What Constitutes a Legal Contract?

Disagreement over the validity of contracts can land all parties in a court room. The basics of a legal contract are quite simple---there must be agreement and there must be something of value exchanged. It's the interpretation of these two elements that causes the problems. What defines agreement and what does exchanging something of value mean in the context of a legal contract?

Element #1 - Agreement

Has a real agreement taken place or is the discussion phase still in process? The first of two requirements that identify a legal contract is agreement. Both parties must be in agreement over the major issues outlined in the contract. This means one party has made an offer and the other party has accepted it. Agreements that violate laws are not valid contracts. Both parties must be of sound mind when making the agreement.

Offer and Acceptance

Identifying what an agreement is or whether an agreement has been reached is a point of disagreement for many. Offer and acceptance are the two elements forming an agreement. Valid contracts can be made orally or in writing. For example, a car has been dropped off for an oil change but the mechanic does more work on the car than the oil change and the mechanic wants to charge the customer for the work. The customer did not accept an offer for the additional work. There was not a legal agreement made to do the extra work and the customer has the right to refuse to pay for it.

Element #2 - Value Exchanged

The second element of a valid contract is the exchange of something of value or the agreement to exchange something of value. The most basic exchange is that of cash for a service or product. Ebay and other auction sites are a great example of exchanging value. The winning bidder agrees to exchange cash for the item being presented. The owner of the item agrees that they will give the winning bidder the item when they receive the cash. The bidding is initiated by this promise of exchange.

Open Offers

Delay of acceptance can cause conflict in a contract offer. Not responding right away may mean the other party wishes to think about the offer or is preparing a counter offer. In the mean time, the first party may have changed their mind about the terms and decided to end the offer. The best way to circumvent a problem is to state an expiration date in the agreement.

Revoking an Offer

The party making the offer can revoke the offer as long as it has not been accepted. If the party returns with an acceptance of the original offer before the originating party revokes, then the agreement is binding. Counter offers make changes to the original terms. If a counter offer is made, the originating party has several choices: He can accept the counter offer, decline the counter offer or make a counter offer.