The Basics and Formation of a Contract

Hi Everyone,

Before we analysis a contract, it is important to understand the basics and formation of a contract.  The essential elements of a contract are the intention to create a legal relationship, offer and acceptance, consideration, and legality.  A valid contract does not come into existence until one party, the offeror (or) has made an offer to the other party, the offeree(ee) who accepts it. 

For a contract to be created and become binding an offer must be made.  An offer is a promise to do something or give something of value.  Once the offer is made, there must be a form of acceptance.  For example, a man offers $15,000 for his car, and the other person accepts it.  The only person that can accept the offer is the person that the offer is made to.  An offer can lapse meaning the offer is terminated.  For example, the party could die prior to acceptance, fail to accept the offer in the time period specified or no time period is specified but doesn’t accept in reasonable time.  Another option is that the offeree rejects the offer and makes a counteroffer.  A counter offer does not accept the terms of the contract but proposes to add or modify them. 

There is no format that an offer must be made as long as it is understood to be an offer.  The offer must be communicated by the offeror for the offeree to be able to accept it.  Offers can be made verbally, in writing, or through a gesture such as raising your hand in a silent auction.  The general rule for acceptance on the other hand is that it occurs at the time of receipt but there are exceptions for mail and electronic.

Consideration involves the exchange of something.  A contract is void for lack of consideration because there must be an exchange that involves both sides. 

In addition to offer and acceptance, there must be an intention to create a legal relationship relying on presumption law.  The parties to a contract must have intended from the beginning of negotiations that legal obligations would result from the agreement.  The promisor will be bound to the promise that they make.

This is just the basics of the formation of contracts and I will go into more detail when I discuss particular cases.

-Mark