Thanks for reading this article! I’m Carlo and I'm a law student at UOA. Follow me for more content on LinkedIn.
Agreements are very important in business. They are used any time you employ someone, buy a product, or sell someone else a product. This makes it essential to understand what makes a contract binding in New Zealand. This article will outline the three basic elements that a contract must have to be legally binding.
Agreement
The first element that a contract must meet to be binding is that the parties had an apparent agreement about what the terms of the contract were. The courts determine this by asking if a reasonable bystander would have considered that the parties agreed.
Agreement is often characterised by offer and acceptance. The offer must be made with the purpose that it could be accepted immediately by the person it was offered to. This is distinguished from an offer to treat, where the purpose is only to invite the other party to further negotiations. Acceptance is only valid if is an acceptance of all the terms of the agreement. This means that a counteroffer or acceptance along with a request for more information is not an acceptance. The acceptance must also be clearly communicated to the offeror.
Once there has been an offer and acceptance of the offer, the court will likely consider that an agreement has been reached.
Consideration
Consideration is the second element of a legally binding contract. Consideration has a specialized legal meaning, which is that something of value must be exchanged. To elaborate there must be some benefit or detriment for each party of the contract. For a contract where a third party will receive a benefit, only the two parties making the agreement must supply consideration to make the contract valid.
Examples of consideration are paying money to buy a car, where the seller supplies the car, and the buyer supplies money. There is no consideration if the money is promised simply as a gift.
Intention to create legal relations
The third element of a contract is the intention to create legal relations. The court will assume that there was an intention to create legal relations unless this can be shown to be false. An agreement that is made in a domestic context will likely not be understood to have an intention to created legal relations, such as where a parent agrees to do the dishes in return for other work. Agreements between businesses will generally be understood to have the intention to create legal relations. A clear statement to the contrary, such as that it is binding in honour only will likely cause the court to understand there is no intention to create legal relations.
Conclusion
The three elements of a legally binding contract are agreement, consideration and the intention to create legal relations. The agreement is characterised by offer and acceptance. Consideration means that there must be a benefit or detriment to both parties. The intention to create legal relations means that the parties must intend to make a legally binding agreement.
Thanks for reading this article! I’m Carlo and I'm a law student at UOA. Follow me for more content on LinkedIn.
DISCLAIMER: None of the above is intended to be legal advice. The author is not a lawyer, and all writing is intended to be for educational purposes only. The author accepts no responsibility for actions taken as a result of this article. Further information here
FAQs
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.
What are the 3 key elements of a binding contract? ›
The core purpose of a contract is to outline the terms and conditions under which parties agree to fulfill their respective obligations.
- Offer and acceptance. The foundation of a contract lies in the offer and acceptance. ...
- Consideration. Consideration is another crucial element of any contract. ...
- Legal capacity.
Contract Elements Overview
There are three key elements of a binding contract, and they are what are known as the offer, the acceptance, and the consideration.
What are the three 3 parts of a contract quizlet? ›
Any contract includes three essential elements: an offer, an acceptance, and consideration. The contract is formed when one party accepts the offer of another party. An offer is a commitment with certain terms made to another party, such as a declaration of willingness to buy or sell a product or service.
What are the 3 C's of a contract? ›
The 3Cs are an acronym for Character, Credit, and Capacity. Together they make up the three distinct categories that contract Surety bond underwriters look at before issuing bonds such as bid bonds, Performance Bonds and payment bonds.
What are the three 3 most important elements in proving that a contract exists? ›
To be valid, a contract must generally contain all of the following elements:
- Offer.
- Acceptance.
- Consideration.
- Legality.
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.
What are the three main terms of a contract? ›
No contract is valid unless it contains three essential elements: (1) the names of the "parties," (2) the "subject matter," and (3) "consideration." Each of these terms is defined below.
What are the basic requirements of a contract are there are 3? ›
Each party must: Recognize that the contract exists. Be an active participant in the contract. Consent to the terms listed in the contract.
What are the three 3 characteristics of a contract? ›
Contracts are made up of three basic parts – an offer, an acceptance and consideration. The offer and acceptance are what the purpose of the agreement is between the parties. A public relations firm offers to provide its services to a potential client.
To that end, several key elements constitute contract formation; contract law is shaped by considerations of public policy, and parties involved, such as the offeror, must be aware of these legal principles. Those elements are offer, consideration, acceptance, and mutuality.
What are the requirements for a contract to be legally binding? ›
For a contract to be legally binding, both parties must be aware that they are entering into an agreement. To do this, they must acknowledge that the contract exists, and both parties must agree that they are bound to the obligations of the contract by their own free will.
What are the three 3 required elements to create a valid contract? ›
For a contract to be valid and recognized by the common law, it must include certain elements-- offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.
What are the three 3 stages of a contract? ›
A contract has three distinct stages: preparation, perfection, and consummation. Preparation or negotiation begins when the prospective contracting parties manifest their interest in the contract and ends at the moment of their agreement.
Which three of the following are essential elements of a contract? ›
Enforcing a contract comes down to six key elements: offer, acceptance, awareness, consideration, capacity, and legality.
What are the three main requirements for a contract? ›
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality. In some states, elements of consideration can be satisfied by a valid substitute.
What are the principles of a binding contract? ›
There are five elements which, taken together, make a contract valid:
- offer;
- acceptance;
- consideration;
- capacity; and.
- intention to create legal relations.
To that end, several key elements constitute contract formation; contract law is shaped by considerations of public policy, and parties involved, such as the offeror, must be aware of these legal principles. Those elements are offer, consideration, acceptance, and mutuality.
What are the elements of binding? ›
Whether a contract is 200 pages or 10 pages, to be a legally binding agreement they must contain six basic elements: Offer, Acceptance, Awareness, Consideration, Capacity, Legality.
