5 Essential Requirements of a Contract: All You Need to Know

A contract is a binding agreement, legally enforceable, and with more power than a simple promise. It consists of several key elements, each of which must be present for the promise to be a legal contract.

Most business and professional dealings involve contracts, from an employment offer to a vendor’s agreement to provide services or goods for payment. Contract requirements set forth the terms of the agreement, obligations of each participant, the liability each party assumes, and penalties for breach of the contract. To create a well-prepared contract you might need the assistance of a professional business lawyer.

Here, we outline the requirements of a contract and how each one is critical for a valid document.

5 Essential Requirements of a Contract

Business contract requirements indicate that something of value was exchanged between two parties and that all parties participating in the transaction agreed to the terms.

Most verbal and written contracts share common provisions, each of which must be met for the contract to be a binding legal document.

1. Offer

A binding contract must have a specific and understandable offer of a valid item that the other party accepts. The offer and acceptance must be clear and present in the contract, eliminating questions about what is being offered and the terms of acceptance.

An offer states the exchange of value between the contracting parties, and the offer’s details may be highly detailed. For example, some contract requirements may include an identifying number of an item, such as a vehicle’s VIN, for the contract to be valid. Simply making an offer for “a blue car” may not be specific enough.

An offer may be revoked, changed, or altered at any point in contractual negotiations until it is accepted. Furthermore, the offeree (the person to whom the offer is extended) can make a counteroffer. At this point, the original offer is terminated, and both parties may negotiate the terms of the counteroffer.

2. Acceptance

If the offeree accepts the proposed offer — whether the original offer or a counteroffer — they may do so verbally or in writing. Acceptance of an offer can come in several forms, including:

• Conditional acceptance — accepting the offer once the offerer meets conditions.
• Option agreement — accepting the offer during a preset time for a preset price.
• Acceptance by action — the offeree’s actions demonstrate agreement.

Inaction does not constitute agreeing to accepted terms of an agreement. For example, if the offer states that the proposal will be accepted “unless we hear otherwise,” the offeree’s non-response may not hold up as valid consent to the contract.

Explicit acceptance is one of the universal requirements of a valid contract in the United States. Both sides must act to commit to the contract.

The main requirement for contractual acceptance is that a clear, direct statement must be present accepting all listed terms and conditions of the offer.

3. Mutual Consideration

Each of the parties involved must agree to the terms and conditions and be bound by the contract. For a contract to be legally binding, both parties must be aware of what they are agreeing to.

Each party must:

• Recognize that the contract exists
• Be an active participant in the contract
• Consent to the terms listed in the contract
• Decisively indicate that the agreement is authentic
• Agree of their own free will to be bound by the obligations set forth in the deal

An absence of one of these elements of a contract may be grounds to void the contract. For example, if the consent to the terms and obligations was made under duress or fraud, then the contract would not be valid. Awareness must be made clear in a contract for it to be valid.

4. Competency

All parties agreeing to the contract must be competent to enter into a legally binding agreement. In short, an individual cannot unwittingly sign away their rights or property. Competency is a common argument in the validity of a will or other estate planning documents.

U.S. contract law requires all parties signing the contract to demonstrate that they are in possession of their faculties and are able to give consent. A minor (someone under the age of 18) is not legally able to consent to a contract, for example, and so their signature on a contract could render it invalid.

Minors aren’t the only category or persons who may be deemed legally incompetent to sign a contract. Someone falling into one of these categories may also not have the capacity to enter into a contractual agreement:

• Someone under the influence of alcohol or drugs.
• An individual with cognitive declines, such as dementia.
• Someone who doesn’t have a sufficient understanding of the contract’s obligations.

However, just because someone falls into one of these categories doesn’t mean they cannot participate in the contract.

A minor child can have their legal representatives, such as their parent or guardian, sign a contract for them, or in the case of someone who doesn’t understand the language of the original contract, a certified translated copy may be provided for them to sign.

5. Legal Purpose

A contract, either written or verbal, serves to legally bind all parties to the terms of the agreement. The legal purpose of a contract is to provide enforceable options for an aggrieved party if the other party fails to honor the terms of the agreement.

Additional Contract Elements to Be Included

The above are the required elements of a contract, but many contracts have other essential elements. When drafting a business contract, it can benefit both parties to have additional considerations listed in the document.

Transaction Details

The explicit details of the transaction may be stated in a contract. If, for example, one party purchased an item from another party and agreed to pay for it in installments, then the details of the payments, such as a calendar of the date, time, or amount, would be part of the contract.

Other transaction details in the contract could include proof of sale for an item or service, such as a copy of the sales receipt. Or transaction details may be the date and method of delivery of an item, as one might find when buying something online and having it delivered.

Signatures

Many contracts have a signature page, where each party signs. In some cases, the signatures must be notarized. The signature is an explicit agreement to the terms of the contract.

Signatures are standard guarantees of the terms of a transaction, such as signing the credit card receipt after a purchase. However, not every contract requires a signature.

Do You Need Help Preparing a Legally Binding Business Contract?

Drafting a contract that represents your interests and protects you in business transactions can be tricky if you try to do it on your own. An experienced business contract lawyer with a background in contract law can help.

Legally binding business contracts should protect the interests of your enterprise and shield you from personal liability.

Lawyer for Business, a business law firm serving clients across New York State, can review, draft, and negotiate contracts for you online. Contact us today at (716) 745-6225 to schedule your initial consultation.