Businesses enter into contracts each and every day. Contracts are formed when customers make purchases, when suppliers deliver materials, or when contractors place orders. Contracts are a critical element when it comes to operating a business, and when contracts are not honored, disputes arise.

What Is Required to Form A Contract?

A contract requires five basic requirements, and if any one of the requirements is missing, no legal contract can be formed. The requirements for a contract include:

1. Parties Capable of Entering a Contract. The parties to the contract must be legally capable of entering the contract in the first place. This means that each party to the contract must be fully aware of what they are doing by entering the contract and must understand what the contract means. As a general rule, minors are not legally capable of entering into a contract due to their inexperience, nor are individuals who are considered insane capable of understanding what it means to enter a contract.
2. Offer and Acceptance. In order for a contract to exist, an offer to contract must be made by one party, and the offer must be accepted by another party. The offer must be clear and the acceptance must be definite and unqualified.
3. The parties must exchange something. Each party makes a promise to the other or gives something of value to the other party. The consideration does not necessarily have to be fair or proportional: one party could agree to pay a single dollar in exchange for a motor vehicle, and so long as both parties agree to that arrangement, it can be binding. Consideration could also take the form of not doing something, or foregoing something a party normally would do or has a legal right to do, such as waiving certain rights. This is sometimes referred to as “bargained for exchange” or “bargained for detriment”.
4. Legal Purpose. The contract must be for a legal purpose. To say this another way, the contract cannot violate the law. The parties cannot negotiate terms for the contract that break the law, or are illegal.
5. Mutual Assent. Both parties to the contract must have a meeting of the minds, meaning both parties have a similar understanding of what the contract means, and both agree to be bound by it.

If any of the above requirements is lacking, then it is unlikely that a contract has legally been formed. Furthermore, specific types of contracts might have additional requirements in order to successfully form a valid contract. For instance, for many types of contracts encountered in business, the contract must be made in writing, identifying key terms of the contract, and signed by both parties. For instance, California Civil Code Section 1622 notes that all contracts can be made orally, unless the contract is specifically required to be made in writing by law.

Additionally, certain states may impose additional requirements for a contract to be legally binding and valid, and these laws should be taken into consideration if a specific state’s laws govern the contract.

These elements are fairly straightforward, yet when a contractual issues do arise it can be very difficult for the parties to understand and navigate the legalities in contract law.  Please contact our office if you are facing a contractual issue, dispute, or simply have additional questions relating to contracts.

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