Four basic requirements of a contract
To create a legally binding commercial contract, the agreement must contain four essential elements. Commercial contracts do not have to be in writing to be enforceable; however, if a breach of contract occurs, having a written document makes it easier to prove what was agreed. It has to be specific, complete and capable of being accepted. Offers can be preceded by an invitation to treat for example, goods which are on display in a shop or they can stand alone. However, any revocation of an offer must be communicated to the offeree.
What are the four requirements of a valid contract?
In this section we elaborate on general requirements of contracts:. When an agent sells an insurance policy, he or she is selling a contract.
A contract is an agreement enforceable by law. For any such agreement to be legally enforceable, it must meet the following minimum requirements:. Offer and acceptance The process of two parties entering into a contract. If the party to whom the offer was made requests a change in terms, a counteroffer is made, which releases the first offerer from the terms of the original offer.
In the making of insurance contracts, the buyer usually offers to buy and the insurer accepts or rejects the offer.
When you call an insurance agent for insurance on your new automobile and the agent provides coverage, there is an offer to buy and the agent has accepted the offer on behalf of his or her company. As stated previously, this acceptance is called a binder. The offer may be verbal, as in this case, or it may be in the form of a written application. This process differs for life and health insurance.
A contract also requires the exchange of consideration. Consideration The price each party demands for agreeing to carry out his or her part of the contract. The value of the consideration is usually unimportant, but lack of consideration will cause the contract to be regarded as a gift and therefore unenforceable. In many cases, insurance contracts stipulate that the consideration is both in the form of premium and certain conditions specified in the policy.
Such conditions may include maintenance of a certain level of risk, timely notice of loss, and periodic reports to insurers of exposure values. Conditions will be explained in detail in parts III and IV of the text in the descriptions of insurance contracts. Consideration, therefore, does not necessarily imply dollars. Another essential element for a contract is that the parties to the contract must be competent parties Individuals of undiminished mental capacity.
Most people are competent to contract, but there are exceptions. Mentally ill or intoxicated persons are not recognized as competent. Minors may enter into contracts, but such contracts may be voided or terminated. Upon reaching majority age eighteen in some states, age twenty-one in others , the young person may ratify or reject the contract. If ratified, the contract would then have the same status as one originally entered into by competent parties. A minor who enters into an insurance contract, therefore, may void it during infancy or when he or she reaches majority.
Ratification of a policy at the age of majority can be accomplished by oral or written communication either explicitly or implicitly by continuing the policy.
Some states have laws giving minors the power to enter into binding life insurance contracts on their own lives as young as age fourteen. A contract must have a legal purpose Not be for the performance of an activity prohibited by law.
If it does not, enforcing the contract would be contrary to public policy. A contract by a government employee to sell secret information to an agent of an enemy country, for example, would not have a legal purpose and would be unenforceable.
Contracts may be either oral or written; they must, however, follow a specific legal form Appropriate language. Legal form may vary from state to state. As noted, some insurance contracts are—at least initially—oral. Most states do not have laws directly prohibiting oral contracts of insurance.
They do, however, require that some contract forms the written version of standardized insurance policy provisions and attachments be approved by the state before being offered for sale.
Moreover, the nature and general content of some policies are specified by law. Most states require that certain provisions be included in life and health insurance contracts.
Thus, although some contracts may be oral, insurance contracts must—for the most part—be in writing, and they must conform to the requirements of the states in which they are sold. Previous Section. Table of Contents. Next Section. Offer and Acceptance Offer and acceptance The process of two parties entering into a contract.
Consideration A contract also requires the exchange of consideration. Competent Parties Another essential element for a contract is that the parties to the contract must be competent parties Individuals of undiminished mental capacity. Legal Purpose A contract must have a legal purpose Not be for the performance of an activity prohibited by law.
Legal Form Contracts may be either oral or written; they must, however, follow a specific legal form Appropriate language. Discussion Questions What are the requirements of a contract? Provide an example. A talented high school senior is entered into the National Basketball Association Draft, selected by a team, and ultimately signs a play contract. Why might this contract be disputed as unenforceable?
Following construction of a storage shed on his property, a homeowner refuses to pay the builder the full amount agreed upon orally for performance of this service. Can the builder sue the homeowner and collect damages for breach of contract? Why or why not?
The requisites for formation of a legal contract are an offer, an acceptance, competent parties who have the legal capacity to contract, lawful subject matter. The five requirements for creating a valid contract are an offer, acceptance, consideration, competency and legal intent. The Offer: Would You Like to ? The offer.
But too often, individuals enter these agreements without considering the essential provisions necessary to create an enforceable contract. Contracts May be Oral or Written A contract is intended to formalize an agreement between two or more parties. A contract can be oral, but an oral contract sometimes referred to as a verbal contract may be difficult to enforce unless its terms can be proved or are admitted by the parties. A signed, written contract that contains the essential provisions reduces this risk.
A contract that meets all these requirements is valid. When any of the elements mentioned is lacking, vitiated or irregular, the contract may become void, voidable or unenforceable.
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The Nuts and Bolts of an Enforceable Contract
A contract is a legally binding promise made between at least 2 parties in order to fulfil an obligation in exchange for something of value. Contracts can either be written, oral, or a combination of both. There are some contracts which must be in writing, including the sale of property or a tenancy agreement for more than 12 months. Contracts ensure that your interests are protected by law and that both parties will fulfil their obligations as promised. If a party breaks the contract, there will be certain solutions available to the parties known as 'remedies'.
Requirements of a Contract: Everything You Need to Know
The requirements of a contract are consideration, offer and acceptance, legal purpose, capable parties, and mutual assent. The requirements of a contract are consideration, offer and acceptance , legal purpose, capable parties, and mutual assent. When any of the required elements is lacking, vitiated, or irregular, the contract may become void, voidable, or unenforceable. Consideration is the value that convinces the parties to engage in a contract. Each party agrees to furnish an item of value to the other party in a contract. An example of consideration is when you are selling a boat. You want the buyer to pay you a certain amount, and then you, as the seller, will give the buyer the boat. Time considerations, payment terms, and any other expectations are factors that are associated with consideration. A contract will only be valid if both parties involved have clear consideration.
It's important for businesspeople to know the elements of a valid legal agreement. This ensures all contracts entered, oral or written, are legally binding and enforceable.
To be valid, a contract must generally contain all of the following elements:. An offer is an expression of a willingness to enter into a contract on certain terms. It is important to establish what is and is not an offer. Offers must be firm, not ambiguous, or vague.
How to form a valid contract
Contracts are part of doing business. There are contracts with partners and vendors, and there are employment contracts. Most business owners don't have an attorney on retainer to look at every single contract that come across their desks. Because of this, it is important for business owners to understand the elements of a contract that make it legal and binding. Even though there are many other components that a contract can have, there are five requirements for a document to be a legal contract. The five requirements for creating a valid contract are an offer, acceptance, consideration, competency and legal intent. The offer is the "why" of the contract, or what a party agrees to either do or not to do upon signing the contract. For example, in a real estate contract, the seller will offer to sell the property to the buyer for a certain price. The offer must be clearly stated so that all parties understand what the expectations are. In this example, the property is identified by address and perhaps also by the county assessor's parcel number, and the price would be written clearly in the contract. Acceptance is exactly what it sounds like: the person receiving the offer agrees to the conditions of the offer. Acceptance must be voluntary.
What are the basic requirements for the successful formation of a contract?
In this section we elaborate on general requirements of contracts:. When an agent sells an insurance policy, he or she is selling a contract. A contract is an agreement enforceable by law. For any such agreement to be legally enforceable, it must meet the following minimum requirements:. Offer and acceptance The process of two parties entering into a contract. If the party to whom the offer was made requests a change in terms, a counteroffer is made, which releases the first offerer from the terms of the original offer. In the making of insurance contracts, the buyer usually offers to buy and the insurer accepts or rejects the offer. When you call an insurance agent for insurance on your new automobile and the agent provides coverage, there is an offer to buy and the agent has accepted the offer on behalf of his or her company. As stated previously, this acceptance is called a binder.
