Contract Formation: Offer, Acceptance and Consideration

What a contract is

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

Restatement (Second) of Contracts § 1

Formation, according to § 17(1), “requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.” The Restatement is not binding law, but courts in every state rely on it. In addition, sales of goods follow Article 2 of the Uniform Commercial Code.

The offer

An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

Restatement (Second) of Contracts § 24

Courts judge an offer objectively. In Lucy v. Zehmer, 196 Va. 493, 503 (1954), a farm owner said his written promise to sell was a joke. Still, the court enforced it: “If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind.”

Acceptance

Under § 50(1), “Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.” Some offers invite acceptance by performance. For example, in Carlill v. Carbolic Smoke Ball Co. (1893), a company promised £100 to anyone who caught influenza after using its product as directed; a buyer who did so accepted by performing.

Under the common-law mirror-image rule, an acceptance must match the offer. However, for sales of goods, UCC § 2-207(1) treats “A definite and seasonable expression of acceptance” as an acceptance “even though it states terms additional to or different from those offered.”

Consideration

To constitute consideration, a performance or a return promise must be bargained for.

Restatement (Second) of Contracts § 71(1)

Consideration can be giving up a legal right. In Hamer v. Sidway, 124 N.Y. 538 (1891), an uncle promised his nephew $5,000 to refrain from drinking, smoking, swearing and gambling until age 21. Because the nephew “restricted his lawful freedom of action,” the court enforced the promise.

Even without consideration, a promise may bind under promissory estoppel. Section 90(1) enforces a promise the promisor “should reasonably expect to induce action or forbearance” that does induce it, “if injustice can be avoided only by enforcement of the promise.”

Researching contract formation in your state

First, find the statute or rule that governs contract formation where you live. State law controls most of these questions, so the answer can change from one state to the next. Next, read recent decisions from the appellate courts in your state. They show how judges apply the law today. Also, check the local rules of the court that would hear your case. Our state procedures guide links to each state’s official rules. In addition, the Research Center explains how to confirm a source is still good law.

Sources and further reading

Official sources used on this page:

• bpb-us-e1.wpmucdn.com
• static.case.law
• static.case.law
• law.cornell.edu

Related reading on Lawtopolis:

• The Statute of Frauds: Which Contracts Must Be in Writing
• Contract Defenses: Capacity, Mistake, Fraud, Duress and Unconscionability
• Contract Law and Consent: How Contracts Form and When They Bind