What is a Contract?

contract is a legal agreement between two or more parties concerning their promise to sell goods or perform services. Although a contract can be oral, it is a good idea to put the terms of the agreement in writing so as to decrease the potential for dispute concerning what each party agreed to do.

When a dispute arises in which one party alleges the other has failed to fulfill their obligation under the contract, the other party may  sue for a breach of contract.

How Do I Form a Valid Contract?

Before you start demanding the goods or services that you think were promised to you, look at whether you have a valid contract. Only valid contracts are enforceable. The requirements for forming a contract are fairly simple and are intended to show that there was mutual assent between the parties to enter into a contract and as to the specific terms contained in the contract.

Let’s look at an example. You are the owner of a restaurant and you entered into a contract with a vender to purchase lobsters, a popular item on your menu. The vender brings in a shipment of frozen lobsters and you demand that the vender take the lobsters back and bring you the live lobsters you ordered. Clearly, in this example the parties didn’t have a meeting of the mind as to the terms of the contract.

The elements necessary to form a valid contract are:

  • Offer: An offer is essentially a promise by one party (offeror) to do something for the other party (offeree).
  • AcceptanceThe offeree has received your offer and may determine whether to accept it or reject it.
    • Acceptance can be a tricky element to prove as you may have issues of revocation, counteroffer, expiration of the offer, or improper method of communicating the acceptance.

An acceptance scenario may look like this. You send an email to your friends offering to sell your current phone for $50 but you don’t say how long your offer is good for. Your friend Tony needs a new phone and goes to the bank immediately after receiving that email and withdraws money.

Tony has said nothing to you about his intentions to buy the phone from you. You rescind the offer twenty minutes after you made it because you want to give the phone away to someone else. Under these facts, it is difficult to conclude that Tony has accepted the offer before the offer was withdrawn.

Changing the facts slightly, we now know that Tony did respond to the email immediately, indicating the acceptance of  the offer. While Tony is at the bank getting the money for the phone, you decide the phone is worth more than $50.

When Tony presents you with the $50, you tell Tony you are now selling the phone for $75. It’s too late to withdraw the offer because Tony has already accepted the offer at $50.

  • Consideration: If you offer something valuable or beneficial in exchange for the offeror’s promise, this would constitute consideration. Consideration does not have to be financial in nature.
    • For example, if you have a comic book that you know the offeror has been dying to get their hands on, that may be the value needed to complete the contract.
  • Legal Purpose: A contract has to be made to serve a legal purpose. You decide to buy a home because your family is growing. That would be a legal purpose.
    • However, if you decide to buy the house because you want to run a prostitution service from it, this would not be considered a legal purpose and your contract will be found invalid.