Elements of a Contract

Articles
Whether a contract is 200 pages or 10 pages, to be a legally binding agreement they must contain six basic elements: Offer, Acceptance, Awareness, Consideration, Capacity, Legality.
Find out how digital contracting can help your business
April 11, 2024
Last updated:
April 11, 2024

What is a contract?

Contracts are legally binding agreements between two or more parties, and are at the centre of every professional relationship. Whether it’s a renewal, lease agreement, or a new sales deal, a contract will set the conditions and agree on terms for the parties involved.

Whether a contract is 200 pages or ten pages, to be a legally binding agreement, it must contain these six essential elements:

• Offer

• Acceptance

• Awareness

• Consideration

• Capacity

• Legality

When all six elements are met, the agreement becomes legally binding. If even one element is missing, the contract may not be enforceable.

Offer

All contracts start with an offer. One party requires something from the other. The other party has the resources to fulfil it for an exchange in value. This results in ‘the offer’, which defines the responsibilities of each party. For example, Party A agrees to pay £500pm to Party B for renting office space. A contract offer does not exist until the requesting party has received it.

Acceptance

The second element of a contract is acceptance. The definition of contract acceptance has long been disputed, but formally, a contract is considered to have been accepted when it has been signed. Any conditional acceptance or the negotiation of additional terms is a counter-offer, which is seen as a rejection of the original agreement as it starts the process again.

Awareness

For a contract to be legally binding, both parties must know that they are entering into a new agreement. Sometimes termed a meeting of the minds, the parties must come together, recognise that the contract exists and agree to be bound by the contractual obligations.

If awareness cannot be established, then the contract can be voided. If a party signs the contract under duress or can prove fraud, misinterpretation or undue influence, the contract is rendered invalid.

Consideration

The purpose of a contract is based on what it provides. For contractual purposes, contracts are not considered binding unless something of value is exchanged between the parties. Property, services, and insurance are all considered contractual considerations.

It's important to remember that there doesn’t need to be an exchange of money for contractual consideration to be valid. Although, a one-off or recurring payment is classed as a consideration.

Capacity

Contracts can be daunting, especially when signing on behalf of a company. That’s why only parties that can demonstrate legal capacity before they sign enter a new contract. Legal capacity is when the parties indicate that they understand the contract's obligations, terms, and consequences before they sign.

If it is found that a party lacks the capacity, the contract will be void. Instances of lacking capacity are if the signing parties are considered minors, under the influence of drugs or alcohol, or if the contract was signed under threats.

Legality

All contracts are subject to the laws of the jurisdiction in which they are signed and must abide by these to justify sufficient legality. However, in the US, federal and state laws are not always aligned; in that circumstance, the clause of the US Constitution will be the leading authority.

How is a contract enforceable?

Contracts govern businesses, and much of their potential revenue is driven by signed contracts. That's why more companies are investing in their contract processes - to ensure that every contract reaches its maximum potential and can be implemented without complications.

Only some contracts are enforceable, however. Even contracts written in legal jargon may not be valid in court.

Enforcing a contract comes down to six key elements: offer, acceptance, awareness, consideration, capacity, and legality. If a contract lacks any of these elements, you may not have the legal right to enforce it.  

Contract classification

In the commercial world, there are several classifications of contracts. Here, we've listed the most common:

With action

Contact action refers to any oral or written contract with a direct action resulting from purchasing goods or services between parties.

Written contract

written contract is a document that defines what the parties can and cannot do within their commercial relationship. These legally binding contracts establish a set of agreed terms & conditions and an approved set of obligations.

Oral contract

Today, action is only taken in business if there is some form of a written agreement. But an oral contract (or a verbal contract) is still valid with some exceptions, such as agreements involving guarantees. The critical difference between a written and an oral contract is highlighted by how easy it is for a claimant to prove the contract's terms.

Download the Summize datasheet

How can digital contracting software enforce contracts?

Step one is to understand when a contract is legally enforceable and what comprises an enforceable contract. Businesses across the globe are turning to digital contracting tools like Summize to help with this problem.

Summize is a game-changer for businesses that work with contracts. Created by legal and SaaS professionals, Summize exists to optimise your contract lifecycle, ensuring that every contract you create and sign is enforceable. Unlike other contract lifecycle management technology, we focus on three core elements - create, manage, and review.

Firstly, Summize automatically extracts and summarises content from your contracts, making the valuable data accessible with actionable tasks. Secondly, our intelligent automation makes workflows simpler and smarter across the business. Our Teams or Slack chatbot for business users is the digital gateway to legal, enabling self-help, more streamlined contract processes, and better collaboration.

Finally, our powerful data engine gives access to better decision-making and actionable insights summarising risk and potential cost savings while accelerating revenue opportunities. We exist to simplify and accelerate the entire contract lifecycle without replacing existing ways of working. That's why it's digital contracting, done differently.

Why not book a demo today?

Download

About the author

The Summize Team

Summize is a Contract Lifecycle Management solution that incorporates contract workflows into the tools you and your business already use every day.
The LinkedIn icon in blueThe Law Society logo
Read more about the author