5 Elements Every Business Contract Needs to be Legally Binding

Contracts are an integral part of the business world, and they serve to protect all parties involved in a project or transaction. When one party fails to fulfill its duty in the contract, the other party can seek legal recourse.

But in order for a contract, whether written or oral, to be valid, it must contain certain elements, or components. A legally binding contract should have five elements: legal purpose, mutual agreement, consideration, competent parties and genuine assent.

Legal Purpose

Legal purpose is an essential element in contract law. The obligations within the contract must comply with the laws of the land in order for the agreement to be legal and enforceable.

If the parties enter the agreement for an illegal purpose, the contract is not considered legally binding.

Mutual Agreement

In order for a contract to be legally binding, all parties must be in mutual agreement about the offer and scope of the contract.

All parties must be in agreement with all terms of the contract.


Each party must agree to give up something of value in exchange for a benefit.

For example, you hire a general contractor to remodel your bathroom. You and the contractor sign an agreement in which you promise to pay a sum of money in exchange for the contractor performing the remodeling work.

Competent Parties

All parties who enter the agreement must be competent. In other words, they must be of legal age, of sound mind and not under the influence of drugs or alcohol.

Contracts with minors and those deemed mentally incapacitated are not enforceable.

Genuine Assent

All parties must enter into the agreement freely. Contracts may not be enforced if one or more parties make mistakes. A contract can be voided if one party has committed fraud or exerted undue influence on the other. If a party is coerced into signing the agreement, the agreement is unenforceable because it was made under duress.

A legally binding contract should have all of these elements, but there are certain types of agreements that must be in writing. Real estate sales contracts, for example, must always be in writing.

What Happens if a Party has Breached the Contract?

If one or more parties fails to fulfill his or her obligations under the contract, then that party has breached the contract.

If one party breaches the contract, the other party may suffer a financial loss. There are several options for obtaining compensation in case of a contract breach.

Typically, the injured party will file a lawsuit against the other party or parties who breached the contract for damages. Let’s say that you enter an agreement to purchase widgets from another company, but that company only fulfills half of the order. You may sue for the cost of hiring another company and for the costs you incurred because of the delay.

You may also compel the company to complete the work as per the contract, or terminate or amend the agreement in cases of fraud or signing under duress.


What are the essential elements of contract?

An offer
An acceptance
An intention to create a legal relationship
A consideration (generally money)

What are the 4 types of contracts?

Lump sum contract – a fixed price for all work
Unit price contract – this contract is for the types of tasks being carried out plus cost of material
Cost plus contract
Time and materials contract