Contract Formation

Introduction

Contract formation is the process by which parties create legally enforceable agreements. Under American contract law, a contract requires offer, acceptance, and consideration. The law applies an objective theory of contract formation, examining the external manifestations of assent rather than the parties’ subjective intentions. The principles of contract formation are derived primarily from the common law, with significant modifications under Article 2 of the Uniform Commercial Code for sales of goods.

The Objective Theory

The objective theory of contracts holds that a party’s assent to a contract is determined by what a reasonable person in the position of the other party would have understood the first party’s words or conduct to mean. In Lucy v. Zehmer (1954), the Supreme Court of Virginia held that even a jesting statement could constitute a contract if a reasonable person would believe that the speaker was serious. The objective theory promotes certainty and reliability in contractual dealings.

Under the objective theory, mutual assent requires a meeting of the minds as objectively manifested. The Restatement (Second) of Contracts § 17 provides that formation requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. Mutual assent is typically established through the process of offer and acceptance.

Offer

An offer is a manifestation of willingness to enter into a bargain, made so that another person is justified in understanding that their assent to the bargain is invited and will conclude it. An offer must communicate a definite proposal with sufficiently certain terms. Under the Restatement § 33, the terms of the offer must be reasonably certain to enable a court to determine the existence of a breach and provide an appropriate remedy.

An offer may be terminated by revocation, rejection, counteroffer, lapse of time, death or incapacity of a party, or destruction of the subject matter. Revocation is effective when received by the offeree. An option contract—an offer that is irrevocable because it is supported by consideration or a firm offer under UCC § 2-205—cannot be revoked during the option period.

Acceptance

Acceptance is a manifestation of assent to the terms of the offer, made in the manner invited or required by the offer. The mirror image rule requires that acceptance be on exactly the same terms as the offer; any variation constitutes a counteroffer. Under the common law, a counteroffer terminates the original offer and creates a new offer.

The mailbox rule provides that acceptance is effective upon dispatch, properly addressed with postage prepaid, unless the offer specifies otherwise. The Restatement § 63 provides that acceptance by mail is effective when sent, not when received. This rule does not apply to revocations, rejections, or counteroffers, which are effective only upon receipt.

Consideration

Consideration is the bargained-for exchange that makes a promise enforceable. Under the Restatement § 71, consideration requires a performance or return promise that is bargained for between the parties. The performance may be an act, forbearance, or the creation, modification, or destruction of a legal relationship.

Consideration must be bargained for —the promisee must give something in exchange for the promisor’s promise. Adequacy of consideration is generally not required; courts will not examine the relative value of exchanged promises. However, illusory promises —promises that do not commit the promisor to any performance—do not constitute consideration. The pre-existing duty rule provides that performing an existing legal obligation is not consideration for a new promise.

Promissory Estoppel

Promissory estoppel under Restatement § 90 provides an alternative basis for enforcing promises that lack consideration. A promise is enforceable if the promisor reasonably expected to induce action or forbearance, the promisee actually relied on the promise, and injustice can be avoided only by enforcing the promise. The remedy may be limited to the extent of the promisee’s reliance.

Promissory estoppel is commonly used in commercial contexts where parties make preliminary commitments before finalizing formal contracts. In Feinberg v. Pfeiffer Co. (1959), the court enforced a promise of pension benefits under promissory estoppel even though the employee had not provided consideration for the promise, because she relied on it by continuing to work.

Conclusion

Contract formation requires mutual assent and consideration, evaluated under the objective theory of contracts. The framework of offer, acceptance, and consideration creates a predictable legal structure for commercial transactions. Promissory estoppel provides a supplemental basis for enforcing promises that induce reasonable reliance, ensuring that the law of contracts serves its fundamental purpose of protecting reasonable expectations.