Topic 11.2: Essentials of a Contract

Learning Objectives

After successfully completing this topic, you will be able to
• list the four essentials of a contract, and
• distinguish between valuable consideration and good consideration.

There are Four Essential Elements in all Contracts

• legally competent parties,
• offer and acceptance (agreement),
• legal purpose, and
• consideration.

Legally Competent Parties

The parties to a contract must be legally competent for the contract to be enforceable. Three categories of persons are deemed not competent:
• persons who are insane,
• persons intoxicated by alcohol or drugs, and
• minors.

These contracts are voidable by the incompetent person, but not by the other party.

Agreement

An agreement is a meeting of the minds. There must be an offer, an acceptance, and communication of the acceptance.

Legal Purpose

The objective of the contract must not violate the law. For example, if a public official agrees to take a certain action in consideration of a bribe, the agreement is void.

Consideration

A contract requires consideration to be enforceable. Consideration is the promise to give up something of value when the agreement is closed. A promise for a promise is sufficient consideration. Many people mistakenly believe that an earnest money deposit is required as consideration for a real estate contract. All that is needed is for the buyer’s promise to buy and the seller’s promise to sell.

Types of Consideration

There are two types of consideration: valuable consideration and good consideration.

Valuable Consideration

Valuable consideration has monetary value, and includes a promise to do something the party is not required to do, or to not do something the party has the right to do. Valuable consideration is an essential for a contract.

Good Consideration

Good consideration does not have monetary value. It is most often called love and affection.

Good consideration does not meet the standard for enforceability. For example, a father may agree to give property to his daughter because of his love and affection (good consideration). However, if the father changes his mind before the property transfer, the court will not enforce the promise because the promise was one-sided; the daughter has not done or promised to do anything in return.

Both parties must give consideration

Either type of consideration produces a valid contract that can be completed. Once a contract has been completed, it doesn’t matter whether the consideration was valuable or good. 

Real Estate Contracts Must Be in Writing and Signed

An additional contract essential in a real estate contract is required by the statute of frauds: real estate contracts must be written and signed.