What are the four 4 essential elements to make a valid and enforceable contract?

What is a contract?

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

Whether a contract is 200 pages or 10 pages, to be a legally binding agreement they must contain these six basic elements:

• Offer

• Acceptance

• Awareness

• Consideration

• Capacity

• Legality

When all of the 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 rental of an office space. A contract offer does not exist until it has been received by the requesting party.

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 be aware that they are entering into a new agreement. Called ‘a meeting of the minds’, the parties must recognise that the contract exists and that they are agreeing to be bound by the contractual obligations.

If awareness cannot be established, then the contract can be voided. If a party signed 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. Things such as 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, the exchange of money in a one-off or recurring payment is classed as a consideration.

Capacity

Contracts can be daunting, especially when you are 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 demonstrate that they understand the obligations, terms, and consequences of the contract before they sign.

If it is found that a party lacked the capacity, the contract will be void. For example, a party lacks capacity if they 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, and in that circumstance, the clause of the US Constitution will be the leading authority.

How is a contract enforceable?

Businesses are governed by contracts and much of their potential revenue is driven by signed contracts. That’s why more businesses are investing in their contract processes, to ensure that every contract is maximising potential and can be implemented without complications. Not every contract is enforceable however. Even contracts that are 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, then you may not have the legal right to enforce it.  

Contract classification

In the commercial world, there is a multitude of contracts that can be made. Here, we've listed the most common

With action

Contact action refers to any oral or written contract that has a direct action as a result of a purchase of goods or services between parties.

Written contract

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

Oral contract

Today, very little action is taken in business unless there is some form of a written agreement. But a oral contract is still valid. However, it withholds some exceptions, such as agreements involving guarantees. The key difference between a written and an oral contract is highlighted by how easy it is for a claimant to prove what the terms of the contract are.  

How digital contracting software can enforce contracts

Understanding when a contract is legally enforceable and what comprises an enforceable contract is step one. Businesses across the globe are turning to digital contracting tools like Summize to help them ensure that every contract they have is enforceable.

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 of the contract lifecycle - create, manage and review. Firstly, Summize automatically extracts and summaries content from your contracts making the valuable data inside them accessible with actionable tasks.

Secondly, our intelligent automation makes workflows simpler and smarter across the business. Our Q&A Teams chatbot for business users acts as the digital legal front door.

Finally, our powerful data engine gives access to better decision making and actionable insights summarising risk and potential cost savings but also 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.

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