Question

what are the elements associated with creating a contract? Why is a contract needed?

Answer 1

A contract is nothing but the legal binding between two or more parties that enter into a legal agreement. The contract is valid if there is an offer made, offer accepted and the consideration to be paid by the promise made.

A valid contract has four requirements. They must consist of offer, acceptance, consideration and intention of legal consequences.

• Offer – It is an act to do something or to pay an amount, if accepted, forms a valid contract. To make an offer there should be at least two parties or even more who can legally enter into a contract. It is important to specify the deadline for the acceptance of offer in order to avoid potential dispute between the parties or cancellation. An offer cannot take silence as a form of acceptance from the other party.
• Acceptance – After the offer is made, there should be acceptance from the other party or parties to make it a valid contract. The party accept the offer if they are clear with the rules and regulation. If the parties are still under the negotiation process and there is no acceptance till now to the offer, then it is still not a contract. If a person to whom the offer is made has accepted only some of the terms or proposes some of the new terms, then it is the counter-offer that is made by the other party and is still not a valid contract.
• Consideration – This forms the important part of the contract which consist of value such as money, payment or the cost of the promises of performance agreed to in a contract. A valid contract will have consideration part for both the parties where one party promises to do something in return for a promise from the other party to provide some benefit.
• Intention of legal consequences – A contract is valid if the parties agree to enter into a contract legally and are aware that the agreement can be enforced by law. Sometimes the document may contain the words “subject to contract” or “without prejudice” which indicates that the things that are written are legal in nature.

The purpose of the contract is that it formalize the agreement between the parties so that it can be considered seriously. It prevent fraudulent conduct of one party to another. The expectation of both the parties are clearly stated in the legal document so it helps in minimizing disputes. A contract protects intellectual property and limits liability. It helps in building trust between the parties and provide peace of mind.