Legal Contracts: The Basics of Contract Formation

Forming a Contract

When it comes to personal affairs, there are generally three types of people – careful, careless, and careful”less”. Yes, you won’t find the third category in the dictionary, but by and far most people fall here. If you haven’t figured out the reference from the context, I’m talking about those people who don’t make a conscious effort to read between the lines (literally!), but at the same time don’t neglect to at least skim the lines. In this article, I will discuss the basic legal requirements of forming a contract.

Most of us enter into contracts on a daily basis. Contracts are not only the agreements that large corporations enter into to merge with other companies or the deeds used to purchase real property. Most contracts are those that the average person enters into when purchasing, say, coffee from the local starbucks or filling up their tank at the gas station. In fact, by reading this blog, you have entered into a contract by agreeing to its terms and conditions.

So what, then, is required for the formation of a contract? this question takes me back to my Contracts 101 course in law school. In a nutshell, formation of a contract requires offer, acceptance, and consideration. An offer is literally that – the offer, whether oral or written, for an arrangement. An advertisement in the local newspaper that invites the public to purchase a vehicle at a given price is an offer. Acceptance is equally a relatively simple concept. Acceptance is literally the oral or written expression of assenting to the offer. “I will purchase the vehicle at the given price” is an oral expression of acceptance. In legalese, offer and acceptance, in conjunction, is referred to as mutual assent. That is, both the offeror and the acceptor assent to the transaction.

Consideration requires a bit more discussion. In the legal world, consideration is referred to as a legal detriment and an exchange. In layman’s terms, it is something of value given by the offeror in exchange for something of value given by the acceptor. Expanding on our vehicle-sale example above, let’s say the advertisement reads 2011 Ferrari 559 for $1,000 (yeah right!!!). In that case, consideration is the $1,000 that the offeror will accept and the acceptor will pay for the vehicle. Notice that the $1,000 is to the detriment of the acceptor, that is, he is paying this amount, and to the benefit of the acceptor. While courts generally do not care about the value of consideration, they do require that there be consideration. Also, consideration need not be a payment. It may be an act or forbearance to act, such as, “if you quit smoking I will give you ice cream.” (if it was only that is easy!).

While there are certainly many nuances to contract formation, the basic idea is offer, acceptance, consideration. So whether you are a college student selling your furniture or an entrepreneur embarking on a new business venture, always remember to memorialize your agreements. The time it takes to form a contract is well worth avoiding the possibility of a lawsuit down the line!

This article is provided for informational purposes only. It does not constitute legal advice. It is not promised or guaranteed to be current or complete. The information provided in the article is not intended to create an attorney-client relationship between the sender and receiver. It is offered only for general informational and educational purposes. It is not legal advice or legal opinion. You should not rely or act on any information in this article without first consulting with an attorney.