In today’s world contracts are the legal documents ordinary people are likely to be most familiar with. When we buy a car or a video player, take a lease on a property, arrange for a bank loan or a mortgage, change jobs, pay for mean at a restaurant, arrange for delivery of groceries from the supermarket and, in general, enter into any of hundreds of everyday agreements for the sale or purchase of goods or the exchange of services, we are making contracts. It is important to remember that a contract does not have to be formally written down and signed by the parties to it in order to be valid and binding.
Given this freedom of form, it is as well to be clear on the basic elements that distinguish contracts from other forms of agreement and which must be present for a contract to be recognized as such and therefore enforceable.
In the first place, there must be an agreement between the two parties, who may be individuals or groups, a natural or juristic person. This agreement is often described as a ‘meeting of minds’ or consensus ad idem.
Second, there must be valuable consideration given and received by each party. In other words, each party promises to give something in exchange for the other party’s promise to give something else in return. Habitually this consideration takes the form of money, goods or service, but it may be practically anything so long as it has some identifiable value. Thus, in this mutual arrangement of offer and acceptance, each of the two parties may be viewed.
Third, the parties must intend their promises to be acted on and to be legally binding. Trivial or vague undertakings are not construable as contracts, nor are ‘promises’ to undertake the impossible.
Fourth, the subject matter of the contracts must not be illegal or ‘tainted with illegality’; so called ‘contract killings’ are not contracts in law.
Fifth, the contracts must be freely entered into by both parties and both should be of equal bargaining power.