A contract is a legally binding agreement between two or more parties, each promising to perform (or refrain from performing) a certain action in exchange for a consideration of value. In order for a contract to be valid, it must contain (at least) the following four elements: an agreement (comprised of both an offer and an acceptance), valuable consideration, competent parties, and a legal purpose. Let's explore each of these requirements in a bit more detail.


Without the mutual consent of all parties involved, there obviously can be no contract. The intention of all terms of the contract must be agreed upon, and no essential items may be left undetermined or unsettled. Additionally, each party's intentions must be made clear to the other(s).

An agreement must inevitably have both an offer and an acceptance. An offer is a proposal that, if its exact terms and conditions are accepted completely, creates a contract. It can originate from either party; for example, a completed application along with an initial premium payment submitted to an insurance company by an individual seeking coverage is, in actuality, an offer. If the insurer issues the policy as it was applied for, then the offer was accepted. (Generally, any words or actions that may reasonably be interpreted as agreeing with the offer constitute an acceptance.)

An acceptance must be both unqualified and without conditions. If an offer prompts only a qualified or conditional acceptance, then the original offer is effectively rejected and a counteroffer automatically made. Only an offer whose terms are completely and unreservedly accepted is regarded as a contract. Using our insurance example above, if the insurance company had instead issued a policy with a conditional rider that the applicant did not ask for, the original offer would be considered denied and an insurer-issued counterproposal made.


In conjunction with the agreement, each of the contract's parties must furnish valuable consideration. In other words, each of the parties is required to give up something of value or perhaps refrain from exercising some legal right or privilege. Valuable consideration maybe in any number of forms, including (but not limited to) a monetary payment; an act or forbearance from an act; a promise; or the creation, revision, or cancellation of a legal right. Again referring to our previous insurance contract, the applicant's consideration is made up of not only the initial premium payments, but also the statements (which constitute promises) made on the application. The consideration given by the insurance company is their promise to pay all valid claims according to the terms of the policy.

Competent Parties

In order for a contract to be binding, all parties concerned must possess the legal capacity to enter into a contractual agreement. An individual must be of legal age to agree to a contract within the state that has jurisdiction over the transaction. The individual must also meet that jurisdiction's guidelines for mental competence. Non-personages must be entities that have the authority to enter into legally binding agreements, such as licensed businesses or nonprofit organizations.

Legal Purpose

Finally, in order to be valid, a contract must be for a particular purpose, and that purpose must be legal and not contrary to public policy. For example, wagering or gambling contracts oppose general public policy and are thus not legally enforceable. Our insurance contract, on the other hand, does not diverge from public policy, and so fulfills this requirement.

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