From the Nolo eCommerce Center
For most contracts, legalese is not essential or even helpful. On the contrary, contractual agreements are best expressed in simple, everyday English.
Although lots of contracts are filled with mind-bending legal gibberish, there’s no reason why this has to be true. For most contracts, legalese is not essential or even helpful. On the contrary, the agreements you’ll want to put into a written contract are best expressed in simple, everyday English.
All that is necessary for most contracts to be legally valid are the following two elements:
- all parties are in agreement (after an offer has been made by one party and accepted by the other)
- something of value has been exchanged, such as cash, services or goods (or a promise to exchange such an item) for something else of value.
In a few situations, a contract must be in writing to be valid. State laws often require written contracts for certain transactions such as real estate sales or contracts that will last more than one year. You’ll need to check your state’s laws to figure out which contracts must legally be in writing. Of course, because oral contracts can be difficult or impossible to prove, it is wise to write out most agreements, even if not legally required.
Let’s look a bit more closely at the two elements – agreement between the parties and exchange of things of value – necessary for a valid contract.
1. Agreement Between Parties, a.k.a. Offer and Acceptance
Although it may seem like stating the obvious, an essential element of a valid contract is that all parties really do agree on all major issues. In real life there are plenty of situations that blur the line between a full agreement and a preliminary discussion about the possibility of making an agreement. To help clarify these borderline cases, the law has developed some rules defining when an agreement legally exists.
The most basic rule of contract law is that a legal contract exists when one party makes an offer and the other party accepts it. For most types of contracts, this can be done either orally or in writing. Let’s say, for instance, you’re shopping around for a print shop to produce brochures for your business. One printer says (or faxes) that he’ll print 5,000 two-color flyers for $200. This constitutes his offer. If you tell him to go ahead with the job, you’ve accepted his offer. In the eyes of the law, when you tell the printer to go ahead, you create a contract, which means you’re liable for your side of the bargain (in this case, payment of $200). But if you tell the printer you’re not sure and want to continue shopping around (or don’t even respond, for that matter), you clearly haven’t accepted his offer and no agreement has been reached. Or if you say his offer sounds great, except that you want the printer to use three colors instead of two, no contract has been made, since you have not accepted all of the important terms of the offer – you’ve changed one term of the offer. (Depending on your wording, you may have made a counteroffer, which is discussed below.)
Sure enough, in real, day-to-day business the seemingly simple steps of offer and acceptance can become quite convoluted. For instance, sometimes when you make an offer it isn’t quickly and unequivocally accepted; the other party may want to think about it for a while or try to get a better deal for himself. And before he accepts your offer, you might change your mind and want to withdraw or amend your offer. Delaying acceptance of an offer and revoking an offer, as well as making a counteroffer, are common situations in business transactions that often lead to confusion and conflict. To minimize the potential for a dispute, here are some general rules you should understand and follow.
- How long an offer stays open. Unless an offer includes a stated expiration date, it remains open for a “reasonable” time. What’s reasonable, of course, is open to interpretation and will vary depending on the type of business and the particular fact situation. To leave no room for doubt as to when the other party must make a decision, the best way to make an offer is to include an expiration date. And if you want to accept someone else’s offer, the best approach is to do it as soon as possible, while there’s no doubt that the offer is still open. Keep in mind that until you accept, the person or company who made the offer – called the offeror – may revoke it. Revocation is discussed below.
- Counter offers. Often when an offer is made, the response will not be to accept the terms of the offer right off, but to start bargaining. Of course, haggling over price is the most common type of negotiating that occurs in business situations. When one party responds to an offer by proposing something different, this proposal is called a “counteroffer.” When a counteroffer is made, the legal responsibility to accept, decline or make another counteroffer shifts to the original offeror.
For instance, if your printer (here, the original offeror) offers to print 5,000 brochures for $300 and you respond by saying you’ll pay $250 for the job, you have not accepted his offer (no contract has been formed), but instead have made a counteroffer. If your printer then agrees to do the job exactly as you have specified for $250, he’s accepted your counteroffer and a legal agreement has been reached. While it is true that a contract is only formed if the accepting party agrees to all substantial terms of an offer, this doesn’t mean you can rely on inconsequential differences to void a contract later. For example, if you offer to buy 100 chicken sandwiches on one-inch-thick sourdough bread, there is no contract if the other party replies he will provide 100 emu filets on rye bread. But if he agrees to provide the chicken sandwiches on one-inch-thick sourdough bread, a valid contract exists, and you can’t later refuse to pay if the bread turns out to be a hair thicker or thinner than one inch.
- Revoking an offer. Whoever makes an offer can revoke it as long as it hasn’t yet been accepted. This means if you make an offer and the other party says she needs some time to think it through or makes a counteroffer with changed terms, you can revoke your original offer. Once she accepts, however, you’ll have a binding agreement. Revocation must happen before acceptance.
An exception to this rule occurs if the parties agree that the offer will remain open for a stated period of time. This type of agreement is called an option, and it usually doesn’t come for free. Say someone offers to sell you a forklift for $10,000, and you want to think the offer over free of the worry that the seller will withdraw the offer or sell to someone else. You and the seller could agree that the offer will stay open for a certain period of time, say thirty days. Often, however, the offeror will ask you to pay for this 30-day option – which is understandable, since during the 30-day option period he can’t sell to anyone else. Payment or no payment, when an option agreement exists, the offeror cannot revoke the offer until the time period ends.
2. Exchange of Things of Value
In addition to both parties’ agreeing to the terms, a contract isn’t valid unless both parties exchange something of value – in anticipation of the completion of the contract. The “thing of value” being exchanged – which every law student who ever lived has been taught to call “consideration” – is most often a promise to do something in the future, such as a promise to perform a certain job or a promise to pay a fee for that job. For instance, let’s return to the example of the print job. Once you and the printer agree on terms, there is an exchange of things of value (consideration): the printer has promised to print the 5,000 brochures and you have promised to pay $250 for them.
The main importance of requiring things of value to be exchanged is to differentiate a contract from generous statements and one-sided promises that are not enforceable by law. If a friend offers you a gift, for instance, such as offering to stop by and help you move a pile of rocks, without asking anything in return, that arrangement wouldn’t count as a contract because you didn’t give or promise him anything of value. If the other party never followed through with his gift, you would not be able to enforce his promise. However, if in exchange for helping you move rocks on Saturday, you promise your friend you’ll help him weed his vegetable garden on Sunday, a contract exists.
Although the exchange of value requirement necessary to form a valid contract is met in most business transactions by an exchange of promises (“I’ll promise to pay money if you promise to paint my building next month”), actually doing the work can also satisfy the rule. If, for instance, you leave your printer a voice-mail message that you’ll pay an extra $100 if your brochures are cut and stapled when you pick them up, the printer can create a binding contract by actually doing the cutting and stapling. And once he does so, you can’t weasel out of the deal by claiming you changed your mind.