Contract FormationWHAT'S COVEREDIn this lesson, you will learn about how contracts are created and what makes them enforceable or unenforceable. Specifically, this lesson will cover:1.Requirements of Contract Formation2.The Agreement: Offer and Acceptance3.Consideration1.Elements of Consideration2.Exception to Consideration1. Requirements of Contract FormationAlthough it has countless wrinkles and nuances, contract law asks two principal questions:•Did the parties create a valid, enforceable contract?•What remedies are available when one party breaks the contract?The answer to the first question is not always obvious; the range of factors that must be taken into account can be large and their relationship subtle. Since people in business frequently conduct contract negotiations without the assistance of a lawyer, it is important to attend to the nuances to avoid legal trouble at the outset.Whether a valid enforceable contract has been formed depends in turn on whether:1. The parties reached an agreement (offer and acceptance).2. Consideration was present (some price was paid for what was received).3. The agreement was legal.4. The parties entered into the contract with capacity to make a contract.5. The agreement is in the proper form (something in writing, if required).
2. The Agreement: Offer and AcceptanceThe core of a legal contract is the agreement between the parties. That is notmerely a matter of convenience; it is at the heart of our values. Although agreements may take any form, including unspoken conduct between the parties, they are usually structured in terms of anofferand anacceptance.Note, however, that not every agreement, in the broadest sense of the word, need consist of an offer and acceptance, and it is entirely possible, therefore,for two persons to reach agreement without forming a contract.EXAMPLEPeople may agree that the weather is pleasant or that it would be preferable to go out for Chinese food rather than seeing a foreign film; in neither case has a contract been formed.One of the major functions of the law of contracts is to sort out those agreements that are legally binding - those that are contracts - from those that are not.IN CONTEXTIn interpreting agreements, courts generally apply an objective standard. The Restatement (Second) of Contracts (Section 3) definesagreement as a “manifestation of mutual assent by two or more persons to one another.”The UCC (Section 1-201(3)) defines agreement as “the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance.”The critical question is what the parties said or did, not what they thought they said or did. The distinction between objective and subjective standards
crops up occasionally when one person claims he spoke in jest, as in the casebelow.