Contract Formation

There are usually three phases to a contract: (1) thinking about and negotiating the contract; (2) agreeing on the key terms, either orally or in writing; and (3) performing the contract ― that is, doing what you have agreed in the contract to do.

Once you and the other party create a contract, you are both legally required to do what the contract states you are supposed to do. If one of you fails to do what the contract requires you to do, the other party can sue to enforce the contract ― that is, either get a court order requiring the other party to do what it agreed to do, or get money from the party who failed to do what the contract required, if that party’s failure caused the other party to lose money.

Most contracts can be formed just by oral agreement, that is, do not need to be in writing, but certain contracts, like those involving real property, must be written down to be enforceable.

In order to create a valid and enforceable contract, there are certain requirements:

• Offer and Acceptance – one party must make a clear and definite offer, and the other party must accept that offer, clearly and definitely.
  • Offer: Buyer: “I’ll give you $1,500 cash for that used motorcycle of yours.”
  • Acceptance: Seller: “Great! I accept.”
• Exchange Something of Value – also known as “Consideration.” Each party must promise or provide something of value to the other party;
  • In the example above, the Buyer is giving $1,500 cash to the Seller, and the Seller is giving the motorcycle to the Buyer. The cash and the motorcycle are each something of value, or “consideration,” for the contract.
• Legal Purpose – the contract cannot be formed for an illegal purpose.
  • In the example above, if the Buyer offered what was left of his oxycodone prescription for the motorcycle, the contract would have an illegal purpose – the sale of a controlled substance – and would therefore not be enforceable by a court.
• Capable Parties – the parties to the contract must be legally capable of entering into a contract. For example, a minor cannot form a legally binding contract. Both parties must also be capable of understanding the meaning of the contract. Neither party can be mentally incapacitated at the time of the contract.
• Mutual Assent – also known as the “meeting of the minds,” both parties must intend to be legally bound by the agreement and also must agree on all the essential terms of the contract. In the following example, the minds of the buyer and seller do not meet, because the seller does not agree that the price the buyer offers for the motorcycle is enough:
  • Buyer: “I’ll give you $1,500 cash for that used motorcycle of yours.”
  • Seller: “Ha! That might pay for one of the wheels!”

Legal Editor: Robert A. Sternbach, November 2014