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The 7 Elements of a Contract that Form a Binding Agreement

November 12, 2019

Many people think contracts are just agreements between two parties, and that contract management just involves checking in on people to ensure everything is running smoothly. But there’s more to it than that. For something to count as a contract, there has to be an offer accompanied by agreements on both (or all) sides.

There are a few other elements that go into contract creation, as well. Including all of these elements will ensure that your document holds up in court (if necessary) as well as outline conditions and compensation for both sides.

Elements of a contract

If you’re looking to write a contract, you have a responsibility to understand what all goes into it. Drafting up a contract incorrectly may mean you don’t get paid for services or goods rendered, among other negative outcomes.

While some will choose to use a legal service to draft their contracts, others may want to save that money and try their hand at contract writing. This article walks you through the seven elements of a completed contract so you aren’t leaving anything out.

elements of a contract

It should be understood that contracts can be formed in writing, verbally, or through action. Do not make the mistake of thinking you don’t have a contract simply because you never signed something.

1. Offer

The first elements of a contract is the offer. This is the step in which one party approaches another and says, "I will give you [consideration] to perform [good or service]."

An offer alone does not bind a contract. In order for a contract to become binding, there needs to be acceptance, which we discuss in the next step. 

2. Acceptance

The second element of a contract is acceptance. It is not a contract without both aspects. For example, a contractor offers their services for a certain rate, and a homeowner accepts. 

Negotiations and counter-offers are not the same as agreements. Both parties have to come to agreements on specifics, or essential terms. Simply saying “yes, I will hire you as a contractor” is not a legally binding statement, as no terms have been decided.

Saying “yes, I will hire you as a contractor at this rate, for this project, in this timeline,” is a specific agreement with essential terms included.

If a contract is still in negotiation, either party is still capable of backing out and neither is legally held to the agreement. A contract becomes binding once the receiving party agrees through a clear statement that they accept the offer.

Not rejecting the offer is not the same as agreeing to an offer: without a clear statement of acceptance, there is no agreement.

Related: Dealing with a software contract? Discover all that goes into understanding and negotiating one to its fullest potential.

3. Meeting of the minds

This is the moment in which both parties are considered to have agreed to the contract at hand. In contract law, this step is also referred to as:

  • Mutual agreement
  • Genuine agreement
  • Mutual consent
  • Consensus ad idem

Contracts can be voided if it is found that one party did not properly consent, or that they consented under duress. Other reasons a contact could be voided is if there was misrepresentation of a product or service, or if there was undue influence during contract development.

3. Consideration

Consideration is either a monetary payment or alternate method of payment agreed upon by the two parties engaging in a contract. The consideration must have value to the parties involved, and is exchanged upon completion of the agreed-upon service or action.

Consideration must be legal, and is sometimes held to a moral code. Examples of acts commonly incapable of being used as consideration are illegal acts like prostitution and gambling.

Contracts can be rescinded if the consideration ends up being worth less than anticipated, is damaged, or destroyed. For example, if you buy a house that is then found to be covered in mold, your home-buying contract may then be rescinded.

4. Legal capacity

Before entering into a contract with someone, ensure they are legally capable of doing so. For example, your toddler promising to eat their dinner is not a legally binding contract because they are a minor.

Those who may not have legal capacity to enter into a valid contract are people from the following groups:

  • Minors (18 and under in most countries)
  • Prisoners
  • Those suffering from a mental impairment
  • Bankrupts
  • Corporations

Circumstances will vary, so just be sure all parties in your contract are fully able, and have the legal capacity to enter into a legal agreement.

5. Consent

People must enter into contracts of their own choosing. You cannot force someone’s hand; there has to be genuine consent. If you are found to have forced someone into a contract or agreement, that agreement likely will not hold up in court.

6. Legality

Contracts are only legally binding if all products and services being agreed upon are, in fact, legal substances and actions. For example, those dealing illegal drugs cannot take their clients to court for failed payments.

7. Written documentation

This is a physical document stating all that you’ve agreed upon, and is optional. The written document is more popular in commercial dealings. Those making social agreements (ie, I will help my son pay for this car so long as he promises to pay me back) are less likely to draft up an official document.

It should be understood that verbal agreements and agreements sent over text message or email can be legally binding contracts should there be proof that both parties agreed to an offer.

Contracted to work

Contracts are a tried and true method of making sure both parties make good on their agreements. You now have everything you need to know to determine what to include in upcoming contracts, who you can go into a contract with, and whether current agreements are legally binding.

What happens when someone doesn’t hold up their end of the bargain? Check out this article outlining breach of contract.

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