Understanding the Essential Elements of a Valid Contract

Running head: BUSINESS LAW
Business Law
Name of the Student
Name of the University
Author Note

BUSINESS LAW1
Issue
Pam & Pete needs to be advice regarding molly’s eviction threat from her house
where she invited them herself to stay with her in exchange of a consideration.
Rule
A contract to be legally binding invalid it must satisfy all the essential requisites that
creates a legally binding contract. The following five elements are the most essential
elements that it makes a legally binding contract: a) offer, b) acceptance, c) consideration d)
capacity, e) intention to form a legally binding contract. Apart from these 5 there are few
other factors like the element of certainty and formality is also important to form of valid
contract1.
The foundation of valid contract starts with a proper offer and acceptance where the
offeror makes the offer or proposal to the offeree who either accept or reject the proposal.
The offeror can make an offer in any way he feels like as there is no particular format for it; it
may be in writing or can also be oral and even implied. It is only that the parties either agree
with each other to do or not to do something as their proposal or agreements with each other.
An offer needs to be differentiated from invitation to treat, a form of advertisement where II
the offer invites the world at large to make an offer pertaining to his invitation or proposal2.
An offer can be easily differentiated from an invitation to treat as held in the case of Carlill v
Carbolic Smoke Ball Co. where it was said that at certain conditions a unilateral contract can
be a valid agreement even when it was in the form of an advertisement, for it had the
elements of offer and acceptance3. An acceptance, alike offer, has no certain format which
needs to be fulfilled; it can be completed by written form, orally or by implication. The
1 McKendrick, Ewan. Contract law: text, cases, and materials. (Oxford University Press UK, 2014).
2 Stone, Richard, and James Devenney. The modern law of contract. (2017) Routledge.
3 Carlill v Carbolic Smoke Ball Co [1892] 2 QB 484 (QBD).

BUSINESS LAW2
conduct of the offeree is sometimes enough to imply that he has accepted the offer4. The
offeror has the scope to revoke his offer right before the offeree accepts it and similarly the
offeree has the right to reject the offer at the first instance before he accepts it.
The essential element of consideration which is a significant element to make an
agreement binding. It is a value which the parties to the contract exchanges or rather the
offeree gives to the offeror in lieu of a promise to do or not to do something. It has been
argued in various landmark cases that consideration is the value which is mostly measured by
money and that it should be good, adequate and proper, if not sufficient5. However,
consideration is different from conditions which are clauses that are added to an agreement.
Like, if A does something then B will do something for A in return; this a condition and not a
consideration.
The essential element of intention of the parties is an important factor to form an
agreement that is valid and binding. The parties to the contract must agree to perform their
parts of the agreement wilfully and they should agree to the same terms of the agreement.
There must not be a disagreement or mistake to understand the terms to which they are
agreeing to form the agreement. The principle of ‘consensus ad idem’ must be met. The
offeror has the scope to revoke his offer right before the offeree accepts it and similarly the
offeree has the right to reject the offer at the first instance before he accepts it6.
Along with the above mentioned essentials, the agreement must also be certain, free
from ambiguity, unreasonableness and whims and fancies of the parties, once it has been
confirmed by the parties. An incomplete and vague agreement is no agreement at all and it is
to be declared null and void as it did not meet the essential requisites of a binding contract.
Ambiguity and difference in the intention of the parties makes an agreement void as held by
4 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (NSW) (1988) 14 NSWLR 527.
5 McKendrick, Ewan. Contract law: text, cases, and materials. (Oxford University Press UK, 2014).
6 Stone, Richard, and James Devenney. The modern law of contract. (2017) Routledge.