Elements of a Contract
UPDATED: February 20, 2013
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The legal elements of a contract include mutuality of obligation, which is comprised of offer and acceptance, definite terms, and consideration. These elements must all be present in order for a contract to be enforceable. In addition, the contract must have been made for a legal purpose and all parties involved must be competent. The negation of one or both of the latter two requirements – legal purpose and competence – can also render a contract unenforceable but are not usually considered as part of the basic elements of a contract.
Mutuality of Obligation
Mutuality of obligation, or meeting of the minds, means that the parties to a potential contract must agree on the specifics of the bargain. Mutuality of obligation is demonstrated by an offer by one party and acceptance of that offer by another.
An offer is defined as a manifestation of willingness to enter a bargain. This manifestation must be made in a way that justifies another person in understanding that if he or she accepts, the bargain is concluded. Simply put, when someone proposes an exchange to another person, that is an offer.
Acceptance is a manifestation of assent to the terms of the offer and can be made in a number of ways. If the offer specifies a manner of acceptance, the person being offered the bargain (the offeree) must accept in that fashion. Sometimes, the offer can be accepted by a return promise or by actual performance of the promised act. Courts now generally find acceptance can be by any reasonable means under the circumstances unless the language of the offer indicates otherwise.
An offer that allows the offeree to accept only by a promise is called a bilateral contract. A bilateral contract is considered formed when the offeree promises to perform some obligation in the future. If the offeree never performs the obligation, then there has been a breach of contract because the promise to perform was acceptance of the offer.
An offer that requires the offeree to accept by performance of the promise is called a unilateral contract. If the offeree never performs, there is no breach of contract because there was no contract. The contract was never accepted as indicated in the offer.
Generally, silence cannot constitute acceptance. However, if the parties have prior dealings in which silence was the method of acceptance or if the offeror has indicated that acceptance can be made by silence, then silence will suffice.
A contract is only binding if a court can look at the bargain and determine the parties’ obligations. The terms of the contract must be reasonably certain. The theory behind this is that the parties could not have formed a contract without agreeing upon the material terms of that contract. This element is sometimes considered as part of the offer.
Consideration is what the parties exchange that is of value. A promise must generally be supported by consideration in order to be enforceable. Consideration can be many things. It can be a benefit, profit, or, alternatively, some loss or responsibility that is incurred or assumed. It does not have to be money.
Courts will not usually judge the adequacy of consideration. However, they will ensure that what was exchanged (or promised to be exchanged) had some value. In addition, the exchange at issue must have been bargained for by the parties.
For example, if Adam promises to give Brad a watch but never does, Brad cannot go to court and enforce Adam’s promise because there was no consideration – Brad did not promise anything in return. However, if Adam promised to give Brad his watch if Brad watched Adam’s cats for the weekend, then Brad could enforce Adam’s promise so long as Brad did watch the cats.
Consideration can also be what is called a legal detriment. A party can do something that the party was not obligated to do or can refrain from doing something he or she has the legal right to do, and that will qualify as consideration.
Lastly, it is important to note that past consideration does not qualify as consideration adequate to form a contract. For example, say Brad watched Adam’s cats all weekend as a favor to Adam, then come Monday Adam told Brad, “Thanks for watching my cats. To show my appreciation, I’ll give you my watch.” Brad cannot enforce Adam’s promise to give him the watch because Brad’s side of the bargain was past consideration.