Requisite elements in the formation of a contract

Last updated on August 14, 2012

A contract is a legally binding agreement, usually between only two parties. For the contract to be legally binding, several requirements must be fulfilled:

  1. A meeting of the minds between the parties, manifested through offer and acceptance;
  2. Consideration;
  3. An intention to create legal relations;
  4. Parties must have a capacity to contract; and
  5. The parties must freely consent to the agreement.

Under the first requirement, two steps must take place: offer and acceptance.

An “offer” is defined as an expression of willingness to contract on specific terms, and it is made with the intention that it will become binding on the parties as soon as it is accepted by the person to whom it is being addressed to (the “offeree”). Thus, an “offer” has three requirements:

  1. It contains the terms of the exchange;
  2. It is an indication of the willingness of the person making the offer (the “offeror”) to be bound by the contractual terms; and
  3. It confers on the offeree the power to bind the to offeror the contract so that the latter can no longer withdraw the offer upon acceptance.

An “acceptance” is the unconditional acceptance of all the terms stated in the offer. For it to be effective, it has to be communicated to the offeror. It may be written or orally communicated to the offeror. In general, silence will not amount to an acceptance, but there are exceptional cases (see more here).

Under the second limb, the general rule is that a promise is only enforceable if it is supported by consideration. “Consideration” is something that has value in the eyes of the law and given in exchange for a promise. It can be understood using the “benefit-detriment analysis’’. A simple example would be a seller offering to sell his goods to a buyer and the buyer promising to pay him in return for the goods. In this example, the price of the goods paid is the consideration – the offeree buyer agrees to suffer a detriment in terms of the money he pays to the seller, where the offeror seller benefits by receiving money from the buyer.

In the third limb, there must be an intention by both parties to create legal relations. The law makes a determination based on the facts at hand. Usually the law is unlikely to find such an intention in a social or domestic setting. For instance, a husband promising his wife that he would buy her a Prada bag in exchange for making him breakfast for a week, is unlikely to be bound by a legal contract. However, the law will consider otherwise in instances where agreements were entered in a business or commercial context, even if the parties involved had familial or close social relationships.

In the fourth limb, broadly speaking, minors (below 21), or mentally incapacitated persons, do not have the capacity to enter into a contract. However, certain contracts such as sale of goods, services, or employment contracts, remain binding on minors.

Finally, it is a requirement under the law that both parties must freely consent to the agreement. This means that if one party coerces the other into signing the contract, via duress or undue influence, the law may not recognise its legality.