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What Elements Are Required to Form a Contract?

What Elements Are Required to Form a Contract?

Whether you own a small family business or are the CEO of a Fortune 500 Corporation, you will undoubtedly be a party to numerous contracts over the course of your involvement in the business. Contract disputes are also among the most common reasons for a business to be involved in litigation. As such, knowing more about the legal aspect of contract formation is wise for any business owner. Toward that end, the Orange County civil litigation lawyers at Brown & Charbonneau, LLP explain the elements required to form a contract.

Contracts Are Everywhere

As a business owner, you probably enter into hundreds, if not thousands of contracts a year. Many of these contracts you may not even recognize as a formal contract because they aren’t in a traditional form. For example, when you order promotional materials online or when you hire a cleaning company, you are likely entering into a contract. To help you recognize what constitutes the formation of a contract, it helps to learn the elements required to create a binding contract. For a contract to be created, the law requires three basic elements:

  • Offer – an “offer” is defined as a manifestation of willingness to enter a bargain. Another way of defining an “offer” is as a promise to act or refrain from acting, which is made in exchange for a return promise to do the same. An offer must include definite terms. For example, you might offer to sell 1000 blue shirts, size women’s medium for $5 per shirt to a potential customer. Offers are distinguished from preliminary negotiations by the fact that an offer has a present intent to form a contract. For instance, advertisements are usually considered preliminary negotiations. In the previous example, if you only sent an advertising flyer to customers that discussed the shirts you have for sale, that would be a preliminary negotiation, not a contract. If, however, an advertisement includes concise and definite terms that create the belief that an offer has been made, a seller might be liable for breach of contract if the customer is ultimately unable to buy the goods at the stated price for any reason. An offer can be rejected outright, amended, or accepted. If it is rejected, the offer dies. If it is amended, a new counter-offer is created.
  • Acceptance – acceptance is defined as a manifestation of assent to the terms of the offer. An acceptance can be made in many ways but typically must be expressed in the manner specified by the offer. For example, if the offer requires the other party to acknowledge acceptance in writing, an oral acceptance may not qualify. If no manner is specified, then a manner that is reasonable under the circumstances should be used. When an acceptance is mailed (via snail mail) courts are split on when it becomes effective. Under the majority approach, known as “the mailbox rule,” an acceptance is effective upon dispatch in a properly addressed envelope with prepaid postage, even if the acceptance is lost or destroyed in transit. Under the minority approach, acceptance is effective only upon actual receipt by the offeror, no matter what precautions the offeree took to ensure that the acceptance was properly mailed.
  • Consideration – something of value must be exchanged by both parties for a contract to be created. Consideration does not need to be financial though. A party can promise to do something or to refrain from doing something instead of giving or getting something financially valuable.

As you may well imagine, the three primary elements necessary to form a contract can become much more complex to understand and identify; however, it is necessary to have at least a basic understanding of what the law looks for when determining if a contract was even created before discussing defenses to a breach of that contract.

Contact Orange County Civil Litigation Lawyers

If you have additional questions or concerns about creating a contract or litigation involving a breach of contract, contact the experienced Orange County business and litigation lawyers at Brown & Charbonneau, LLP as soon as possible. Contact the team today by calling 714-406-4397 to schedule your appointment.