How Are Contracts Formed: Everything You Need to Know
How are contracts formed? Contracts are a legally binding agreement between two parties.3 min read
2. Elements of a Contract
4. Offer Acceptance
5. Contract Consideration
How are contracts formed? Contracts are a legally binding agreement between two parties.
Contracts have requirements they must follow in order for them to be enforced in a court of law. Every contract will differ depending on the agreement they are protecting regarding certain goods and/or services. When entering into a contract, both parties should fully understand all of the rights and responsibilities included in the agreement before signing.
Elements of a Contract
Contracts can only be formed when all parties involved in the contract are in full agreement on the promises made in the contract, which is called the meeting of the minds. If a contract is brought before a court, it will be reviewed to be sure that it is valid and enforceable.
There are four basic elements to a creating a valid contract:
The first step to forming a contract is an offer, which is sometimes viewed as the element that is most frequently disputed. When one party offers goods or services to another in exchange for something else, this is considered an offer. Offers manifest the willingness of the parties to enter into a contract with one another, so they need to be clearly defined.
An offer has to be presented so that both parties are aware that a contract will be formed if the offer is accepted. Offers may stay open or available for a certain amount of time depending on what is being offered and by whom.
The following elements can affect the time span of an offer's availability:
- Type of contract
- Contract language
- State in which the contract is formed
The next step towards forming a contract is the offer acceptance, which is when the party to whom the offer of goods or services was extended agrees to it and to the terms included. Usually, an offer is only accepted when the terms are not changed, but sometimes that rule changes depending on the type of contract being offered.
Whether the offer is for goods or service will determine if the terms of the offer may be changed upon acceptance. Acceptance must be made clear to both parties involved in the contract, and not only expressed to a third party. In some cases, the offer acceptance may be communicated between two authorized persons on behalf of the involved parties.
If anyone who is unauthorized tries to accept an offer in the place of one of the involved parties, the acceptance will not be valid. Offers accepted via mail are exceptions to this rule and the act of sending a written form of offer acceptance makes it valid. Silence does not equal acceptance of an offer. If there is no response, the offer is considered unaccepted.
Any change to the terms of the offer is called a counteroffer. Counteroffers themselves do not constitute acceptance. A new offer has virtually been formed, so the process restarts. In this case, the party who made the original offer now needs to decide whether or not to accept this new offer. When a counteroffer is made, the original offer is considered rejected and the rejecting party cannot later decide to accept the original offer.
Consideration in contracts is a vital part of forming a valid contract and refers to what each of the involved parties gains from the agreement. Without consideration, one side is giving something to the other while getting nothing in return. This is called a gift. Considerations usually involve products or services being exchanged for money or a promise of money.
There are three types of contract consideration:
- Present consideration: money is given at the beginning of a contract
- Past consideration: the service or product has already been given without any exchange and at this point, it is too late to form a contract.
- Future consideration: a promise is made by one or both parties to provide something for the exchange.
Contracts can only be formed legally when the products or services being exchanged are legal. Illegal contracts will not be enforced by a court, so if a two parties form a contract regarding the sale of an illegal substance, neither party can be held to that promise by a court.
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