here are three elements that must be present for a contract to exist: offer, acceptance, and consideration.
The first step to a contract is an offer. An offer is a written or spoken statement by a party of his or her intention to be held to a commitment upon acceptance of the offer. Many business owners have become involved in legal disputes because, during negotiations, a customer believed an offer had been made when the businessperson believed the parties were only discussing possible options. A businessperson should carefully consider whether his or her statements or the statements of other parties constitute offers. There are a number of factors to look at to determine whether a statement constitutes an offer.
- Is the person making the offer serious? A business executive who jokingly suggests the sale of a successful business in exchange for a good bottle of scotch is not making an offer. On the other hand, a business executive who writes up an offer on a bar napkin may be perfectly serious. A court will look at the context in which the statement was made to determine whether it was a valid offer.
- Does the statement show a willingness of the party to be held to its contents? A person requesting a price quote or opening negotiations is not making an offer. An advertisement is usually viewed as an invitation to an offer rather than an offer itself.
- Does the statement contain definite terms? If the subject matter is identified, the parties are identified, the price is set, quantities are determined, and a time is set for performance, an offer very likely has been made. There should be enough information contained in the statement that, if needed, a court would be able to enforce the contract or determine the damages.
The second requirement for a valid contract is acceptance of the offer. In order for an acceptance of an offer to be effective, it must be made while the offer is still open. In some situations, the company making the offer gives a definite time frame: "My company will sell you this computer software for $2,000, but you must decide whether to buy it within two days." Other ways an offer may end include: the person making the offer withdraws the offer, the person who receives the offer rejects it, a reasonable amount of time passes after the offer is made, or the subject matter of the offer is destroyed before acceptance.
Unless an offer specifies otherwise, an offer can be accepted though the mail. An important rule known as the "mailbox rule" says that an acceptance is effective once it is put in the mailbox. If the offeror attempts to withdraw the offer after the acceptance is mailed but before it is received, the person accepting the offer can hold the offeror to the contract. For this reason, anyone making an offer should be aware that it might be accepted, by means of the mailbox rule, before the offeror knows of the acceptance. This can cause problems for the offeror if he or she assumed the offer was rejected and found another buyer. To avoid possible confusion, some businesses will specify in an offer that acceptance of the offer is only effective upon receipt of the acceptance.
If a person changes the conditions of an offer in responding to the offer, the offer is rejected and the changed conditions constitute a counter-offer: "I want to buy the software, but I will pay only $1,500 for it." In this scenario, the person who made the original offer can respond to the counter-offer by accepting or rejecting it, or proposing yet another offer.
There are two ways a person can accept an offer: by promising to do something, or by performing the desired act. In the first type, known as a bilateral contract, a customer accepts an offer to sell computer software by promising to pay $2,000 for the software. In the second type, known as a unilateral contract, a business owner offers a contractor $1,000 to replace ceiling tiles and the contractor replaces the tiles; the contractor accepted the offer by performing the act requested.
Consideration is a legal concept that describes something of value given in exchange for a performance or a promise of performance. The presence of consideration distinguishes contracts from gifts. Consideration can be a promise to do something there is no legal obligation to do, or a promise to not do something there is a legal right to do. Promises to exchange money, goods, or services are forms of consideration. All parties in an agreement must give consideration in order to create a contract, but courts typically do not make a determination about the adequacy of the consideration unless there is evidence of some type of wrongdoing by the party benefiting most from the contract.