What separates a simple promise from a binding agreement? Let's explore the key elements that make a contract legally enforceable.
Most professional dealings begin with the formation a contract between two or more parties. Whether a company is hiring an employee or closing a deal, a contract will set out the conditions, obligations, terms, and liability of all the parties involved.
This page explores the essential elements of a contract that must be present in order for a contract to be binding and enforceable, in specific jurisdictions - with the key differences between the US and UK.
The elements of a legal contract vary around the world according to jurisdiction. However, there are some common elements that persist across different legal systems. This post will focus on contracting in the United States (US) and in the United Kingdom (UK), and the essential elements a business contract needs in order to be valid.
The contract law of England and Wales is historically influential, and many of its principles have been incorporated or reflected across the English-speaking world - particularly in Commonwealth countries like Australia and Canada.
The elements of a contract in the US are similar to that of the UK, with slight variations:
To form a contract, one party must make an offer that another party accepts. After the offer is made, goods and/or services are exchanged between the two parties in most cases.
The party making the offer – the individual or business who owns the goods or services being offered – is known as the offeror. The party willing to compensate the offeror to use or acquire the goods or services is called the offeree.
An offer generally consists of two parts: the expression and the intention. When the parties express a desire to enter into a legally valid contract, this is called the expression.
An expression can take on many forms, ranging from a verbal discussion to a formal letter that describes the basic terms. The intention is a presumption by both parties that the agreement will be legally binding and they intend to uphold their obligations related to it.
An offer has not technically been made until the offeree receives it. Upon receipt, the offeree can decide to accept, revoke, alter or terminate it. The offeree can also extend the offeror a counter-offer, which terminates the initial offer. This leaves the parties free to negotiate the terms of the newly made proposal.
What constitutes acceptance of an offer has kept law students busy for centuries. However, the short version is that the offer is accepted when the contract is signed (either through wet signature or electronic signature ).
This acceptance can also take other forms, though. For example, a party can accept an offer using conditional acceptance. This means that certain terms must first be met before the acceptance has been finalised.
Offers can also be deemed accepted once certain actions have taken place. For example, if a buyer orders certain goods online at a certain price, and the seller ships these, this can be perceived as the offer being accepted, even without a physical signature.
However, it's important to recognise that silence and inaction doesn't constitute acceptance under most laws. Therefore, not rejecting an offer doesn't necessarily mean that the offer has been accepted.
The contract lifecycle, as we think of it in Juro, mostly covers what happens between offer and acceptance - creating, negotiating and agreeing the contract. But there are other elements at play that determine whether a contract is legally binding. We'll explore these below.
2. The intention to be legally bound
In the UK, a legal doctrine known as the ”intention to be legally bound” states that a contract is only legally enforceable if the parties intended it to be a binding contract.
Without the intention to be legally bound, it may be impossible to enforce the contract. Conversely, if this intent is present, a party who breaches the agreement may face legal action.
The process a court uses to decide whether the parties intended to be legally bound consists of two tests. These are:
1. The objective test: which determines whether a reasonable person knowledgeable of the circumstances would believe that the parties intended to be bound
2. The rebuttable presumption: which establishes a burden of proof regarding whether a valid contract exists. The court will use both of these tests when determining intent and whether the essentials of a contract are present.
For a contract to be binding in the US, both parties must have “a meeting of the minds,” meaning they must both be aware of what they are getting into. The parties must:
Be active participants in the agreement
Recognize that a contract exists
Clearly, decisively, and mutually establish that the agreement is genuine
Consent to its contents, and
Freely agree to be bound by its obligations
If awareness cannot be established, a contract can be voided. For example, if one of the parties to the agreement can prove duress, undue influence, fraud, or misrepresentation, the contract will be deemed invalid.
4. Consideration in a contract
Consideration is another essential element of a contract, and it represents the agreed-upon value in goods, services, property, or even protection from harm resulting from the agreement.
For a contract to be legally enforceable, there must be “mutuality of obligation”. This means that both parties must meet their obligations, and consideration represents the commitment the parties make to each other.
There doesn't need to be an exchange of money for contractual consideration to be valid. However, money, in the form of a one-off or recurring payment, is consideration in practice. Besides money, some examples of proper consideration include:
Promise to act
Promise to refrain from acting
If a contract lacks clear consideration, a court might consider it invalid. Certain things will not meet the definition of consideration. Here are some examples of a lack of consideration:
The agreement is the promise of a future gift.
The contract contains an illusory promise that a party has no actual obligation to fulfil.
One of the parties was already legally obligated to perform under the terms of the contract.
The parties are not in mutual agreement regarding consideration.
Entering into a contract is a two-way street. Consideration represents what you agree to give up in the contract to get what you want out of the contract.
5. Capacity to contract
Only parties with legal capacity are allowed to enter a contract. This means people that understand the terms, responsibilities, and consequences of the contract before they sign. Individuals lacking the capacity to contract include minors, certain felons, and those of unsound mind.
If it turns out that the parties lacked the capacity to contract, the agreement will be void.
6. Legality of a contract
This is a key consideration for contracts under US law. All contracts are subject to the laws of the jurisdiction where they are signed.
There are also instances where a contract is no longer legal, such as when:
A party signed the agreement due to coercion, threats, false statements, or unsuitable persuasion.
Oppressive obligations or results are triggered.
The contract violates public policy or endangers general welfare.
An error in the contract has a material effect upon the initial terms.
Circumstances beyond the control of the parties make performance impossible.
Courts will not impose an illegal agreement. Therefore, a contract needs to be legally enforceable.
Legally binding contracts
If all the required elements of a contract are in place, under the requirements of the jurisdiction in question, then once agreed the contract becomes legally binding on the parties.
The legal doctrines that cover issues like breach of contract, remedies, enforcement and so on are huge topics best explored in an academic context - at Juro, our obsession is contract process.
What makes a contract enforceable?
The fundamental elements required to make a contract legally enforceable in the US include a valid offer and acceptance, sufficient consideration, capacity, and legality. The requirements for the UK are set out above, and other jurisdictions vary in their approach to contract law too.
The US Statute of Frauds typically requires that contracts involving the sale or transfer of land or those that cannot be performed within one year be put in writing and formally executed to be enforceable. However, parties may enter into a binding agreement without signing a formal written document.
For example, as the Virginia Supreme Court held in Lucy v. Zehmer, even a deal made on a piece of a napkin can be considered valid if the parties were sane and displayed mutual assent and consideration. Once signed, a contract might be enforceable even if one party regrets signing it, as long as all the elements are present.
Is a verbal contract valid and enforceable?
Verbal contracts can be enforceable, but only if they are provable in court, meet the requirements of contract formation outlined above, and are not in violation of laws prohibiting oral agreements.
Although many verbal contracts are legally binding, there is always a possibility that a party won’t fulfil their obligation, which is why many people prefer written agreements.
An example of the potentially expensive enforceability of verbal contracts: In 1984, Getty Oil was sold to Pennzoil through a binding oral agreement but was later sold to Texaco for a higher offer. In 1987, Pennzoil filed a lawsuit against Texaco alleging tortious interference with an oral agreement and was awarded $9.1 billion, plus interest and penalties.
Frequently asked questions
What are void contracts?
Void contracts are formal agreements that are fundamentally unenforceable. This is usually because the agreement hasn't fulfilled the necessary requirements for it to be a legally-binding contract.
At what point does a contract become legally binding?
A contract becomes legally binding as soon as all of the contract elements have been met. Before then, it will not be enforceable or legally valid.
Are emails legally binding contracts?
Emails can become legally binding contracts as long as the essential contract elements are met within the email chain.