What Is an Offer?

In contract law, the first thing one learns is that to form a valid contract, there must be an offer, an acceptance, and an exchange of consideration. What makes a valid offer is one of the most contentious aspects of a contract.

An offer can be a single sentence or a detailed written statement. What matters is that the terms be clear and definite so that the person receiving the offer understands what they are agreeing to.

Elements of a Contract

When forming a contract, the "offeror" proposes the terms of the agreement or "makes an offer." The "offeree" receives the offer and either accepts or rejects it. If the former, then both parties must agree on the consideration, which is the payment for the terms of the agreement.

Offer

An offer is a statement of terms under which the offeror agrees to be bound. The offeror promises to do something or refrain from doing something in return for a promise from the offeree. There are some essential elements to an offer.

• Legality: It must be legal and something the offeror can do or refrain from doing. A contract to build a machine that makes diamonds out of popcorn would not be a genuine offer.
• Present intent to be bound: The offeror must intend to carry out the terms of the contract immediately or in a reasonable period of time. The offeror cannot say, "I might do this someday."
• Reciprocal obligations: In a business contract, this is a "firm offer." Both the offeror and the offeree must owe something to each other. If not, no contract exists.
• Specific offeree: The offeror must give the offer to someone. Advertisements are not binding offers. Sometimes reward posters may be considered offers, but not always.
• Ability to accept: Some types of offers have deadlines or expire by the terms of the offer. If an offer says, "Notify sender within eight business days," the offeree cannot accept on the ninth day.

The terms of the offer must be clear enough that the offeree knows what is being offered, what they must do to accept, and what they are being asked to do in exchange for the offer.

Acceptance

The acceptance of an offer is almost as complex as the offer itself. Agreeing may not be enough. An offeree accepts all the terms of the offer as agreed upon. These terms include:

• Mirror the terms of the offer: If the acceptance does not match the offer exactly, it is not an acceptance.
• The offeree is the only person who may accept an offer: In some business settings, an agent of a business owner or CEO may accept for the principal, but only with authorization.
• Knowing and willing acceptance: The offeree cannot accept by accident, by silence, or without knowing the full terms of the contract.
• Communicated acceptance: The offeree must communicate their acceptance to the offeror. The offeree cannot tell someone else to tell the offeror they accept.
• Timing: The offeree must accept the offer before it expires or is withdrawn. If there is no timeframe, then it must be a "reasonable" amount of time.

Counteroffer

If an offer is not accepted exactly as made, it becomes a counteroffer. For instance, if the offer is "I will mow your lawn on Saturday for $10," and you say, "That sounds good, but can you do it Friday?" you have not accepted my offer; you have made a counteroffer.

A counteroffer rejects the original offer and replaces it with the new offer. The offeror can either accept the counteroffer, reject the counteroffer and make their own counteroffer, or revoke the entire offer and cancel the agreement.

Consideration

Consideration is the benefit the parties receive for the execution of the contract. Consideration may be payment of money, but it does not have to be. The elements of consideration only require that:

• It is something worth bargaining for,
• It benefits all parties, and
• It is something of value to the parties involved.

When two kids who share a bedroom agree that one will make the beds while the other picks up the laundry, they have made a contract with an offer, acceptance, and valuable consideration, even if no one else would bargain for it.

A contract lacks consideration if it is something one party was already required to do or if no mutual benefit and obligation exist. For instance, if a parent tells a child they'll buy them a new car if they graduate with straight A's, it is not a contract.

Capacity

Both parties must have legal capacity, or competency, to make a contract. Competency means the individual is of a legal age to contract and has the mental capacity to enter into a contract. The individual must understand the nature and quality of the agreement.

Types of Contracts

Different types of contracts have other requirements beyond offer, acceptance, and consideration. Having an enforceable contract in business is essential. Small business owners should consider consulting a contract attorney when writing or reviewing legal contracts.

Written Contracts

Under the Statute of Frauds, some contracts must be in writing even if the parties agree to all terms and conditions:

• Real estate contracts and any transaction involving the sale of real property or an interest in land
• Contracts for the sale of goods over $500.00 as per the Uniform Commercial Code (UCC).
• Contracts that will take more than a year to complete
• Surety contracts, such as guaranteeing a loan for another person

Service Contracts

Service contracts are those between a company doing business providing services such as auto repair and their clients. These types of contracts are sometimes called invoices or unilateral contracts. The contract explains the terms and conditions, but the client does not perform (pay) until the work is completed.

Independent contractors are the most frequent writers of service contracts.

Oral Contracts

Some people believe that oral contracts are not binding agreements. An oral contract can be a binding contract as long as it contains the same elements as any other contract. The only difficulty an oral contract presents is proving its legality in court. Parties to an oral contract may need legal advice to enforce it.

Additional Information

State laws control the writing and interpretation of contracts. Small businesses may need legal help to write and enforce contracts. The Small Business Administration (SBA) has offices in every state to help with your business development needs.

Questions About Contracts? Speak With an Attorney

Businesses enter into oral, written, and electronic contracts every day. It's a good idea to have a contracts lawyer review everything before you sign, even if you think you know what you've offered or accepted.