Home Business & Economy Understanding the Basic Concept of a Contract & Its Key Elements

Understanding the Basic Concept of a Contract & Its Key Elements

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As young entrepreneurs, we understand that there’s a lot of hustle involved with starting and running a business. Most often we ignore the legal aspect of the business because we either think a small business does not necessarily need any sort of legal structure, or we simply cannot afford a lawyer, who will help us build this structure.

This article will help you to understand the basics of contract law, and whether small businesses need contracts in their operations or not. I will try to be as simple as possible even though sometimes I may need to insert a few jargon.

Now let’s start with the definition of a contract and its key elements. A contract in its basic form is an obligation between two or more parties. An enforceable contract first of all, must have 3 key elements which are: (1) an offer (2) acceptance of the offer and (3) consideration must be provided for the offer.

In simple terms if I offer you my car for 1dollar, you must accept my offer and fulfil your obligation of that 1dollar which will then be regarded as your consideration to me, for my offer. When all these 3 elements are clear, certain and fully fulfilled, then a contract has been made.

The party who makes the offer is usually referred to us the offeror, while the other party who either accepts or refuses the offer is known as the offeree. It is important to note that consideration is key to avoid a ‘naked’ or ‘bare’ promise which is known legally as Nudum Pactum.

Acceptance of the offer in its exact sense, terminates the power of revocation that the offeror ordinarily has. Once this offer is made to the offeree, the power of acceptance comes into play.

Nevertheless, if the offeree accepts the offer, but on different terms rather than the precise terms of the offeror, it constitutes a counter offer and the offeror now gains the power to accept or decline. With regards to consideration, it is a mutual benefit affair (something that both parties receive as per their engagement).

Money is usually the consideration most people are used to, but it can also be in the form of products or services in exchange for the terms of the contract being met.

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