The essentials of creating a contract

Mar 27

I. Introduction

One of the key elements, not only in private law, but in law in general, is the contract. It is the instrument by which economic and social relationships are organized and systemized in a way which provides functionality for a certain society. They provide the legal framework that allows individuals and legal entities to exchange goods and services and create obligations for the parties included in a contract. By definition, a contract is an agreement between two or more parties to establish, regulate, or extinguish a patrimonial legal relationship. However, legal agreements can differ, and so can the requirements in a contract. For instance, marriage or family relations are primarily personal rather than economic in nature. Furthermore, by making a distinction, we can also explain why donation, even though it is gratuitous, is interpreted as a contract, and that is because it directly affects the patrimony of the parties. The freedom of contract is also important to note, as both parties in a contract are free to determine the conditions within it. Of course, this freedom is not unlimited, as there are legal provisions which are mandatory to constrain the liberal aspect of a contract, as well as public policy considerations and principles of morality, ensuring that private agreements do not undermine the legal order or fundamental social values.

II. Formation of contracts: Offer, Acceptance and Mutual Assent

When we talk about the formation of a contract, we need to take into consideration the concept of mutual assent, often described as the “meeting of minds” between the parties willing to create a patrimonial legal relationship. This requires a valid offer and a corresponding acceptance, both of which must be in accordance with all the essential elements of an agreement. The requirement that acceptance must mirror the offer ensures legal certainty and prevents ambiguity in contractual obligations. If the acceptance introduces modifications, it is not an acceptance in a clear way, but rather it constitutes a counteroffer, thereby reopening negotiations. Furthermore, different legal systems apply different legal rules about when exactly a contract is formed. In Italy, for example, the contract is formed when the offeror receives the acceptance and has knowledge of it. In common law systems, for example in the United Kingdom, the contract is formed when acceptance is sent, not when it is received. This is called the mailbox rule and emphasizes the idea that acceptance becomes effective upon dispatch, even if it has not been received yet. In France, there is no strict rule; the moment of formation is usually decided by the judge. Nevertheless, it is important to make a clear distinction between mere and informal agreements and legally binding ones. In common law systems, the doctrine of considerationfurther reinforces the contractual nature of an agreement by requiring each party that has legal intentions and wants to create a legal relationship with another to provide something of value, therefore ensuring that contracts are based on the principle of “quid pro quo” rather than mere promises.

III. Essential elements of a valid contract

In order for a contract to be considered valid, it must consist of several essential elements. The required elements are agreement, cause, object, and form, if the law demands it. The agreement must be based on morality, meaning that consent must be genuine and free from defects, and shall not be vitiated by mistake, fraud, or coercion. The concept of cause is also important. It provides the legal justification, or the reason, for an obligation, and it ensures the legitimate purpose of the legal bond. If a lawful cause is not present, providing grounds for the legal bond, then the contract may be considered void. It is important to note here that the concept of “causa” (cause) is traditional for civil law systems, while in common law there is the idea of “consideration.” The main difference between the two concepts is that “cause” emphasizes the lawful purpose or motive behind the obligation, while “consideration” focuses on the idea that each party must provide something of value. The object is the next element. It must be sufficiently certain, possible, and lawful by any means. The idea here is that this requirement ensures that the contractual obligations are possible to be performed. If there is impossibility to perform, the contract is void. We can see the same feature even in contracts from Roman law times – initial impossibility occurred if the agreement was already impossible to perform at the time when the contract was made, while supervening impossibility occurred when the performance of a contract became impossible on account of events occurring after it was made. That is why the object and the possibility of performing the obligations are important to be taken into consideration when creating a contract.

Although most contracts are consensual and do not require a specific form, certain transactions, particularly those involving economic value or public interest, must comply with formal requirements; otherwise, the contract is invalid. Another distinction must be made between a void contract, which has no legal effects because of the absence of essential elements, and a voidable contract, which is initially valid but may be terminated due to defects or conduct outside the legal framework of the contract.

IV. Obligations and Patrimonial Legal Relationships

Joining a contract leads to obligations for the parties involved. The parties are identified as debtor or creditor. The debtor is bound to perform a specific act, refrain from acting, or transfer a good, while the creditor holds the right to demand performance. We can classify these rights into two kinds. Rights in personam are obligations which arise from contracts and torts (wrongful acts). They apply only to the parties or legal entities involved in the legal bond. For instance, if someone owes money, only that person must pay the money, not anyone else. The other kind is rights in rem, which are mainly property rights and legally binding. They apply against everyone in the world and are often interpreted as erga omnes. For example, if someone owns a house, everyone must respect his ownership. Obligations form a part of a person’s patrimony, understood as the total set of rights and obligations with economic value. Sources of obligation can be contracts, torts, unilateral promises (even though only one party is bound), quasi-contracts, and potentially from family relationships. All of them create a large framework within which contract law operates and regulates the relationship between the parties in a contract.

V. Classification of contracts

Contracts can be classified in several ways depending on their structure, formation, and obligations. Contracts based on consideration involve situations where each party gives something or suffers a detriment. For example, in a sale contract the buyer pays money and the seller transfers ownership of the goods. If only one party benefits and the other does not receive something in return, the contracts are gratuitous (e.g. donation). Bilateral contracts are agreements where both parties have obligations towards each other, which correspond to each other. However, if one of the parties cannot perform their obligation, the other may refuse to perform as well or may choose between specific performance(forcing the contract to be carried out) or termination of the contract. In contrast, unilateral contractsimpose an obligation on only one party, such as in the case of donation, although there is mutual assent and a unilateral promise. Another important distinction is between commutative contracts, where obligations are clear and certain when the contract is made, and aleatory contracts, where one party assumes a risk and the obligation depends on a future uncertain event, such as insurance and suretyship. A consensual contract is another type of legal relationship, where obligations are formed simply by agreement, and no special form is needed. In solemn contracts, however, a specific legal form is required for validity. An example is a notarized act. Another kind is a real contract, which becomes valid only when the object is delivered; otherwise, it is considered void. There is also bailment, which occurs when one person delivers goods to another for a specific purpose, with the obligation to return them.

VI. Non-performance and Contractual remedies

A central function of contract law is to regulate non-performance and the remedies available to the injured party. When one party fails to perform its contractual obligations, the other party may seek various remedies. One of them is specific performance. As mentioned above, specific performance compels the defaulting party to fulfil its obligations, and it is particularly prominent in civil law systems, where the exact execution of the contract is often preferred. Alternatively, the other party can terminate the contract, thereby releasing both parties from further obligations. Additionally, the injured party may seek compensation for the damages which occurred from the breach of the contract. The calculation of damages is based on the principle of full compensation. Another distinction that should be made is between contractual liability and tort liability. Contractual liability exists only between the parties involved in a contract and occurs when one of them fails to perform the agreed obligations. On the other hand, tort liability occurs when a person causes damage to someone else without a contract. For instance, a driver injures a pedestrian, there is no contract, but the law requires compensation (Art. 2043 of the Italian Civil Code). However, there are cases where both forms of liability may coexist. For example, a doctor has a contract with a patient (contractual liability), but also violates the patient’s right to health (tort liability). Therefore, the doctor may face both liabilities. These remedies illustrate one fundamental principle: agreements must be respected, while also providing mechanisms to address situations where performance fails.

VII. Good Faith and Pre-Contractual Liability

Even before a contract is concluded, the law imposes obligations on the parties during the negotiation phase through the principle of good faith and fair dealing. This principle requires parties to act honestly, reveal relevant information, and avoid conduct that may mislead or disadvantage the other party. Although parties are generally free to terminate negotiations, this freedom is not unlimited. For instance, if one party creates a legitimate expectation that a contract will be concluded and the other party relies on this expectation, an unjustified withdrawal from negotiations may give rise to pre-contractual liability. This liability is typically grounded in tort law and aims to compensate the injured party for reliance damages, such as expenses incurred during negotiations or lost opportunities. The recognition of pre-contractual liability reflects the need to balance the freedom to negotiate with the protection of trust and fairness in commercial dealings.

VIII. Final words

In conclusion, contract law is a concept characterized by many elements. With such a complex identity, contract law provides the grounds for the structured formation of a legal relationship between two parties for economic purposes. It is important to have a general idea of how a contract is created, starting from the principle of “meeting of minds,” where a valid offer is required, to classification based on the purpose of the legal bond. There are requirements for validity which differ from legal system to legal system, such as the principle of “causa” typical for civil law jurisdictions and the idea of consideration in common law systems. Furthermore, understanding the distinction between rights in rem and rights in personam is fundamental for contract law, as well as understanding that the breach of obligations creates either contractual liability, which exists only if there is a formal agreement between certain individuals, or tort liability, where there is no existence of a contract. Nevertheless, if contracts are not based on the principle of good faith and fair dealing from the start, there will be no contract based on real information and clear purposes.

Of course, this is just a general idea of the elements of contract law; there are many more controversial classifications and distinctions, but deeper practical and professional competence and experience are required. However, the mentioned fragments are more than universal, and we, as legal subjects, form at least one contract every day. By understanding the general concepts, people will develop competence that will allow them to address situations where they can potentially be misled into immoral conduct. Furthermore, the complexity in the field of contract law demonstrates the legal guarantees for complying with the norms of the contract and the obligations that come with its formation.

This article is for informational purposes only and does not constitute investment advice.

Boris Atanasov

Partner & Chief Legal Analyst

The Financier Review

Mihail Gaydarov