12.1 - Contract Elements

What is a Contract?

People often have a misconception that contracts are only super complicated multi-page documents that are prepared by lawyers.  The truth is, contracts do not have to be complicated or contain numerous terms in order to be legally binding.  A contract is simply any legally binding agreement between two or more competent parties.  Most contracts are bilateral contracts, which means that both parties agree to do, or not do, something for each other.  Contracts may be formed via verbal agreement between two or more parties (oral contract); or they may be formed by writing out the terms of the contract on paper or Internet communication (written contract).  Contracts are thus essentially just legally-binding agreements that two or more parties make with one another.

Although most contracts set out the agreed-upon terms and conditions when the contract is first formed (express contract), some contracts have the parties indicate consensus through their conduct.  These contracts are called implied contracts.  An example of an implied contract is riding a public transit bus.  A rider does not need to discuss the terms of the contract to ride the bus, they need only to pay the fare and then ride as far as they wish.

Elements of a Contract

A contract is not formed unless the parties involved both want to be in it, and have voluntarily agreed to the terms.  There must be a clear understanding between the parties of the terms of the contract and the willingness to abide by them.  Further, a contract does not exist unless the following three required elements are present:  offer, acceptance, and consideration.  

Offers

The first required element of a contract is the offer.  An offer is the proposal to another party to enter into an agreement on certain terms.  The offer is proposed by the offeror, and received by the offeree.  In order to be valid, the offer must be made seriously and have clear terms communicated.

Offers may be communicated in a variety of ways, such as by mail, fax, email, courier, or in person.  How an offer is communicated is important, as is knowing when the offeree became aware of the offer, or even if they became aware of the offer at all.

Not every action that looks like a contract offer is actually a valid offer.  For example, an invitation to treat refers to the communication that is intended to elicit offers from parties who receive it.  Advertising a car for sale is an invitation to treat, and not a valid offer in itself.  By placing the for sale ad, the seller is trying to get offers, and it is not an offer itself.

Offers don’t remain valid forever.  Instead, these are the three key ways in which offers are ended:  when a contract lapses, when a contract is revoked, or if a counteroffer is presented.  First, a lapse is when an offer is terminated or ceases to exist in certain circumstances.  An offer lapses if it’s not accepted before the due date set out in the offer; or if the offeror dies, becomes mentally incompetent, or goes bankrupt.  Second, offers are revoked when the offeror withdraws the offer before it’s accepted by the offeree.  Finally, offers are ended when a counteroffer is presented.  A counteroffer is when an offer is made as a response to a previous offer.  After the counteroffer is made, the first offeree now takes the role of offeror, and vice versa.  Once a valid offer is presented, a legal contract still does not exist.  A contract also requires the other two required contract elements to be present before it is considered to be legal and enforceable.

Acceptance

The second required element of a valid contract is acceptance.  Acceptance is a clear indication by the offeree to enter into a contract on the terms set out by the offeror.  Acceptance happens after the offeree has formally communicated acceptance of the terms of the agreement.  Acceptance may be made in a variety of ways such as orally, in writing, or by conduct.

Valid acceptance of a contract may be communicated in a variety of ways.  First, acceptance of an offer must be active, and not passive.  This means that acceptance can’t happen by not doing something.  For example, a roofing company cannot call a homeowner to say that they will come over and re-roof their house for $10,000 unless the homeowner calls to say “no”.  Second, acceptance is valid when the offeror receives notice of acceptance from the offeree.  So once the offeror knows that the terms have been accepted, the acceptance is valid.  Third, acceptance must be made in a reasonable manner, or in the form required by the offeror.  This refers to communicating clearly and specifically the acceptance.  Fourth, when the offeror requires acceptance by mail or that mail may be used, acceptance is said to occur when the offeree posts the mail - whether or not the mail actually arrives at the offeror.  Finally, an offer cannot be accepted if the offeree knows that it’s been revoked by the offeror.

A unilateral contract is a unique kind of contract in that it is a contract that is formed when the offeree accepts an offer by performing an act requested by the offeror.  For example, if a person puts up a poster in their neighborhood offering a $100 reward for the reward of “Fifi” (a lost dog), then anyone that finds and returns Fifi should receive the $100 reward.  This is a valid contract.

Consideration

The third and final required element of a contract is called consideration.  Consideration is something of value that benefits the party who receives it, or is a loss or inconvenience to the party who provides it.  Valid consideration examples include present consideration (where something of value is exchanged at the time that the contract is made), or future consideration (where something of value is exchanged after a contract is made).  On the other hand, an example of invalid consideration is past consideration.  This is where something of value is exchanged before a contract is made.  An example of past consideration might be giving someone a ride home after school, and then after they arrive at their home the driver demands payment for the ride.  The ride was the thing of value received by the passenger, but a contract did not exist at the time that they were offered a ride home.  In this example, the ride home is considered to be a gratuitous promise (an offer that benefits only the offeror), and is therefore not a contract.

Summary

Contracts are important aspects of life.  Contracts may be long and complicated, or they may be short and simple.  Contracts may be oral or written.  Whatever terms are found in contracts, all contracts must have an offer, acceptance, and consideration in order to be considered legal.  However, not all contracts that have even offer, acceptance, and consideration are valid contracts.  Section 12.2 will explain this in more detail.