The Essentials of a Contract – Part 1

Contracts make up all aspects of our day to day lives. Whether you operate a business here in New Jersey, are buying or refinancing a home, or arranging financing on your new vehicle or appliance purchase, you will have to sign contracts. Most people, however, remain more than a little confused about what makes a valid contract. So, in this series, we’ll explore the five essentials of a contract, so that you can feel confident next time you’re faced with this potentially daunting document.

The five essentials that make a valid contract are:

1. That the parties are competent to contract;
2. There is a proper subject matter;
3. Valid consideration;
4. A meeting of the minds; and
5. Mutual obligations.

All five of these elements must be present to make have a valid and legally binding contract. So, let’s look at point one in more detail here.

All contracts have at least two parties, but there may also be multi-party contracts as well as intended third-party beneficiaries. Each party has different obligations, but they also need to be competent to contract. So, what does this mean?

To enter into a binding contract, New Jersey law requires that a person must have the requisite legal capacity to be able to enter into a contract. In its simplest terms, an individual must be of sound mind and at least 18 years old. This means that the person cannot be underage, mentally ill, under guardianship, or intoxicated to enter into a valid contract. The principal exception to this is a married person under the age of 18, who is considered an adult for purposes of contracting. So in real-world terms, this means that your 17-year-old child cannot enter into a legally binding contract to purchase a vehicle.

This essential of a valid contract is in place to diminish the chance of coercion or other circumstances that may affect a person’s legal capacity to both understand and commit to the terms of a contract. Both parties to the contract must be of their “right” state of mind in the first instance to create a valid agreement.

If there is a dispute, evidence that one party was not competent will provide a valid reason for the contract terms to be found unenforceable. So, if you want to buy a piece of real estate that has been inherited by a 14-year-old, you cannot simply have a minor sign a sales contract and expect it to be legally binding. The same thing applies if someone is getting special care or assistance to handle their affairs. This means that it is crucial to conduct due diligence to ensure that your contract is legally binding and valid.

If you’re concerned about ensuring your documentation is legally binding and contains the essentials of a valid contract, be sure to speak to an experienced law professional. The Adriana Baudry team is available to assist you and review the details of your contract before the parties sign.