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Basics of a Contract

Contracts can be created under a variety of circumstances and under endless possibilities of terms. It is important to know when an agreement creates a contract so that you can best understand your rights and obligations. Whether it's verbal or written, for services or goods, the contract basics remain the same. The formation of any contract requires an offer, acceptance and consideration.

Offer

An offer is the expression of a willingness to enter into a contract. It must be made with the intent that the terms shall become binding upon acceptance. An obvious example is an offer to purchase a home. The buyer proposes to the seller to purchase the home for a certain amount of money and on certain terms. If the buyer disagrees with the offer, the buyer can then make a counter-offer and propose new terms. The back-and-forth aspect of a negotiation is a series of offers, rejections of those offers, and new offers. It is a fallacy to believe that an agreement has been reached merely because most of the terms have been agreed upon. An exception to this is a contract for goods, which is subject to unique rules pursuant to the Commercial Code.

Offers are not always as clear as a purchase offer. For example, an offer might also be a store advertisement that includes the sales price of an item. When Walmart offers to sell a TV for $1,500.00, the consumer expects to be able to accept that offer and buy the TV at the stated price. Imagine waiting in line all night on the Thursday before Black Friday just to get into the store finally and discover that all the advertised sales were no longer offered. Those shoppers are there to accept the offered products at the offered prices.

Acceptance

Acceptance is a promise or act by an offeree with the intention to be bound by the terms of the offer. Signed contracts are obvious examples of acceptance. The terms are laid out – hopefully– such that each person understands his or her rights and obligations.

Acceptance is more complicated when it is expressed in the form of an act. Consider a landowner who asks a contractor to build his home for the flat fee of $100,000.00. (For those in the construction industry, ignore for a moment the 50 change orders that would likely follow in real life.) The landowner hands the contractor the check and the contractor then begins to build the home. While is this certainly not an example of best business practices, it’s an example of acceptance through action.

Consideration

Consideration is something of value that each party contributes to the agreement. It is important to remember that different parties place value on different items and experiences. There is no requirement that the consideration be fair or reasonable. Consideration may be as obvious as money or something less tangible such as time. In the example above, the carpenter provides his time and services to the landowner who provides money.

That’s it. Regardless of the size of the document or scope of the work, an offer, acceptance and consideration are all that is required to properly form a contract.

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