A contract is an agreement that can be enforced in court. It is formed by two or more parties who agree to perform or to refrain from performing some act now or in the future. There are four requirements to form a valid contract, namely an agreement, supported by legally sufficient consideration, made by parties who have the legal capacity to enter into the contract, for a legal purpose.
Agreement is the first essential element for contract formation, meaning the parties must agree on the terms of the contract and manifest to each other their mutual assent, or voluntary consent, to the same bargain. Ordinarily agreement is evidenced by two events, an offer and an acceptance. One party offers a certain bargain to another, who then accepts that bargain. Although it is wise to have an agreement in writing, with certain exceptions it is not a requirement.
An offer is a promise or commitment to do or refrain from doing some specified action. There are three requirements for an offer to be effective, namely that the offeror must have a serious intention to become bound by the offer, the terms of the offer must be reasonably certain, or definite, so that the parties and a court can ascertain the terms of the contract, and the offer must be communicated to the offeree. Once an effective offer has been made, the offeree’s acceptance of that offer creates a legally binding contract (providing the other essential elements for a valid and enforceable contract exist). Note that serious intent of the offeror is not determined by his subjective intentions, beliefs and assumptions, rather by what a reasonable person in the position of the offeree would conclude are meant by the offeror’s words and actions. For example, a reasonable person would recognize that offers made in obvious anger, jest or undue excitement do not meet the serious and objective intent test. Similarly, expressions of opinion, statements of future intent, preliminary negotiations, invitations to bid, advertisements and price lists, and live and online auctions, are not considered offers.
The second requirement for an effective offer involves the definiteness of its terms. An offer must have reasonably definite terms so that a court can determine whether a breach has occurred and give an appropriate remedy. While the specific terms depend on the type of contract, in general a contract must identify the parties, the object or subject matter of the contract, the consideration to be paid, and the time of payment, delivery or performance. Finally, the third requirement is that the offer must be communicated to the offeree.
Once there is a valid offer, the offeree can accept it, thus making it a binding legal obligation (a contract). Alternatively, an offer can be terminated by revocation, rejection or counteroffer. Unless the offer is irrevocable, the offeror can revoke his offer by communicating the revocation to the offeree prior to acceptance. An offeree can reject an offer, by words or conduct, thereby terminating the offer. Like revocation, a rejection is effective when it is actually received by the offeror. Finally, an offeree can make a counteroffer, essentially a rejection and simultaneous new offer. In addition, to ensure that offers do not remain open indefinitely, the power of an offeree to transform an offer into a binding legal obligation can be terminated by operation of law through lapse of time, destruction of the specific subject matter of the offer, death or incompetence of either party, or supervening illegality of the proposed contract.
Acceptance is a voluntary act by the offeree showing assent to the terms of an offer, either by words or conduct. Acceptance must be unequivocal, typically must be communicated to the offeror, and must be timely. There are also rare circumstances in which silence can constitute acceptance. An attempt by an offeree to change the terms of the offer may be considered a counteroffer.
Consideration is the value given in return for a promise or performance; it is the inducement, price or motive that causes a party to enter into an agreement. Consideration is something of legally sufficient value given in exchange for the promise, and a bargained for exchange. This element of bargained for exchange distinguishes contracts from gifts.
Contractual capacity is the legal ability to enter into a contractual relationship. The age of majority for contractual purposes is eighteen. The general rule is that a minor can enter into any contract that an adult can, except those prohibited by law for minors (such as the purchase of alcohol or tobacco). However, a contract entered into by a minor may be voided at the minor’s option, with a few exceptions. A minor may disaffirm the contract by expressing her intent, through words or conduct, not to be bound by the contract.
Contracts made by mentally incompetent people can be void, voidable or valid, depending on the circumstances. If a court has previously determined that a person is mentally incompetent, any contract made by that person is void – no contract exists. If there is no such court determination, but the person was incompetent at the time the contract was formed, the contract is voidable if the person did not know that he was entering into the contract or lacked the mental capacity to comprehend its nature, purpose and consequences. In these situations, the contract is voidable, or can be ratified, at the option of the mentally incompetent person, but not the other party. A contract entered into by a mentally ill person not previously declared incompetent may be valid if the person had the capacity at the time the contract was formed.
Contracts by an intoxicated person are good examples. If the person was sufficiently intoxicated to lack the mental capacity to comprehend the legal consequences of entering into the contract, the contract may be voidable at the option of the intoxicated person. However, if the person understood these legal consequences despite intoxication, the contract will be enforceable. To disaffirm, the intoxicated person can do so at any time while intoxicated and for a reasonable time after becoming sober, but must make full restitution. In addition, the person can ratify a contract formed while intoxicated after becoming sober.
Finally, for a contract to be valid and enforceable it must be formed for a legal purpose. A contract to do something that is prohibited by federal or state statutory law is illegal and, as such, void from the outset and thus unenforceable. Examples include usury, contracts to commit a crime and contracts by an unlicensed person. In addition, a contract to commit a tortious act is contrary to public policy and thus illegal and unenforceable. Additional examples of contracts contrary to public policy include restraint of trade, discriminatory contracts and adhesion contracts. With few exceptions, an illegal contract is void.
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