Contracts serve as legally binding agreements that outline expectations, responsibilities, and potential outcomes of a business relationship. Understanding the essentials of a contract is critical for facilitating clear communication and awareness of both parties. But what makes a contract valid and enforceable? What are the four basics of a valid contract? Let’s explore those key elements.
In contract law, the four basics of a legally binding contract are:
- Offer
- Acceptance
- Consideration
- Intention to create legal relations
A contract must have each of these four basics for it to be considered legally binding and enforceable. Let’s examine each of them and consider how they can be realised and managed.
1. Offer
The first basic element of a contract is an offer. This element refers to the initial step of a contract where one contract party (the offeror) proposes an exchange of value in specific terms of the agreement to another contract party (the offeree). The purpose of entering a contract is presented with tentative conditions, rights and responsibilities. The offer is considered the first step in a contract formation process, and the offeree can choose whether or not to accept and negotiate the proposed terms and conditions.
The contract request stage of the contract lifecycle is a great place to start with a contract offer. The offeror can leverage a user-friendly request wizard with a dynamic questionnaire to make the request clearer and easier. From there, they can enter contract drafting, where they can either form a contract from scratch or make it easier on themselves by merging contract terms and preferred clauses with a pre-approved template. This functionality is available with contract management software to make the offer phase easier.
2. Acceptance
Acceptance is a basic element of a contract and refers to the point where the offeree agrees to an offer (mentioned above) made by the offeror. Essentially, the offeree signifies their consent to be bound by an upcoming contract, and the two parties begin to create a legally binding agreement. Acceptance is a crucial moment in the formation of a contract. Keep in mind that the offeree can also propose a modified counter-offer with changes to the original offer.
Offerees can either manually accept a request or use more robust tools, such as contract management software. After a request is accepted by the offeree, the offeror can automatically receive a prompt to create a new contract record from that request. From there, they can add new contracts and pull documents from their approved request record over to their new contract, select an agreement type, and their counterparty. Field mapping with contract management software allows for request data to be transferred to a new contract (data mapping). Additionally, the new contract record also displays linked and associated requests so that offerors can return to the original request record if need be. From there, the offeror can trigger a contract workflow and follow a normal contract lifecycle management process for their contract.
3. Consideration
Consideration is a basic element of a contract that involves both parties’ agreement to exchange something of value. The parties define what each will provide to form a binding contract. Consideration details which goods, services, or promises are involved in a contract.
During consideration, one should ensure that clauses have the clearest possible language and that terms are unambiguous. Contract management software really shines here. Key terms, dates, and other metadata can be extracted from contract documents and used in workflow processes to ensure that tasks and obligations are completed in the shortest amount of time. Generative AI can generate clauses at the drop of a question to a chatbot. Auto-redlining can replace contract clauses with ones from the preferred clause bank for the best possible language.
4. Intention to create legal relations
‘Intention to create legal relations’ is a basic element of a contract that refers to a mutual understanding between contract parties that they intend to enter a legally enforceable agreement. This contract basic signifies that both parties are serious about their commitments outlined in a contract, and understand that there are implications such as expected delivery, lawsuits for breach of contract, etc. The intention to create legal relations distinguishes a social contract from a legally binding agreement.
Nothing signifies an intention to treat a contract as legally binding better than contract signatures. Parties are to sign enforceable contracts, either via wet signatures or something better: electronic signatures. An eSignature is an electronic rendering of a signature that enables stakeholders to sign a document online without needing a physical copy of the document on hand. Signature bottlenecks can trigger delays with meeting obligations, meeting compliance standards, signifying an intention to create legal relations, and performing contract execution. Electronic signatures can hasten send-to-sign time by up to 20% and also:
Save money: No more paper, printers, ink, travel, or mailing costs needs to be required to get documents signed. Simply enjoy the power of contract management tools and eliminate this headache.
- Save time: Significantly less time can be spent focusing on administrative costs involved with sending, tracking, storing, and following up on documents that are out for signature.
- Provide enhanced security: Confidentiality breaches and processing errors can be reduced because electronic signatures provide audit trails and are legally binding and secure.
- Improve business relationships and visibility: The signing process can be streamlined and accessible in or out of the office. Crucial deadlines can be met.
Next steps
Now that you know the four basics of written contracts, it’s time to leverage the tools mentioned above and many others to execute and fulfil contracts without hassle. If you want to learn how to get started with a contract management system for better contract management, book a free demo with a Contract Insight® expert from Four today.
Contact John O’Brien, CEO at Four Business Solutions – global business consultants and software integrators specialising in business process improvement.
