Elements of a Contract

Contracts

Acontractis an agreement between two or more persons to exchange something of value. A contract legally binds parties to do what they promise. A party who fails to live up to such a promise has breachedthe contract. When you agree to buy something, you usually form a legal contract. If you pay to ride a bus, then you form a legally binding contract because you promise to pay money in exchange for the bus ride.

The law of contracts reaches into many aspects of our daily lives. For example, even when you buy lunch at a restaurant and tickets to see your favorite movie, you are entering into contracts. To protect yourself as a consumer, you need to understand how contracts are formed and how they affect your rights and responsibilities.

Elements of a Contract

To be legally binding, a contract must have certain elements. There must be an offerby one party and an acceptanceby another. An offer must be directed to a specific person. For example, the menu at a fastfood restaurant listing the prices is not an offer, because it is not directed at anyone in particular. When you place your order, however, you make an offer. When they begin cooking your food, the restaurant has accepted your offer, and a contract has been formed. The law infers acceptance from certain actions, such as signing a contract or beginning to carry out the terms of an agreement.

For a contract to be valid, there must also be an exchange of consideration.This means something of value is given for something else of value. For example, when you buy a new shirt at a store, your consideration is the money you pay, and the merchant’s consideration is the item you are buying. The items being exchanged do not have to be of the same value. The law allows consumers and merchants to make both good deals and bad deals. People entering into a contract must be legally competentto make contracts. For example, they cannot be mentally ill or intoxicated. Also, agreements to do something illegal or against public policy are not enforceable.

If Lorenzo says to Christine, “I will sell you my cell phone for $50,” this is an offer. If Christine says, “OK,” or if she pays the $50 to Lorenzo, or if she signs an agreement to pay $50, then there is an acceptance. The exchange of the cell phone for the money is the exchange of consideration. Both parties are competent, and the agreement is not to do something illegal or against public policy. Therefore, a contract has been made.

You should not be too quick to enter into a contract. Always make sure that you understand and agree with all the terms of the contract before you accept them. Otherwise, it may be too late to back out of the deal.

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