How Is A Contract Formed: Everything You Need to Know

How is a contract formed? It begins with a promise between parties to complete a transaction.3 min read

How is a contract formed? It begins with a promise between parties to complete a transaction. Transactions can be a sale of goods, property, employment agreements, and large commercial transactions. An enforceable contract may be written or oral unless it falls under a Statute of Frauds, which requires that specific type of contract be written.

The Statute of Frauds vary by state but typically covers the following transactions:

  • Real Estate.
  • Sales of goods over $500.
  • Repayment of debts.
  • Marital Agreements.

Those are just a few examples, but the common thread is that these are transactions which must have proof in written form for the contract to be upheld legally. By having the terms of the contract in writing, the Statute of Frauds prevents a party from enforcing a contract that did not exist and, therefore, prevents fraud.

Elements of a Contract

For a contract to be legal, at the time of formation, it must include the following elements:

  • An offer.
  • An acceptance.
  • A consideration.
  • A legal purpose.

The first step is to present n valid offer that is clear and definite in its terms and promises. The party accepting the offer must believe that the offer is legitimate and the promise will be completed under the terms presented. The offer will contain a timeframe during which the offer can be accepted, and after that time has passed, the offer can be rescinded. Timeframes will vary state by state and based on the type of contract.

The acceptance is what confirms that the offer has been agreed to. When acceptance occurs, the terms of the contract usually do not change. If the accepting party wants to make adjustments before fully accepting the term, they may submit a counteroffer. Under early case law, a "mailbox rule" was put into place that confirms an offer has been accepted when it enters the postal system. This rule also covers telegrams and couriers. Terms of acceptance can be put on the contract, such as requiring that acceptance be made by telephone.