of all of a contract’s conditions could result in monetary damages. Therefore, a good rule of thumb is to consult with a lawyer before signing contracts, especially if the language or conditions are unclear.
In short, a legally binding contract includes mutual consent, an offer, acceptance, and consideration. Parties of contracts must also have the legal capacity to enter such arrangements; otherwise, the contract’s conditions are void or voidable. In addition, contracts that fail to include the essential elements as outlined in assessment, whether written or oral, are unlikely to be enforceable, making it necessary for all parties to educate themselves before signing on the dotted line.
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