Essential Elements of a Legal Contract – Part 2

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Contracts can be fantastically complicated, or absolutely simple. But without the essential elements being present, they aren’t binding or enforceable. It might be 100 pages long and have cost you $5,000 to have drawn up, but without the essentials you have no deal.

On Monday, I started a series of blog entries on the 10 essential elements that must go into a contract to make it legal. We went through Elements #1 and #2, Offer and Acceptance. Today I want to go through the next two elements, #3 and #4: Consideration, and Date.

Essential Term #3 – Consideration

A contract is a bargain. You offer to make a deal, I accept your offer – the deal is struck. The exchange of promises: “I’ll give you a corporation for $850,” and, “I accept your offer,” is a bargain.

The next step, “Here’s my credit card information,” is what we call consideration – the third must-have element in a contract.

Consideration is a benefit or advantage to the person making the offer and a corresponding cost or prejudice to the person accepting the offer. In this case, I’m doing some work for you and you are paying to have that work done.

Consideration can’t be something given or promised in the past. To be valid, the consideration must be a new promise or some fresh benefit exchanged for the offer.

There is also a question of adequacy. As far as the law is concerned consideration is simply something of value that is given after a bargain is struck. But any time you’ve got something objective involved with something that costs money … well … it’s one of the more heavily-litigated areas of contract law. The question boils down to simply: was the consideration adequate.

As long as you and the person you made the deal with both are happy and say it was adequate, then it is. The problem happens when a third party who is directly or indirectly affected objects to the deal. For example, say you’re in the middle of a nasty divorce or you’re looking at filing for bankruptcy, and you’re selling off assets. You decide to sell your $40,000 car to your bowling partner for $1.

You think it’s fine – if your ex is taking half of everything she can have the 50 cents. Same with your creditors. But as far as your ex is concerned, or the person trying to collect money from you, it’s completely unreasonable that you sold that car for $1. It’s more likely that you were trying to avoid paying what you owed.

When a case winds up in court, the courts take a look at the consideration that was paid. If they find the consideration was inadequate, and could raise allegations of fraud, or an unconscionable deal, then they can refuse to enforce the contract.

An unconscionable deal is one that involves coercion, or a threat. Perhaps it’s taking advantage of an elderly relative in the early stages of dementia, to get a bargain price on a prime piece of oceanside real estate. Or the old “make you an offer you can’t refuse” deal. If a court finds that a deal was unconscionable, even if the contract looked absolutely legitimate on the face of it, once all the circumstances were brought out into the light, chances are the contract would not be upheld.

Essential Element #4 – Date

Contracts have to have a date to be enforceable. No date … no deal. (Short and sweet, huh?)

Next up: Essential Elements #5, #6 and #7: Signatures, Correct Names, and Proper Signers. Look for that in a couple of days.

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