How Is A Contract Formed: Everything You Need to Know
How is a contract formed? It begins with a promise between parties to complete a transaction.3 min read
How is a contract formed? It begins with a promise between parties to complete a transaction. Transactions can be a sale of goods, property, employment agreements, and large commercial transactions. An enforceable contract may be written or oral unless it falls under a Statute of Frauds, which requires that specific type of contract be written.
The Statute of Frauds vary by state but typically covers the following transactions:
- Real Estate.
- Sales of goods over $500.
- Repayment of debts.
- Marital Agreements.
Those are just a few examples, but the common thread is that these are transactions which must have proof in written form for the contract to be upheld legally. By having the terms of the contract in writing, the Statute of Frauds prevents a party from enforcing a contract that did not exist and, therefore, prevents fraud.
Elements of a Contract
For a contract to be legal, at the time of formation, it must include the following elements:
- An offer.
- An acceptance.
- A consideration.
- A legal purpose.
The first step is to present n valid offer that is clear and definite in its terms and promises. The party accepting the offer must believe that the offer is legitimate and the promise will be completed under the terms presented. The offer will contain a timeframe during which the offer can be accepted, and after that time has passed, the offer can be rescinded. Timeframes will vary state by state and based on the type of contract.
The acceptance is what confirms that the offer has been agreed to. When acceptance occurs, the terms of the contract usually do not change. If the accepting party wants to make adjustments before fully accepting the term, they may submit a counteroffer. Under early case law, a "mailbox rule" was put into place that confirms an offer has been accepted when it enters the postal system. This rule also covers telegrams and couriers. Terms of acceptance can be put on the contract, such as requiring that acceptance be made by telephone.
The consideration is a legal concept. The consideration in a contract is made to confirm the agreement to give or receive something for something else, or quid pro quo, between the parties of the contract. The consideration must be present for the contract to be legal. If the contract does not include a consideration, and one party is giving or receiving something for nothing, it is legally seen as a gift, not a contract.
The contract must be of legal purpose. Any illegal activities, such as illegal drug transactions, will make the contract invalid. Illegalities fall into two categories:
- Statutory violations such as law being practiced by a non-lawyer.
- Public policy violations
What Is Capacity?
When the parties sign the contract, they must meet the legal requirements of legal capacity for the contract to be valid an enforceable. Persons who lack the capacity to sign a contract may be too young (minor or infant), incompetent, or intoxicated.
Contract capacity law related to minors includes the following:
- A minor included in a contract does not have to do anything to avoid the contract; their age is a suitable defense legally.
- The minor is no longer seen as lacking capacity on their 18th or 21st birthday, dependent on state laws.
- Minors who reach legal age may ratify or disaffirm the contract within a reasonable timeframe.
For persons who are not mentally competent or intoxicated, contracts can be made voidable at the time they regain capacity or through the person's legal guardian, who can act in their place if capacity is not possible or expected to occur.
Invalidating a Contract
There are many caveats and exceptions to contract law that can be used to invalidate a contract. Some examples include, but are not limited to, the following:
- One person lacks mental capacity.
- A mistake has been made in the contract.
- A misrepresentation has been made in the contract, or about what the parties can complete.
- A contract was signed under duress.
- Undue influence was used to coerce one or more of the parties to sign.
- The contract is seen as unreasonable or excessive in nature.
- The contract is illegal in its purpose.
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