How does a contract form?A contract is a legal agreement between two or more parties that can be legally binding. A contract can only be formed and be legally binding if it has four essential elements:-wpadcamp1 Offer Acceptance Consideration Intention to create legal relationsIt is important to note that if any one of the four elements is missing, then a contract cannot not be formed or be legally binding.An offer is a proposal and becomes legally binding if it is accepted provided it also fulfils the other elements of consideration and intention. The person who makes an offer is called an offeror, and to whom it is made is known as offeree. A proposal is only regarded as an offer if the offeror intends to be bound by it. The offer has to be certain, clear and without any ambiguity.
The elements of a contract set forth above are applicable for both oral and written contracts. However, certain types of contracts are required by law to be in written form. Despite the technical legal enforceability of certain oral contracts, for practical purposes, parties should memorialize their contracts in writing.
For example, if someone says “I am thinking of selling my car for a reasonable price”, it will not be considered an offer as it lacks certainty in terms of thinking, and it is also not clear what price the person might be considering. But if the same person says “I will sell my car to you for £1999”, then it will be regarded an offer by law.An acceptance is saying yes to an offer made.
Acceptance can be described as “unqualified assent to the terms of the offer”. Here the word assent means that the offeree must be willing to agree to the terms of the offer, and the word unqualified means that the offer is being accepted on the terms of its proposal. So if there is an offer of selling a car for £1999 and the offree agrees, it means the offeree is accepting to buy it on the exact term of the price of £1999 – an unqualified assent to the offer. Once an acceptance has been communicated to the offeror, it becomes a legally binding agreement.Consideration is the price that one party pays for the promise of the other. Consideration can also be a detriment which means that in an agreement both parties lose to gain in return.
Suppose you bought a pc for £299 from a computer shop, you paid the shop £299 and in return the shop handed over the pc to you. Here £299 was the consideration (or detriment) that you exchanged for the pc and likewise the shop had a detriment (or consideration) when it sold you the pc but in return it gained £299.
Another rule about the consideration is that it must be sufficient but not adequate. What it means by it that it does not matter what is the real value of the consideration as far as there was something given in return. For example if someone offers to sell his very expensive sports car just for a few quids, then it would not matter if the money paid was not sufficient if the buyer and seller are happy to exchange on that price. This rule is also known as the peppercorn rule.wpadcamp1Intention to create legal relationship is the forth essential element of a contract. A contract can only be legally binding if the contracting parties have intention to be legally bound. Whether two parties have intention to be legally bound will depend on individual circumstances.
Most commercial agreements whether business to business, or business to individual would be regarded by law as created with intention to be legally bound. However there might be some other groups of people which may be considered as having to create an agreement with the intention to be legally bound.
For example, if you agree to mow the lawn if your partner does the dishes in return – and forgets! – by law it won’t be regarded as an agreement that had the intention to be bound. Or you cannot force your partner to fulfil the promise. In circumstances where it is difficult to determine whether an agreement was created with the intention to be legally bound, the law applies what is known as the objective test. An objective tests tries to look at the situation from the perspective of a reasonable person.
A business relies on contracts in order to fulfill its goals and sell its goods and services. More importantly, a business needs legally enforceable contracts. After all, a contract that can’t be enforced is essentially worthless. A legal contract formally obligates two or more parties to perform certain acts based on the terms and conditions of the contract as negotiated by the parties. Several elements must be met in order for a court to deem a contract legally enforceable. The three most important contractual elements are offer, acceptance and consideration, and they all must be present whether the contract is oral or written in nature. In order for a contract to be binding, there must first be an offer.
The party who initiates the contract is called the offeror and presents a proposal outlining certain terms. For example, Jack may propose selling his bike to Jill for $50. Jack would be the offeror in this scenario, and his offer would shift the burden to Jill, the offeree. Jill could either accept Jack's terms or make a counteroffer; for example, she could offer to buy the bike for $40 or pay the full $50 if Jack first repairs the bike.
The offer should specify the precise goods or services being offered and it can be made by either the seller or the buyer. Second, Someone Accepts the Offer. After an offer is made, it must either be accepted or met with a counteroffer. If the offer is rejected outright, there is no contract. The offeree may accept the offer in writing or verbally, unless the offeror requires acceptance to be in one form or another.
In other words, Jack can propose selling Jill his bike for $50 on the condition that she accepts in writing by a certain time or date. If Jill accepts the offer verbally or submits a written acceptance that’s received after the specified time, the acceptance is not legally binding on Jack.
There would be no enforceable contract under those terms. Of course, the offeree may also respond with slightly varied terms. Jill might propose buying two bikes at $80 from Jack. In this case, the response is termed a counteroffer, and the original offeror must accept or reject the terms proposed.
The Uniform Commercial Code, a model code of laws that has been adopted by most states in the U.S., sets out the requirements for offers and acceptance of offers for contracts for the sale of goods. It states that unless it’s otherwise obvious by the circumstances or by a written agreement of the parties, acceptance of an offer can take place in any reasonable manner. The Parties Exchange Some Consideration. After an offer is made and accepted, there must be an exchange of 'consideration' to formally bind the parties to the contract’s terms. Consideration is legal jargon for exchanging something of value like goods for money, services for money, goods for goods or services for services. It usually involves someone paying money to receive a product or service, but really, it can be anything of value. For example, there may be valid consideration if you agree to stop doing something you have a right to do.
Whatever form consideration takes, it is essential that it be mutually agreed upon and actually exchanged in order for a court to enforce the contract’s terms. Without consideration, there is no contract, merely a gift or a discussion of a potential contract. Oral Contracts. While oral contracts can be legally binding depending on the subject matter and type of agreement, it’s better business practice to put you agreements in writing.
A contract that’s been signed by both parties provides documentation of the terms and gives you a significant advantage should a dispute arise. In some cases, agreements must be put in writing before they can be legally enforced under what is known as the statute of frauds. These rules are usually found in state laws. They describe the types of contracts that must be written to be deemed enforceable, including contracts for the sale of real estate and contracts with terms that exceed one year in length. Other Requirements for Enforceable Contracts. The parties must have 'capacity' to enter into contracts, which means they must understand what they are doing.
A minor cannot be legally bound by a contract, and the courts will usually strike out contracts against minors, even if the minor has signed a written agreement. Incapacity due to a mental or emotional illness can prevent a party from being able to legally give consent to a contract, too. Requirements for legal agreements and contracts vary from state to state. You may want to consult legal counsel to make sure your contracts are valid.