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5.6: Contract formation under US law

Lawyers and judges in the United States sometimes refer to “elements”. Elements are things that we need for a legal result.

The elements of a contract are the things we need to form a contract.  Under U.S. law to have a contract we need three things: an offer, acceptance, and consideration.  If we don’t have all three of these elements, then a court would say that we do not have a contract.

1 The Offer

The very first element we need to form a contract is an offer.  U.S. law provides that an offer is where one party, by words or conduct, lets another person or persons know that if they accept, the parties will have a deal. 

One way to think about an offer is to remember that parties frequently negotiate or have informal discussions before making an offer.  If Fred says, “Hey, nice watch, Perry!” no one would think Fred is obligating himself to buy the watch. 

Likewise, if Perry says to Fred, “I’m thinking about selling my watch,” that is not an offer.  We don’t know that Perry seriously intends to sell his watch. 

On the other hand, if at some point Perry says to Fred:  “I’ll sell you my watch for $100”  – – that sounds like an offer.  Anyone listening to their conversation would believe that Perry is ready to sell his watch to Fred for $100.

2 The Acceptance

Our second element to form a contract is acceptance.  An acceptance is where a party, by words or conduct, lets the offeror know that they reached a deal.

 Traditionally, under the common law, an acceptance must “mirror” the offer.  That is, if Perry says “I’ll sell you my watch for $100” Fred must accept precisely those terms, otherwise, there is no contract.  For example, if Fred responded, “I’ll take the watch for $100, if you wrap it in a red ribbon” the parties would not have a contract. 

Once we have an offer and an acceptance under US law we sometimes say there is “mutual assent”.

3 Consideration

The final element that we need for a contract is consideration.  Consideration means promising something, or doing something, of value, in exchange for the other party’s promise or performance.  For practical purposes, consideration tells us what each party is giving and getting from the contract.  

Consideration is sometimes called “bargained for detriment” or “the price of a promise”.  A party agrees to accept some sort of burden or to provide something of value in exchange for something from the other party.

Some things usually cannot be consideration.  If a person is already legally obligated to do something, it cannot be consideration for a contract.

Let’s say the law requires an employer to provide his employee with an hour for lunch.  The employer cannot make a contract where the employee pays the employer $10 each day to let the employee eat lunch.  The contract would fail for lack of consideration because the employer was already legally obligated to let the employee eat lunch.

Promises to make a gift are usually not contracts because there is no consideration.  It might be nice if someone promises to give you $1,000,000 for your next birthday but a court will likely say that this is not a contract because you did not give something up in return for the promise.

U.S. contract law also generally makes social arrangements unenforceable.  When Debby agreed to go out on a date with Perry most courts would say there was no consideration for that promise.  Perry will not succeed if he sues Debby for failing to show up for dinner as promised.