You may be entering into a larger number of contracts with other businesses as you experience company growth. In that case, the legal counsel needs to keep up with the pace.
However, in reality, low-value tasks take the longest. Ensuring that all the essential elements of a contract are covered is time-consuming for the legal counsel. 40% of legal staff surveyed by Gartner claim that managing contract risks take much longer than it should.
A delay like that can even lead to a whopping $7 million in revenue losses.
Interested to learn more? This blog post will discuss the key contractual elements, and how CLMs can help.
6 essential elements of a contract:
Again, a contract is a legally binding agreement between two or more parties. However, in order for it to be valid, ensure that you include the 6 elements of an enforceable contract:
- Intention to create legal relations
- Legality and capacity
Perhaps you wonder if all contracts signed are automatically legal. Not all of them, though. You’ll realize why as we explain each of the contract essentials in detail.
The first element of a legal contract is called an offer. It’s pretty simple ― entering a contract means you have the intention of creating a legal relationship. So your first move is to draft a “ contractual offer” also known as your proposal.
The term refers to a promise made by one party to induce the other party into signing it. That’s with the understanding that it will become binding as soon as it is signed (accepted) by the party to whom it is addressed.
Usually, it looks like this:
A party that makes an offer would be an offeror while the party who gets an offer would be an offeree. An agreement made by the offeror may be counteroffered, revoked or adjusted at any time by the offeree before it’s accepted.
However, take note of this. Once an offer has been accepted, it can’t be withdrawn anymore.
Say you’ve already made an offer, your agreement with the other party is not yet binding unless both parties accept the contract terms. Yes, the second element is ‘acceptance’ aka the signing of the parties.
As you probably know, without acceptance, there is no contract.
Though acceptance is more formally expressed in writing, some may accept verbally. One more thing. Be aware of the mailbox rule though.
It’s when an offer is deemed accepted, regardless of whether the offeror didn’t receive the acceptance after it was placed in a mailbox for mailing.
The third required element of a contract is ‘consideration’. It’s described as something of value that each party can gain by entering the contract.
However, consideration doesn’t always have to be monetary. It may also take the form of:
- promise to do (or not) a particular action.
Intention to create legal relations
For a contract to be valid, there must be an offer that is accepted after thorough consideration. Yet another important contractual element is the ‘intention to create legal relations’. This element is often referred to as the “meeting of the minds.”
Both parties must have a clear understanding of their obligations. Thus, this is when there’s awareness among the signatories. If it’s proven there was undue influence, fraudulent behavior, coercion, or misrepresentation, the contract is void and unenforceable.
Legality and capacity
A contract can’t involve anything against the laws of the state or illegal, such as drug trafficking or assault. Also, all parties involved in the contract need to have the mental capacity to understand what they’re agreeing to, over the age of 18 and not under any legal incapacity.
That’s what the contractual element for ‘legality and capacity’ is about.
If a person is found to be mentally incapacitated, then any contracts that they have entered into will be void. Even if the other party didn’t know the contracting party was mentally impaired when the contract was made, this rule applies.
That way, people won’t sign away their rights without fully understanding what’s going on. However, a minor may still enter a contract through a legal guardian or an appointed representative.
The last required element of a contract is ‘certainty’. By its name, certainty in a contract means that both parties must have a true understanding, no ambiguity, of what they are agreeing to.
It can be achieved in a number of ways, including through express written contractual responsibilities and obligations, the use of industry-standard terms, or clear identification of the key parties.
That way, if a term of the contract was breached, you’ll easily identify the liable party and enforce the claim of its legality accurately.
Ensure your agreement is valid and enforceable with modern CLM
There’s only so much you can do with a contract if you don’t do it well. So it’s better to make sure it’s valid and enforceable.
With modern contract lifecycle management software, it’s easy to create documents that meet all the essential elements of a contract. This way you can follow the automated contract lifecycle and make sure the final result is good.
Here are ways how contract lifecycle management software simplifies contract drafting:
Streamlines the contract drafting process, making it simpler and faster
You’ll never miss to include important terms and conditions due to the automated questionnaire generated during contract drafting.
The way it works is simple: just answer a few questions about the contract, and CLM will produce a draft that includes all the necessary input from you.
Designed to speed up the process of approval and signing of the contract
The application provides users with a clear system that allows users to notify reviewers/ fast so they can approve or reject a contract draft fast.
When a draft is approved, you can send it out to the other party for review. It’ll eliminate the need for paper signatures ― CLM’s integration with digital signature tools will let you collect their signatures no matter where they are. That’s a fast sign of acceptance of the parties.
Tele2’s corporate lawyers are the perfect example of how in-house legal can fasten contract creation through automation. They were able to draft 100 NDA within 50 minutes instead of 50 hours.
Their smart solution involved the use of a modern CLM called Avokaado.
So how can you use the modern Avokaado CLM to make sure you’re including all of the essential elements of a contract?
How to manage the key contract elements with CLM?
As a contract management tool. Part of its job is to have automated contract preparation.
In Avokaado, you have two choices in kicking off your contract draft.
- Uploading a template based on your existing Word document.
Simply click the “Upload” button then a machine learning-based algorithm divides the document into blocks for you. This will let automatic cross-referencing so you can add blocks from the clause library.
- Starting a document from the store’s pre-made template.
Easy. All you have to do is answer the document pre-generated to fill in your template’s details. They are already pre-lawyered so you’re sure that the 6 six elements of contract formation are present.
This questionnaire pops up on the left and you can view the changes in real-time.
After you have finished the draft, collaboration comes next. It’s not only for internal colleagues and stakeholders but for external collaborators as well.
Here’s what you must do after the initial draft.
- Let others check your work for consistency and better quality.
Add approvers and/or signers to your document by hitting “+Add”. You can choose to give them approval or signing rights. It’s really important to define who can edit the document or just leave comments for discussion.
- If approved, share a public link with your external collaborators for negotiation and signing.
They then decide if there’s redlining that’ll happen or if acceptance will occur. During acceptance, signing happens. Avokaado’s integration with electronic signature providers lets you set up the signing workflow in a single platform.
Here are your signing options.
- Dokobit signature supports Estonian, Latvian, Lithuanian, Finnish, Polish, Icelandic, Belgian, Portuguese, and Spanish national ID providers.
- SignNow e-signature serves as a worldwide electronic signature that is legally binding
Note: When you’re not sure if your collaborator can sign eIDAS-compliant, use SignNow.
So, what are the 6 essential elements of a contract?
What makes a good contract? Well, there are a few things that every good agreement should have. We’ve listed 6 of the essential elements of a contract below.
- Intention to create legal relations
- Legality and capacity
A well-crafted contract leaves no room for interpretation. It’s not easy to ensure that every time, you’ll start from scratch. Using contract automation software can make it possible ― faster and easier. You can streamline the process and get your business contracts in order.
Give our software a try today and see how easy contracting can be. Try modern Avokaado CLM for free for 7 days.