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Five Basic Requirements For the Formation of A Contract

Contracts are a critical part of doing business. Employment agreements, non-disclosure agreements, vendor contracts, supplier agreements, and even sales transactions are all forms of contract. So long as each party to the contract fulfills their end of the bargain, everyone walks away from the contract satisfied. But then when terms of the contract are not fulfilled, the parties can end up disputing whether a contract existed in the first place.

Five Basic Elements for Forming A Contract

In order to form a valid and legally binding contract, five basic elements must be established. Without each and every element, the contract is incomplete and may not be enforceable.

  1. Capacity to Enter a Contract. In order to enter into a contract, the parties to the contract must be legally capable to enter into a contract. Certain people are generally considered as lacking the capacity to be legally bound by a contract, such as minors or individuals with a deficient mental state (i.e., those who are considered insane).
  2. The Contract Must Have a Legal Purpose. Contracts can only stand if they are made for a legal purpose, and the terms of the contract cannot violate the law. Any contract that has terms that break the law is not a valid contract.
  3. An Offer Must Be Made and Acceptance Must Occur. A contract at its very core is an offer made by one party, and acceptance of that offer by another party. Without a clear offer and a definitive acceptance, no contract exists.
  4. Consideration Must Be Given. In addition to offer and acceptance, the parties must exchange something in order for a contract to be formed. This thing that is exchanged can be a promise, something of value, or refraining from doing something that a person is otherwise able to do, i.e., forfeiting rights. Consideration can be anything in any amount or value, and the consideration of each party does not have to be equal or proportional to what is exchanged. For instance, a person could sell a yacht for a dollar, and it could be a valid sales contract so long as the other elements for forming a contract are satisfied.
  5. There Must Be a Meeting of the Minds of the Parties. The parties to the contract must both mutually assent to the contract, which means that both parties understand the terms of the contract in the same way. For example, if two parties enter into a sales contract where one party sells a car to the other for $100, the parties must have mutual assent that the dollar amount is in U.S. dollars, rather than for 100 dollars in Australian, Mexican or Canadian dollars, as each of these currencies, like the United States, use the dollar symbol to denote monetary amounts.

There Could Be Additional Elements Required To Form A Valid Contract

The above identified elements for forming a contract are only the bare minimum necessary to form a contract.  Many types of contracts, and especially business contracts, require additional elements.

For instance, many purchase contracts must be made in writing, but not all contracts have to be in writing as some oral contracts are valid and enforceable. Some contracts can be implied in fact, which means that a contract is formed based on the actions of the parties, i.e. the parties’ conduct implies that a contract exists. Some contracts that are for specific performance must be capable of being completed within one year. Other contracts must specify certain terms, such as price, quantity, etc., in order to be valid. When in doubt, it is always best to consult with an experienced New York business lawyer who can help you with the specifics of your business contracts.

There could also be other considerations depending on where the contract is made, or if the contract specifically provides that the laws of a certain state control over the contract. The controlling law of a contract can have an impact on the parties in terms of whether the contract was legally formed, or in the event that a dispute arises from the contract. Contract law can get complicated. In cases like this, it is important to work with an experienced business lawyer to makes sure that you understand the laws that control over the contract, and that your contract complies with those laws.

Contracts are an essential part of business operations, and they are very important for protecting your business and making sure that you get what you bargained for. If you have questions about a contract you are planning on entering, or are in the midst of a contract dispute, please do not hesitate to contact us.