The 6 Essential Elements of a Contract
Every contract, whether simple or complex, is considered legally enforceable when it incorporates six essential elements: Offer, Acceptance, Awareness, Consideration, Capacity and Legality. It is critical that all six elements are present—just one missing element can make a contract invalid and unenforceable.
Read on to learn about each element of a contract and why they matter.
This blog post is offered for general information purposes only. It does not constitute, and is not a substitute for, legal advice.
What is a contract?
In the simplest of terms, a contract is any agreement that is intended to be enforceable by law. The process of getting all necessary parties to sign a finalized agreement is called contract execution.
The elements of a contract
If you’re about to enter into an agreement, you’ll want to make sure that the agreement is enforceable. To create an enforceable contract, six elements must be present.
1. Offer
Without an offer, there’s nothing to accept and there can be no contract, let alone a legally binding one. An offer communicates the offeror's terms to the offeree. It basically states, “These are the terms my party is willing to be responsible for in a legally binding agreement.”
A received offer marks the official start of the contract process. With an offer in hand, the offeree can now accept, negotiate, attempt to clarify, ignore or reject the offer.
It is important to understand the other party’s contract processes. For example, one offeror may recognize any counteroffer as an automatic termination of the previous offer, while another offeror may not.
2. Acceptance
Acceptance is when the offeree accepts the specific terms and conditions proposed by the offeror.
Two conditions must exist for acceptance to be valid. First, the acceptance must be unequivocal: a definite, documented approval. Second, the acceptance must correspond with the terms of the offer. In other words, the terms of the offer cannot change after the offer is accepted.
Acceptance is given by signing the contract. This is known as express, or explicit, acceptance is when an offeree provides an affirmative statement to express their acceptance of the offer.
Another form of acceptance is implied, or implicit, acceptance. This is when the offeree performs a specific action to imply their acceptance. While implicit acceptance does not have the same legal status as explicitly accepting a contract by signing it, the implication of acceptance can create an implied contract, which may still be enforceable under certain circumstances.
3. Awareness
The awareness element is sometimes called “a meeting of the minds.” This is a requirement for both parties to actively participate in the contracting process.
For a contract to be legally binding, both parties must be aware that they are entering into an agreement. To do this, they must acknowledge that the contract exists, and both parties must agree that they are bound to the obligations of the contract by their own free will.
When awareness cannot be established, the contract may be voided and would therefore be unenforceable. The main purpose of the awareness element is to help protect signatories in cases of undue influence, deception, or fraud.
4. Consideration
Consideration is what each party promises to do in order to execute the contract. This can be thought of as the output of the contract: the goods, services, or other thing of value that each party is willing to offer to form an agreement.
For example, when you enter into an agreement to buy a car, your consideration is your money and the dealer’s consideration is the car.
5. Capacity
Capacity is similar to awareness in that the goal is to ensure that all parties understand the terms of the contract. The difference is that capacity considers the individual’s legal capacity to sign the agreement. For the contract to be enforceable, all signatories must demonstrate a clear understanding of the contract’s obligations, terms, and consequences prior to signing.
Examples of someone who may not have the legal capacity to sign a contract are a signer who is a minor, someone under the influence of an illicit substance, or someone who does not understand the language being used in the contract.
The capacity element often comes down to a simple question: does each party fully understand what the contract means and what they’re agreeing to?
6. Legality
All contracts must comply with the law for all applicable jurisdictions where the contract will be enforced. Additionally, contracts involving illegal products or services or relating to criminal activity are not enforceable.
Generate, negotiate and sign contracts faster
By understanding the six essential elements of a contract, all parties can be confident that the contract they are signing is fair and legal. Understanding the essential elements can also help avoid the frustration and expense that comes with entering into agreements that later become invalid or have to be renegotiated.
Get to signature faster when you automate simple contract processes with pre-configured workflows based on best practices.
Learn about how Docusign CLM can help with centralizing your contracts, collaborating across teams and putting guardrails in place to support compliance.