Elements of a valid contract and contractual capacity

Four essential elements

A contract is an agreement that creates enforceable obligations. Analyze four essentials: competent parties, mutual consent, a lawful object, and consideration. A signature is evidence of agreement, but it does not by itself establish all four elements.

Competent parties have legal capacity to contract. Capacity concerns a person's legal ability to enter an agreement, not wealth, negotiating skill, or willingness to participate. An adult who understands the nature and consequences of a transaction generally has capacity. Minority and serious mental impairment can affect capacity. Do not infer incapacity merely from advanced age, a diagnosis, or an unfavorable bargain. When someone signs for another person or an organization, authority to act is a separate question from the signer's personal capacity.

Mutual consent means the parties agree to the same bargain. An offer and an acceptance matching its material terms ordinarily establish agreement. A response changing the price is a counteroffer, not acceptance of the original offer. Consent also must be genuine; fraud, duress, or material mistake can undermine it.

A lawful object means the agreement's purpose is legally permissible. Parties cannot make an illegal objective enforceable by signing a writing or exchanging money. Object refers to what the agreement is intended to accomplish, not simply the physical property involved.

Consideration is the bargained-for exchange of something of legal value. It can be a promise, an act, or forbearance from exercising a legal right. In a purchase agreement, a buyer's promise to pay and a seller's promise to convey can supply consideration before either performs. An earnest-money deposit is not the only possible consideration. A gift promise lacks a bargained-for return. California also treats a moral obligation that arises from a benefit already received as consideration for a later promise, to the extent of that obligation. Courts generally do not require the exchanged values to be equal.

Capacity and legal effect

A void agreement has no legal effect as a contract. A voidable contract may be avoided by a party whom the law protects; it is not the same as an agreement that never had legal effect. A minor's ordinary contract is generally voidable by the minor, but in California a minor's contract relating to real property or any interest in it is void. Particular capacity rules and exceptions depend on the governing law and circumstances.

An unenforceable agreement cannot be enforced through the courts because of a legal barrier, such as a required writing being absent. Thus, the four essentials and enforceability formalities are related but separate checks. For a real estate problem, identify the missing element before assuming that signatures, a deposit, or notarization cure the defect.