For many of us, the term “contract” may conjure up images of crisp stacks of paper brimming with legalese and a (preferably calligraphy) pen laying on top at just the right angle. In truth, the nature and form contracts can take are far more varied and nuanced than these pictures suggest. A legally binding contract may be based on anything from an oral agreement for home repairs, sealed with a handshake, to a flyer taped to a lamppost offering a reward for returning one’s lost pet. In this guide, we will discuss the key elements for transforming agreements into legally binding and enforceable contracts.  

1. An Offer

Mutual Assent: First and foremost, a valid contract must be formed based on mutual assent on the part of all parties to the agreement. Mutual assent is comprised of two components: an offer by one party (the offeror) and acceptance by another party (the offeree). There are scores of different ways the term “offer” is defined across numerous jurisdictions and as applied to different types of contracts, but, on a basic level, an offer may be described as an indication on the part of the offeror of their intent and willingness to be bound by the terms of their offer upon it being accepted by the offeree. Offers may be communicated in writing, verbally, or through the offeror’s conduct, except that contracts subject to the statute of frauds must be in writing.  

Duration and Termination of Offer: Offers do not remain open indefinitely. Other than the more obvious methods, such as the offeror revoking the offer or it being rejected by the offeree, an offer may terminate automatically due to: 

• Lapse of time: If the offeror does not specify a time limit for acceptance, the offer will terminate after a reasonable period. For these purposes, what constitutes a reasonable time will depend on the circumstances, such as the nature of the offer, how it was communicated, and industry practices. 
• A Counteroffer: Upon an offeree making a counteroffer, the original offer is deemed rejected and thus automatically terminates (discussed in detail below). 
• Death or incapacity of a party: If either the offeror or the offeree dies or becomes mentally incapacitated before the offer is accepted, the offer is terminated.

An offer can also be structured to include conditions upon which it will terminate. For example, a contract can include a clause stating that the offer will expire if it is not accepted by a specific date.

Not Valid Offers: Now let’s examine some common items that would not be considered valid offers:

• Advertisements and price quotes are generally viewed as invitations to make an offer rather than offers in their own right.
• Expressions of intent indicating one’s intention or plans for the future, such as "I’m considering selling my car next month for $10,000. These are not offers because they do not commit the speaker to any definite course of action.
• Requests or invitations for bids at auctions, since the bids themselves will be construed as offers, as the auctioneer's solicitation for bids, with the auctioneer retaining the discretion to reject them in hopes of a higher bid.
• Preliminary negotiations, such as conversations or correspondences that express a willingness to discuss potential terms or consider a future agreement.

2. An Acceptance 

Acceptance, whereby the offeree agrees to the offeror's terms, is the second essential element of a valid contract, as it signifies the parties' mutual assent to agree to the agreement’s terms. 

Unilateral vs. Bilateral Contracts: As with offers, acceptance can generally be communicated in writing, verbally, or through the offeree’s conduct unless the offeror mandates a specific manner of acceptance or the statute of frauds requires a written acceptance. That said, when it comes to acceptance methods, there is an important distinction between bilateral and unilateral contracts. 

In a bilateral contract, the offeror makes a promise to the offeree, and acceptance occurs when the offeree makes a corresponding promise to the offeror to reciprocate with their own commitment. For example, in an employment contract, the potential employer (the offeror) promises to pay a potential employee (the offeree) a specific salary and benefits package in return for the offeree’s services, and the potential employee (the offeree) accepts the offer by promising to provide the services in accordance with the terms of the employment agreement. 

By way of contrast, in a unilateral contract, the nature of the offer is such that it promises something in return for the performance of a specific act. In such a case, the performance of that act is deemed to be the acceptance of the offer. For example, if you promise to pay your neighbor $100 if he tows your old car to the dump, your neighbor’s doing so will constitute the act of acceptance.

Counteroffers: As mentioned above, counteroffers essentially have the effect of destroying an offeree’s power of acceptance such that they are no longer empowered to bind the offeree, even if they subsequently try to accept the offer per its original terms. For example, on January 1, Linda offers to sell her car to Robert for $10,000 if he accepts the offer before February 1. On January 15, Robert replies that he will pay $8,000. On January 20, Linda has not replied to the counteroffer, and Robert changes his mind and sends her a further notification agreeing to pay $10,000. In this case, Linda will not be bound by the purported acceptance since the original offer has already been terminated due to Robert’s counteroffer.

The Mirror Image Rule: Traditionally, under the “mirror image rule,” an acceptance would not be valid unless it precisely mirrored the terms of the offer. That is, any attempt by the offeree to deviate from or modify the initial terms would be considered a counteroffer. Since a counteroffer is regarded as a rejection of the original offer, the offeree’s power of acceptance would terminate along with it. 

Over time, strict adherence to the mirror image doctrine quickly became problematic as transactions evolved in complexity, and it ended up enabling parties to exploit relatively minor and inconsequential discrepancies as a way to try and slip out of contracts when it no longer suited them. Consequently, the mirror image rule doctrine has evolved significantly, particularly under the UCC, which adopts a more practical approach focusing on the overall intent of the parties to enter a binding contract and the more material terms of the agreement. 

3. Consideration 

Consideration requires that both parties in a contract provide something valuable or limit their liberty. This mutual exchange binds each party, ensuring the enforceability of the agreement and distinguishing it from mere promises that are not enforceable. 

To better understand how consideration operates in real life, referring back to our discussion of bilateral and unilateral contracts may be helpful. In the case of the bilateral employment contract, the promise to pay a certain salary for the employee’s services constituted consideration on part of the employer. In turn, the promise to perform those services per the terms of the offer operates as consideration on part of the employee. By way of contrast, in our example where your neighbor towed your car to the dump, the consideration on your part was your promise to pay $100 in return for him towing your car away, and the consideration furnished by your neighbor was performing that act. 

Forbearance as Consideration: Consideration can also come in the form of a party’s promise to refrain from any action or not exercise a right they are legally entitled to. For example, an author with a potential copyright infringement claim against a website may agree not to pursue the claim in return for a percentage of the site’s revenue generated by the author’s content. 

Exceptions and Limitations: There are some significant exceptions to the consideration requirement, the most notable of which are:

• Under the UCC, the good-faith modification of a contract (note that under traditional contract law, any change to a contract requires new consideration to be enforceable).
• Under the principles of Promissory Estoppel, a party who has reasonably and detrimentally relied on the promise of another party can enforce it despite the absence of consideration.   
• Promises to repay debts discharged in bankruptcy. 
• Promises to pay debts one incurred while a minor. As we shall see below, minors lack the capacity to enter into enforceable contracts. Therefore, ratifying (i.e., agreeing to be bound by) the terms of an agreement that would otherwise be unenforceable essentially constitutes a promise to act in a way that is to the promisor’s legal detriment, and as we discussed above, a promise to act or refrain from acting to one’s detriment must include the element of consideration to be enforceable. 
• Under certain conditions, promises to make charitable donations. 
• A firm offer under the UCC, which is when a merchant agrees to keep an offer involving the sale, lease, or purchase of goods open and irrevocable for a certain period.

4. Legal Capacity

A contract will not be valid unless all parties involved have the capacity to understand the terms and consequences of the agreement because, as mentioned above, the formation of a contract relies on mutual assent, which an incapacitated party cannot reach. 

Presumption of Incapacity: By law, certain categories of individuals are presumed to lack this capacity, such as minors (under the age of 18 in most states), individuals who have particular mental illness, and individuals under the influence of drugs or alcohol at the time they entered into the agreement. 

Effect of Incapacity: Contracts entered into when one or more of the parties lacked capacity may, depending on the circumstances, either be void, meaning they are deemed entirely invalid from the outset or voidable, which means that the contract may be set aside at the discretion of the party who lacked capacity. 

5. Legality of Purpose

For a contract to be valid, both the subject matter of the contract and the actions it requires must be legal, and any contract that involves activities that are illegal, unethical, or against public policy is not enforceable. 

For example, a contract for the sale of illegal drugs or stolen goods would not be enforceable because the subject matter of the contract is illegal. Similarly, a contract that requires one party to commit a crime, such as engaging in fraudulent activities or committing an assault, would not be enforceable because the actions it requires are illegal. 

Finally, it is important to note that the principles of contract law vary significantly across different jurisdictions. The information provided here is intended to serve as a general guide and should not be considered legal advice. It is recommended that you consult with a qualified attorney to address your specific legal circumstances.

Through AAL’s directory, you can find numerous skilled attorneys with extensive experience in contract law who can help you understand your options, develop a strategic approach, and effectively represent your interests.