Financial Advice

The Essential Elements of a Valid Contract

When most people hear the word contract, they think of ponderous parchment documents stuffed with legal mumbo-jumbo. In reality, a valid contract doesn’t need to be complicated. It only requires an offer by one entity and acceptance by another. As long as each side negotiates in good faith, many straightforward exchanges of goods or services can often be covered by less formal agreements. A valid contract is comprised of five simple elements:

  1. Parties

  2. Goods or Services on Offer

  3. Consideration (Payment)

  4. Performance (Terms)

  5. Signatures


The parties to a contract are the principal individuals or entities involved in a particular transaction. Let’s say that your neighbor’s computer is on the fritz, and he wants to hire you to fix it. The contract that you would draw up for the job would list your neighbor and yourself as parties to the contract. If you operate your computer shop as a corporation or as a sole proprietorship under an assumed name, e.g. Jane’s Computer Repairs, you would list Jane’s Computer Repairs rather than your own name as the provider.

Goods or Services On Offer

You have always loved your brother in law’s sweet classic Corvette. After years of lusting after it, he has finally agreed to sell. The sales agreement that you draw up would include you as the buyer and your brother in law as the seller as the two principal parties, with the Corvette listed as the item being exchanged between the two of you.

Consideration (Payment)

Consideration involves the value of the goods or services placed on offer in a contract. In most cases, consideration takes the form of cash, checks, bank drafts, credit card payments or similar cash substitutes. For instance, the price your neighbor pays you to fix his computer would serve as consideration for that transaction. But in some instances, consideration can take the form of barter or non-cash payment. For instance, your brother-in-law may only agree to give up his Corvette in exchange for your timeshare in Hawaii. If you agree, your timeshare would serve as consideration for the sale.

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Performance (Terms)

Performance describes conditions under which the contract is considered to be fully executed. For instance, the contract between you and your neighbor may state that you will replace the computer’s power supply. The contract between you and your brother in law may state that the chrome rims for the wheels are included along with the car.


The signatures of the principals to the contract indicate that all parties are in agreement concerning the terms contained within the document. If any party is incapable of signing a document on his or her own, an individual who holds a power of attorney may sign on his or her behalf. For instance, if your neighbor with the faulty computer is 12 years old, one or both of his parents would serve as principals to the contract, and would sign the document on his behalf. If you are operating a repair shop as Jane’s Computer Repairs, you would sign the document as Jane Doe, Owner, or using some similar designation.

Is Your Contract Valid?

Contrary to a commonly held belief, oral contracts can be considered legally valid. The problem is that they are often unenforceable when a dispute arises. In the absence of clear evidence in favor of one party or another, disputes concerning oral contracts often erode into irresolvable “he said — yes, but he said” exchanges of accusations. As a result, written contracts are the way to go even among family and friends. Let me rephrase that. Written contracts are the way to go, particularly among friends and family.

Even if the document is correctly drawn up, the agreement underlying the contract may be invalid because one or more parties is incompetent or otherwise not entitled to enter into a legally binding agreement. For instance, if your brother’s ex-wife actually holds the title to his Corvette, your contract to purchase the car would not be valid. Likewise, if your neighbor’s father slips you a Roofie and tricks you into signing a contract to rebuild his son’s entire computer for $5, you could probably be released from the contract.

This May Not Be A Contract But Here’s Your Disclaimer

While most contracts will contain some form of each of the five elements listed above, each particular contract will vary according to the specific circumstances involved. As a result, the information contained in this article serves only as a general description of the construction of a valid contract and is not intended to serve as or substitute for legal advice. Please consult with an attorney with specific questions you may have concerning legal transactions or contracts.