First Principles of Business Law

1.2. The essential requirements of contract formation

There are three basic requirements (elements) of contract formation. Each one of these must be satisfied before a contract can come into existence. The three elements are:

1. The parties must have intended, when reaching agreement, to create and take on legally binding obligations.
2. The agreement must either be formally written (executed) in a a document called a 'deed' or, as an alternative, the parties must, at the time of reaching agreement, give each other of 'something of value'.
3. The parties must agree on enough aspects of their transaction for it to be practically workable.

The elements of contract formation are simple enough to summarise but, in practice, they each involve many different particulars and rules. By working through this module you will learn how to identify and apply the appropriate concepts and apply them.

 Note: As well as satisfying the elements of contract formation, the parties must have the the power to undertake legal obligations. This is referred to as ‘capacity to contract’ and is dealt with later in this module.