Elements of a Contract

A legally binding contract must have certain elements. There must be an offer by one party and an acceptance by the other. In addition, the two parties must agree exactly to the terms of the con­tract. This is called mutual agreement. To have mutual agree­ment, the parties do not always have to say “we agree.” The law infers agreement from certain actions, such as signing a contract or beginning to carry out the terms of the bargain.

In every valid contract, there must also be an exchange of consideration. This means something of value is given for something else of value. For example, when you buy an item at a store, your consid­eration is the money you pay, and the merchant’s consideration is the item you are buying. The values of the items being exchanged do not have to be the same. The law allows consumers to make both good deals and bad deals.

People entering into a contract must be legally competent to make contracts. This means they cannot be mentally ill or
intoxicated. Also, agreements to do something illegal or against public policy are not enforceable in court.

If Lorenzo says to Sally, “I will sell you my motorcycle for $150,” this is an offer. If Sally says, “OK,” if she pays the $150 to Lorenzo, or if she signs an agreement to pay $150, there is an acceptance. They have agreed to the exact terms. The motorcycle being exchanged for the money is the exchange of consideration. Both parties are compe­tent, and the agreement is not illegal or against public policy. There­fore, a contract has been made.

You should not be too quick to enter into a contract. Be sure you understand and agree with all the terms before you accept; other­wise, it may be too late to back out of the deal.