Contract Formation: Everything You Need to Know
Contract formation is an important determination a court must make when a party files a suit claiming a breach of contract.3 min read
Contract formation is an important determination a court must make when a party files a suit claiming a breach of contract. If a contract was never formed, then there could not have been a breach.
A contract is an agreement between two or more parties intended to bind both parties. Contracts specify the terms of the agreement between the parties.
There is no general requirement that a contract be in writing. A contract may be made orally; however, the Statute of Frauds requires certain types of contracts to be in writing.
There are three elements of Contract Formation:
- An offer
- An acceptance
- A Consideration
At least two parties are required to form a contract. The offeror makes the offer; the offeree accepts.
An offer is a clear expression of a willingness to contract with the intention that it bind the offeror to what has been agreed to as soon as the offeree accepts it.
A genuine offer is different from what is known as an "invitation to offer."
- Auctions: When an auctioneer calls for bids, this is not a genuine offer, but rather a request for offers. The bids made on items are the offers, which the auctioneer can then accept or reject. The person who makes the bid can revoke his bid before the auctioneer accepts it.
- Display of Goods/Statement of Price: A price tag is not an offer. This is an invitation for customers to buy.
- Advertisements/Tenders: Advertisements are invitations to make an offer. An order form sent in by a customer would be considered the offer. However, advertisements may be considered offers if they are and offer to form a unilateral contract. A reward to find a missing cat would be a unilateral offer that can be accepted by performance: finding the cat.
Acceptance may be expressed through words, deeds, or performance. If a specific method of acceptance is called for in the contract, acceptance must be in that form. However, if a method of acceptance is not specified, it may be through reasonable means.
The default rule is that an acceptance must be a final and unqualified acceptance of all of the terms of the offer. To make a binding contract the acceptance must exactly match the offer.
In certain cases, it is possible to have a binding contract without a matching offer and acceptance.
If in a reply to an offer, an offeree
- Introduces a new term
- Varies the terms of the offer
- Puts a condition in the acceptance
that reply is not an acceptance and will not be binding. Instead, the reply is treated as a "counteroffer." The original offeror may accept or reject this new offer. If the offeror accepts, a contract has been formed with the new terms or condition.
If an offeree requests information regarding the original offer, this is not a counter-offer.
Battle of the Forms
If the parties to a contract are merchants, additional, conditional, or different terms added by the offeree may become a part of the contract instead of being considered a counteroffer. They will not if one or more of the following is true:
- The offeree conditions acceptance on the new terms
- The new terms materially alter the contract
- The offeror objects to the new terms within a reasonable time
Both parties must receive valuable consideration for performance of their side of the contract. If there is no consideration given by one or both sides of a contract, then the exchange is considered a gift. A gift is transferring property, money, etc. to another, without anything in return. Failure to give a gift, even if you promised to do so, is not a breach of contract because there is no consideration.
Meeting of the Minds
In order for a contract to be valid, there must be “a meeting of the minds” regarding the agreement. Both parties must understand and agree to the same terms, duties, rights, and responsibilities of both parties under the contract.
Burden of Proof
If a party provides proof that all three of these elements have been met, that party has made a prima facie case that a contract existed. If a party would like to challenge the formation of the contract, it must present evidence to refute at least one of the elements.
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