Essentials of Valid Contract

Contracts form the backbone of society by establishing trust and minimizing risks between
parties. A contract is the exchange of an act or promise between two or more individuals where
one individual offers the other some form of value in exchange for something in return.
Contracts are not always money related, as they often relate to the specific performance of
certain obligations or agreements not to carry out certain acts (e.g., non-compete
undertakings). A contract is a binding agreement that creates legal obligation(s) recognised by
law, meaning that a party can bring a civil claim (or even criminal if fraud is involved) against
another party to the contract for breach of contract.

A contract is valid and legally binding if the following six essential elements are present:
Offer
Acceptance
Consideration
Intention to create legal relations
Legality and capacity
Certainty

1. Offer
Offer and acceptance analysis form the basis of contract law and the formation of a valid
contract. Developed in the 19th century, the offer and acceptance formula identifies the point
of formation, where the parties are of 'one mind'.

An offer is a proposal constituting specific terms for one party to enter into an agreement with
another party, which is essential to the formation of an enforceable contract.

2. Acceptance
Acceptance is an agreement to the specific terms of an offer. Offers do not have to be accepted
through words; they can be accepted through conduct. If someone purports to accept an offer
but accepts on different terms than that of the original offer, that will constitute a counter-offer
rather than an acceptance.
The acceptance must normally be communicated to the offeror – silence cannot be treated as
an acceptance.
In exceptional circumstances (for example, where the offeree has been given terms of dealing
and proceeds with the dealing without formally communicating acceptance), silence may be
treated as an acceptance.

3. Intention to Create Legal Relations

An agreement does not need to be worked out in meticulous detail to become a contract.
However, an agreement may be incomplete where the parties have agreed on essential matters
of detail but have not agreed on other important points.
The question of whether the parties have reached an agreement is normally tested by asking
whether a party has made an offer which the other party has accepted. Agreements may not
give rise to a binding contract if they are incomplete or not sufficiently certain. There will
usually be no contract if the parties agree ‘subject to contract’ but never quite agree on the
terms of the contract.
If the agreement is a stepping stone for a future contract or is an agreement to agree, then the
agreement might be void for a lack of intention to create legal relations. Moreover, a domestic
contract is presumed not to be legally binding in common law jurisdictions.

4. Consideration
Consideration constitutes something of benefit to the person who has the obligation or who
makes a promise to do something (the promisor). It can also be something detrimental to the
person who wants to enforce the obligation, or who has the benefit of the promise (the
promisee). There is no need for an 'adequate' value: if some value is given for the promise, it
would be sufficient consideration.
Where the consideration of one party is not absolutely clear, the agreement will generally
include language such as ‘FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is
hereby acknowledged’ in the recital.
Alternatively, one can make the document in a deed without the need for consideration.

5. Legality and Capacity

What would render a contract illegal?
A contract is illegal if the agreement relates to an illegal purpose. For instance, a contract for
murder or a contract to defraud the Inland Revenue Department is both illegal would therefore
be void contracts that are unenforceable.
Certain contracts may also be unenforceable because they are immoral and against public
policy.

6. Certainty
A valid contract requires reasonable certainty for the essential terms. If the parties fail to reach
an agreement on the essential terms with reasonable certainty, then it may be contract void
even if all other essential elements are present.