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Contract Basics

Contract Requirements

To have a valid contract, there must be an offer, acceptance, consideration, and legal intent.

The first element of a valid contract is the offer. An offer is a presentation of something to someone for the party to either accept or reject. The elements of an offer are the intent to contract, an invitation to enter into a specific agreement, and a communication of the offer. An example of an offer might be "I will clean your garage for $100." The other party may then accept or reject it. If one party simply says, "I'd like to clean your garage," then there is no contract.

The second element is an acceptance of the offer. An acceptance is agreement or assent to an offer. The acceptance must be done by the proper means, by the proper party, and in conformity with the offer. An example would be "I am in agreement and will pay you $100 to clean my garage." An acceptance of an offer must be definitive. It must affirmatively accept the offer in its entirety to be valid. It may be in writing but does not have to be.

The third element is consideration. Consideration is the passing of something of value from one party to another party in a contract. It must be bargained for and exchanged for the promise of the other party. In this example, the $100 is the consideration. If the agreement was simply that one person will clean another person's garage, then this agreement lacks consideration.

Elements of a Contract

Certain elements must all be present for an interaction to become a contract. Different scenarios show how that is determined in various situations.
One exception to the consideration requirement is promissory estoppel. Promissory estoppel is a legal principle stating that an agreement can be enforceable even without formal consideration—if one party makes a promise that the other party has relied upon to their detriment. Promissory estoppel is used to avoid injury to a party.

For example, Joe is responsible for buying 1,000 bottles of water for a 10-kilometer fundraising race. John offers to supply the water and says he can provide each bottle for around two cents.

"Don't worry about finalizing the contract or paying up front," John says. "I'll have everything at the race site by 6:00 on the morning of the race."

The morning of the race arrives, and John fails to provide the contracted-for water. Joe has to scramble and go to a big-box store, where he spends eight cents a bottle.

As a result of Joe relying on John's promise to his (Joe's) detriment, the contract may still be able to be enforced despite the lack of consideration because the injustice to Joe can only be avoided by enforcing John's promise.

The fourth element of a contract is legal intent. This means both parties intend to be bound by the terms of the contract.

One final issue to consider, which is not part of the contract itself but is a key to its enforceability, is competency. A person must be competent to make a contract. They must be of the age of majority and of sound mind. If a person is not competent, then the contract is voidable. In other words, the person who is underage or not mentally competent need not obey the contract terms. A voidable contract may also be converted into an enforceable contract if the contract is affirmed by one of the parties.
Business leaders must assess elements such as legal intent, acceptance, and consideration when reviewing a contract, but the courts will make any determination of legality.