Four Essential Elements of a Contract

An agreement must contain four essential elements to be regarded as a contract. If any one of them is missing, the agreement will not be legally binding.

Offer

There must be a definite, clearly stated offer to do something. For example: A quotation by sub-contractor to the main contractor and an offer to lease.

An offer does not include ball park estimates, requests for proposals, expressions of interest, or letters of intent.

An offer will lapse:

  • when the time for acceptance expires;
  • if the offer is withdrawn before it is accepted; or
  • after a reasonable time in the circumstances (generally the greater the value of the contract, the longer the life of the offer).

Invitation to treat

An invitation to treat is a mere declaration of willingness to enter into negotiations; it is not an offer, and cannot be accepted so as to form a binding contract. An agreement is not created if there is an acceptance of the invitation to treat.

An invitation to treat is part of the preliminaries of negotiation, whereas an offer is legally binding once accepted, subject to compliance with the terms of the offer. For example: Invitations to treat are advertisements, price lists, circulars and catalogues.

Acceptance

Only what is offered can be accepted. This means that the offer must be accepted exactly as offered without conditions. If any new terms are suggested this is regarded as a counter offer which can be accepted or rejected.

There can be many offers and counter offers before there is an agreement. It is not important who makes the final offer, it is the acceptance of that offer that brings the negotiations to an end by establishing the terms and conditions of the contract.

Acceptance can be given verbally, in writing, or inferred by action which clearly indicates acceptance (performance of the contract). In any case, the acceptance must conform with the method prescribed by the offerer for it to be effective.

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Intention of legal consequences

A contract requires that the parties intend to enter into a legally binding agreement. That is, the parties entering into the contract must intend to create legal relations and must understand that the agreement can be enforced by law.

The intention to create legal relations is presumed, so the contract doesn't have to expressly state that you understand and intend legal consequences to follow.

If the parties to a contract decide not to be legally bound, this must be clearly stated in the contract for it not to be legally enforceable.

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Consideration

In order for a contract to be binding it must be supported by valuable consideration. That is to say, one party promises to do something in return for a promise from the other party to provide a benefit of value (the consideration)

Consideration is what each party gives to the other as the agreed price for the other's promises. Usually the consideration is the payment of money but it need not be; it can be anything of value including the promise not to do something, or to refrain from exercising some right.

The payment doesn't need to be a fair payment. The courts will not intervene where one party has made a hard bargain unless fraud, duress or unconscionable conduct is involved.

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