Contracts: Formation

A contract is an enforceable agreement that creates legal obligations. In everyday commerce, contracts range from a signed services agreement to a click-through software license to a verbal promise to pay for work completed. Not every promise is a contract, and not every agreement is enforceable. Contract formation focuses on the elements the law requires before courts will treat a deal as binding, as well as the circumstances that can prevent enforcement even when the parties thought they had a bargain.

At its core, formation asks a simple question: did the parties reach a legally recognized agreement on definite terms, supported by a lawful exchange, with the capacity and intent to be bound?

The essential building blocks of an enforceable agreement

While terminology varies across jurisdictions, formation typically centers on five themes:

• Offer: a clear proposal to enter a bargain on specified terms.
• Acceptance: an unambiguous assent to the offer’s terms.
• Consideration: a bargained-for exchange of value.
• Mutual assent: a meeting of the minds assessed by objective evidence.
• Defenses to formation: reasons the law will not enforce the agreement even if offer and acceptance appear present.

Understanding each element helps explain why negotiations sometimes fail to become contracts, why “handshake deals” can be binding, and why some signed documents still get set aside.

Offer: more than an invitation to negotiate

An offer is a manifestation of willingness to enter into a bargain, made so that another person understands that acceptance will conclude the deal. The key features are intent and definiteness.

What makes an offer legally sufficient?

A valid offer generally includes:

• Clear commitment: the proposer signals readiness to be bound, not merely to talk.
• Definite terms: enough specificity to determine what each side must do.
• Communication to the offeree: the offer must reach the person who can accept.

Price, quantity, scope of work, and timing often matter. The law does not require every detail to be spelled out, but the essential terms must be sufficiently certain for a court to enforce.

Common situations that are not offers

Many communications look like offers but are legally treated as preliminary:

• Advertisements and marketing: typically invitations for customers to make offers, unless they are unusually specific and leave nothing open to negotiation.
• Price quotes: often informational, depending on context and language.
• “Subject to contract” discussions: signals the parties do not intend to be bound until a formal document is signed.

Practical takeaway: if you do not want a statement to be treated as an offer, avoid definite, promissory language and clarify that the discussion is nonbinding.

Acceptance: the moment a deal is made

Acceptance is the offeree’s assent to the offer on its terms. Formation hinges on whether acceptance was made in a manner authorized by the offer and whether it was communicated appropriately.

Mirror-image acceptance and counteroffers

As a general principle, acceptance must match the offer. If the offeree changes material terms, that response is usually a counteroffer, not acceptance. A counteroffer rejects the original offer and proposes a new one, shifting control back to the other party.

In real negotiations, parties commonly trade drafts and revisions. A contract forms when one party accepts the other’s final proposal without material change, or when conduct clearly indicates assent to the agreed terms.

Methods and timing of acceptance

An offer can specify how acceptance must occur, such as signing and returning a document or accepting by a particular date. If the offer is silent, acceptance may be reasonable under the circumstances, including acceptance by performance.

Issues frequently arise around timing:

• Expiration: an offer can lapse after a stated deadline or after a reasonable time.
• Revocation: an offeror can usually withdraw an offer before acceptance, if revocation is communicated.
• Rejection: once rejected, the offer generally cannot be accepted later unless renewed.

Practical takeaway: define acceptance procedures, especially for business deals. Clarity reduces disputes about whether a contract formed via email, a signature, or performance.

Consideration: the exchange that supports enforcement

Consideration is the requirement that each party give or promise something of value as part of the bargain. It is not limited to money. It can be a service, delivery of goods, a promise to refrain from doing something, or another legal detriment.

Why consideration matters

Contract law generally enforces bargains, not gifts. A promise like “I will give you $5,000nextmonth”maybemorallymeaningfulbutnotlegallyenforceablewithoutconsideration.Bycontrast,“Iwillpayyou$5,000 next month if you complete the project by Friday” includes an exchange: the work is the price of the promise.

Adequacy versus existence

Courts typically do not evaluate whether the deal was “fair” in dollar terms. The focus is on whether consideration exists, not whether it was a good bargain. A token exchange may still count if it was genuinely bargained for, though sham consideration can be challenged.

Pre-existing duty concerns

If a party merely promises to do what they are already legally obligated to do, that often does not constitute new consideration for a modification. This comes up in contract changes mid-performance. To make modifications enforceable, parties often provide additional value, adjust obligations on both sides, or document the change carefully.

Practical takeaway: when revising a deal, ensure the modification includes a clear exchange, not just one side demanding more while offering nothing new.

Mutual assent: agreement measured objectively

Mutual assent is the shared understanding that the parties agreed to the same bargain. Importantly, the law usually applies an objective standard: what a reasonable person would infer from the parties’ words and actions, not what one party secretly intended.

Mutual assent in real life

Mutual assent can be shown through:

• Signed writings
• Emails confirming essential terms
• Verbal agreements paired with performance
• Conduct consistent with a shared deal, such as shipping goods and paying invoices

Disputes arise when parties believed they were aligned but key terms were missing or ambiguous. If essential terms are too indefinite, a court may find there was no contract because there was no workable way to determine obligations.

Intent to be bound

Parties sometimes agree on major points but intend not to be bound until a formal contract is executed. The question becomes whether the parties treated the preliminary agreement as final or as a step toward a later deal. Clear language and consistent behavior matter.

Practical takeaway: if you intend to be bound only upon signing a final document, say so explicitly and act consistently with that intent.

Defenses to formation: when an apparent contract is not enforceable

Even when offer, acceptance, consideration, and mutual assent appear present, defenses can prevent enforcement. These are not afterthoughts; they are central to formation because they can mean no binding contract exists.

Lack of capacity

A party may lack legal capacity due to factors such as minority or certain mental impairments. Capacity rules aim to protect those who cannot meaningfully consent. If a party lacked capacity at the time of agreement, the contract may be void or voidable depending on the circumstance.

Duress and undue influence

Agreements obtained through wrongful pressure can be set aside. Duress involves coercion that overcomes free will, while undue influence involves improper persuasion within a relationship of trust or dominance. The law’s focus is whether consent was truly voluntary.

Misrepresentation and fraud

If one party induced assent by making false statements of fact, the agreement may be voidable. The seriousness depends on whether the misrepresentation was intentional, negligent, or innocent, and whether it was material to the decision to contract.

Mistake

A contract may be affected by mistake when the parties were operating under a false assumption. If both parties share a fundamental mistaken belief, the agreement may be voidable. If only one party is mistaken, relief is less likely unless the other party knew or should have known and enforcement would be unfair.

Illegality and public policy

Courts do not enforce contracts for illegal activities or agreements that violate public policy. Even perfectly formed bargains can be unenforceable if their purpose or required performance is unlawful.

Putting formation into practice

Contract formation is not just academic. It determines whether a business can collect payment, whether a consumer must pay a cancellation fee, or whether a vendor can enforce a limitation of liability. The most reliable way to prevent formation disputes is to document essential terms, specify how acceptance occurs, and confirm whether discussions are binding or nonbinding.

A well-formed contract is the product of clear offer and acceptance, supported by consideration, reflecting mutual assent, and free from defenses that undermine genuine consent. When those pieces align, the law treats the agreement not as a casual promise, but as a commitment with enforceable consequences.