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Valid and Legally Binding Contract Essential Elements


A contract is a consensus that involves two or more parties, which the law will impose. The accord sets the limits and dictates how the entities, that is, the offeror and the offeree are expected to conduct themselves. A contract clearly states the mandates of each party and the consequences that can follow if one of the parties fails in its designated mandate (BPP, 2010). In most cases, the party that failed in its mandate is issued in a court of law, where if found guilty, a monetary fine is imposed against it.

Emerson (2009) argues that it is therefore important to understand the elements of a contract because these are the aspects used to evaluate the validity of an accord in a court of law. This is because most businesspeople are fond of entering into agreements without a prior understanding of the elements of a valid contract. For instance, an oral agreement is not efficient when there are disputes between the parties involved. This is because there is no proof of what happened on a material day. It is therefore advisable to conduct all agreements in writing for future reference. In fact, technological advancement has made the storage of information much easier due to the introduction of small portable storage devices such as flash disks and memory cards.

Types of Business Agreements

There are three types of business agreements:

  1. Bill of sale,
  2. Employment agreements, and
  3. Confidentiality agreements.

A bill of sale is a written document that both the buyer and the customer draft or formulate, and it describes all the terms of the entire transaction. For instance, if party A wants to buy a second-hand computer, he/she do not just pay for the purchase without a written agreement to show that the ownership of the computer has changed. The bill of sale agreement comprises all the contact details of the parties that were involved in the trade, that is, the full names and addresses of both the buyer and the seller. Additionally, Marsh and Soulsby (2002) explain that the document quotes the cost of the item, the date of the transaction and the specifications of the item. The features here include the colour, size and model number, which describe the item and explain its worthiness.

Furthermore, if a dispute occurs later, both the buyer and the seller receive compensation according to the description of the agreement. For instance, if party A purchased a laptop from party B and later on a dispute arises, party B would expect party A to return the laptop with all of the specifications described in the sale agreement.

Second, an employment agreement is a type of agreement that takes place between an employee and the employer. The employer can be an organization or an individual and, in most cases, the parties formulate the agreement before the commencement of work. This agreement is used to confirm that an employee has been formally hired and it explains what he/she is entitled to, such as the salary, allowances, hours worked, terms of employment, duration off work, deductions, and contact details of both the employer and the employee (Goldman & Sigismond, 2010).

Failure to adhere to these terms can lead to the termination of the employee’s contract. The terms apply to the two entities, and in case of any changes, they must consult each other. Emerson (2009) advises that a hired person must ensure that there is a written agreement before he/she starts working because it will be difficult to claim his/he rights when disputes arise. For instance, if the employer decided to withhold an employee’s salary, any legal action against him/her would be fruitless if there was no written agreement.

Furthermore, according to Beatty and Samuelson (2009), confidentiality agreements are popularly known as non-disclosure agreements, and they involve two or more entities. In the agreement, the entities are under an obligation not to reveal the information they get from either party. For instance, an auditor can enter into a non-disclosure agreement with an agreement such that under the terms stated in the agreement he/she is barred from disclosing the information to other parties who are not part of the agreement. Additionally, courier companies enter into non-disclosure agreements with their clients, which hinder them from disclosing any information to another party.

Elements of a Valid Contract

It is important to understand the elements of a contract because when disputes arise, analysis of contract elements is essential to establish whether the accused party has a case to answer. The elements identify the facts that justify the claim. Thus, the major elements of a contract include parties, objects, consent, and consideration.


Contracts are open to all persons as long as they are not underage. Besides, for an individual to enter or participate in an agreement, he/she must be of good sound mind. This implies that a child and agreement does not consider a child as a party. People who are out of their minds are also exempted from this role because they are not conscious of themselves. Goldman and Sigismond (2010) explain that children who are below the age of sixteen can only enter into contracts through their parents or a guardian. Furthermore, the parties in an agreement must agree on whom to take the role of offering and acceptance. The offer should be feasible and the acceptance should be absolute and unconditional.

Consent or Agreement

Consent is also required for a contract to be valid, and it requires the signatures of the entities that are involved in it. However, the law does not recognize consents granted through manipulation or force. For instance, a person who is under the influence of alcohol cannot give genuine consent, and this is because alcohol impairs one’s judgment. This means that communication must take place before granting consent to ensure that all the parties are acquainted with the terms of the contract.

It is therefore important to conclude before the signing of the contract document. Currently, written statements support consents because people have mastered the art of forgery and thus, the supporting statement acts as consent that the parties involved are aware of the terms and conditions of the contract.


An object is the third element of contracts, which is also called a subject. Object refers to the thing that is making people agree, and without it, the agreement is not valid. For instance, in an employment agreement, the job position is the subject of the agreement because if it were not there, the parties would not have needed the contract and hence it is the backbone of an agreement. In a bill of sale, the subject is the item traded in the contract. However, the subject must be legal because the law does not allow certain subjects.


Consideration is the last element of contracts, and it is the most binding element. Consideration refers to what the parties earn from a contract. Without consideration, a contract is not valid because the consideration is supposed to influence the parties to stick to the contract. The consideration can be any form such as money and so forth. In an employment contract, the employee earns money as his/her consideration while the work he/she does act as the consideration to the employer. This consideration is what calls for compensation in a lawsuit because it is perceived that one of the parties did not get its consideration. Similarly, lawful consideration is essential because an agreement is only valid when there is something in return, not necessarily cash, but an act, abstinence or promise, to do or not do something (Emerson, 2009).

Rules of Offer and Acceptance

In business contracts, and offer refers to what one party is willing to do for the other party. Alternatively, it can be something that one party is willing to give another party in the contract. The offer must be communicated to all the parties. Before the coming of computers, offers were communicated through letters, but nowadays an offer can be sent via email or better still through telephone. These two mediums of communication are the fastest and guarantee a quick turnaround. Once the offer is communicated, the other party is expected to reply to the email or telephone call as a sign of acceptance.

For instance, in a public tendering process, communication of an offer can be through social networks such as Facebook and printed media such as newspapers. The following is a sample offer: James called George and offered to sell his SUV to him at $8000. George accepted the offer and a few days later, they agreed.

An offer becomes invalid once an acceptance has been received and therefore the offering part should no longer communicate the offer to the accepting party. Likewise, in case the person giving the offer dies before signing the agreement, then the contract is no longer valid.

Rules of Intention and Consideration

The rules of intention and consideration are very important in a contract. The notices of intention such as intention-to-sue create a room for settling the matter outside the courts. Alternatively, consideration is the binding factor in a contract and therefore each party must gauge the proposed consideration to determine whether it is worth it (BPP, 2010).

Furthermore, communicating the offer presents an opportunity for the parties involved to vet the subject of the contract. For instance, abortion is not a legal subject in some countries. Besides, communication of intention notifies other people who may have entered into an agreement with the party in question and thus may contend the contract (Marsh & Soulsby, 2002).


In contracts, all the parties should analyse their capacity before agreeing. Most people tend to overlook the elements of agreements and it is only later that they realize that they do not have any facts to validate their claims. As discussed in this paper, the major elements of a valid contract include parties, object, consent or agreement, and consideration. Before filing a lawsuit, it is important to evaluate one’s capacity because unjustified claims will only lead to the incurrence of unnecessary expenses. Having appropriate legal capacity binds the subjects or parties to the contract and avoids dispute. In addition, the nature of essential elements of a valid and legally binding contract determines the type of an agreement. For instance, a bill of sale agreement is only applicable to tangible items such as vehicles and houses. In employment agreements, both the employee and the employer need to have it in writing because it can be used to solve any disputes that might arise in the future. Agreements are triggered by an offer from the offeror, which is communicated to the potential party and if the second party accepts then the progress begins. Before accepting an offer both entities use the rules of intention and consideration to gauge what they stand to earn through the agreement. An agreement is not valid if it does not bear the signatures of the parties involved, and thus this element cannot be skipped. Furthermore, the agreement must refer to a given subject, which can be a job, an item or a pledge. This is because without a subject an agreement cannot exist. Therefore, all contracting parties must observe the essential elements of contracts to avoid any misunderstandings.


Beatty, F.J. and Samuelson, S.S. (2009) Introduction to Business Law. 3rd ed. Mason, OH: Cengage Learning.

BPP. (2010) Business Law. London: BPP Learning Media Ltd.

Emerson, W.R. (2009) Business Law. 5th ed. New York: Barrons Educational Series.

Goldman, J.A. and Sigismond, D.W. (2010) Business Law: Principles and Practices. Mason, OH: Cengage Learning.

Marsh, B.S. and Soulsby, J. (2002) Business law. 8th ed. London: Nelson Thornes.

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