To form a contract, there must be an offer by one party, an acceptance by another party, and an exchange of consideration (something of value). The person who proposes the terms of an agreement makes an offer, and is called an "offeror" in contract law. The person to whom the offer is made is known as the "offeree." While an offer can be as simple as a one-sentence verbal statement, both parties generally benefit from a more detailed (and written) assessment of the offer and terms.

The Purpose of a Contract

The purpose of a contract could be the sale of goods, a pledge to refrain from a particular activity, or a promise to perform a task. But in the most basic sense, a contract is an agreement to perform (or refrain from performing) a given task.

Example: If Sharon needs her house painted, she could ask a painter to complete the job for a set amount of money. The painter could either accept by stating, "Yes, I will paint your house for that amount," or simply by painting Sharon's house.

How would the painter in this example know how to accept Sharon's offer? They would have to look at the terms. Both parties likely would want to know more details about the deal, such as the kind of paint used, the amount need, whether the paint will be purchased in advance by Sharon, how long the job will take, how many coats are needed, and so on.

Terms of an Agreement

The terms of a proposed agreement must include enough detail for a person to accept and perform the task or obligation. Generally, and in particular with respect to consumer and commercial transactions, this means that certain material terms must be present in the offer. Material terms typically include the price and the subject of the contract, such as goods or services rendered. Depending on the subject of the contract, the quantity of goods and timeframe for delivery may also be considered material terms.

Terms may also include whether a person can accept through promise or performance.

Valuable Consideration

The consideration is the value bargained for by the parties.

Example: Tom offers Dan $10,000 to build a fence. Dan accepts, and halfway through the construction process, Tom offers Dan another $5,000 to be paid upon completion. There is no enforceable contract for the extra $5,000. Under the original contract, Dan was already obligated to complete the fence for $10,000. The extra compensation is not supported by any new consideration (from Dan).

On the other hand, if Tom offered Dan an extra $5,000 for completing the fence one month ahead of schedule, there would be consideration for the contract to be modified (the speedy construction).

Capacity

Last, but not least, a person must have legal authority to either make or accept a binding offer. This authority is called "capacity." Generally, a person is presumed to have capacity to make a contract if she is at least 18 years old, and of sound mind. See Will Your Contract be Enforced Under the Law? to learn more.

Questions About Contracts? Speak with an Attorney

Businesses enter into contracts all the time, even when there is no actual paper contract involved. While it's routine for businesses to enter into various contracts, it's generally a good idea to consult with a contracts lawyer before signing on the dotted line, particularly for high-stakes agreements involving valuable assets.