Just What is a Contract?

This is a business law blog and the foundation of most business transactions is the contract. So just what is a contract according to the law and how do you make one?

A contract is a “meeting of the minds” or agreement between two parties to do or refrain from doing something for each other. Legally, to make a contract, there must be an offer, an acceptance of the offer and consideration. An offer is a proposal to do or refrain from doing something in exchange for “consideration,” that is, something of value. To be an offer, the proposal has to be firm and it has to be specific. In other words, the proposal has to stay open for some period of time and it has to define what the parties’ obligations will be if it is accepted.

An acceptance accepts the offer as is. It cannot propose to change, add to or subtract from the terms. If it does, then legally it constitutes, not an acceptance, but a counteroffer that then needs to be accepted by the first party if there is to be a contract.

Lastly, there must be consideration passing between the parties. Often, consideration consists of payment. For example, one party will provide a service or sell a product to the other while the second party will pay money to the first party. Also, the parties might agree to barter; each will transfer something of value to the other.

Consideration must flow in both directions. If one party promises to do something for another and the second doesn’t promise to do anything, then the law calls that a “naked promise.” It is usually unenforceable in a court of law.

This is just the shortest summary of the law of formation of contracts. Your situation may not fall under these generalities. If you need further guidance on contracts, you should consult with a business attorney.

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