The 3 basic elements of an agreement: offer, acceptance and consideration

Updated: 8 December 2019

What you need to know about an agreement is that three essential elements or ingredients must exist,  these are offer, acceptance and consideration.

1. Offer

You are making an offer when you explain to someone that you will enter into a contract with them on certain terms. 

And your offer is effective only if it has valid consideration (more about that below) and shows that you intend to create a legal obligation.

So here are the rules for an offer:

  • you can revoke an offer before someone accepts it but you must let the person know;  
  • if you reject an offer, it is no longer available for acceptance; and
  • if you make a counter offer then that is the same as your rejection of the original offer.

Also, acceptance is important.

2. Acceptance

You need to tell the offerer that you accept an offer for it to be effective.

Now if you are the one making an offer, you can explain that the person accepting must accept an offer in a certain way, for example: “you need to accept this offer by written notice to us in an email."

Also, silence is not a way that you can accept an offer.

Now for the rules about consideration...

3. Consideration

In simple terms, if you are making a promise to do something in a contract, something must be given to you in return for making that promise to do something.

So here are the essential elements of consideration:

  • there has to be a detriment to the party promising and a benefit to the party receiving;
  • your consideration must be sufficient but it does not have to be adequate. Importantly, Courts don’t assess the value. This approach protects your economic freedom;
  • the promisor must be bound to perform, they can't simply have an option to perform;
  • if you have past consideration, its not  sufficient. That is, something given before a promise is made cannot be good consideration for doing the promise; and
  • a promise to perform an existing legal duty, or actually performing an existing legal duty is not generally sufficient consideration.

Do you have questions or comments about what goes into an agreement? Be sure to leave them below. 

I wish you success in your ventures!





Vivian Michael
 

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to deliver the best quality business legal services to entrepreneurs launching an Australian business, wherever they are in the globe.

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