What Is a Contract and When Does a Promise Become Binding?

English law and the systems descended from it look for four things. There must be an offer, a clear proposal to be bound on stated terms. There must be an acceptance of that offer, on the same terms, communicated to the person who made it. There must be consideration, meaning each side gives something: money, goods, work, or a promise to do or refrain from something. And both sides must intend the agreement to have legal consequences.

That last ingredient is why the lunch date is not a contract. Courts presume that social and family arrangements are not meant to be legally binding, and presume the opposite for commercial dealings. It is also why a gift is not a contract: nothing comes back the other way, so there is no consideration. A promise to give you a car is, in most common law countries, unenforceable until the car is handed over, unless it was made in a formal deed.

Working out exactly when a contract is formed matters, because until that moment either side can walk away. A price tag in a shop window is not an offer but an invitation to make one; the customer offers to buy at the till and the shop accepts by taking the money. That is why a shop can refuse to sell a mispriced item. An advertisement is usually an invitation too, though a famous 1893 case held that a company which promised 100 pounds to anyone who caught flu after using its smoke ball had made a genuine offer to the world, and had to pay.

Acceptance has to match the offer. Reply with different terms and you have made a counter-offer, which kills the original. Silence is not acceptance; a seller cannot write that they will assume you agree unless you object. And an offer can be withdrawn at any time before it is accepted, as long as the withdrawal reaches the other side first.

Most contracts need no particular form. An agreement made in conversation is as binding as one on paper, and the paper matters mainly as evidence of what was agreed. A few kinds must be in writing, and the list varies by country: sales of land almost everywhere, guarantees of someone else's debt, and consumer credit are the common ones.

Online terms raised the question of whether anyone who has not read a contract can be bound by it, and the answer courts have given is a qualified yes. A term is binding if the other party took reasonable steps to bring it to your attention before you agreed, which a clearly labelled agree button generally does. The exception is an unusually onerous term buried in the small print, which judges in several countries have refused to enforce unless it was specifically pointed out. Consumer law then adds a floor beneath the whole arrangement: terms that are unfair to a consumer can be struck out however clearly they were displayed.

An agreement with all four ingredients can still fail. A contract made under duress, by threats, or under undue influence from someone the victim trusted can be set aside. So can one induced by a misrepresentation, a false statement that led the other side to agree. Some people lack the capacity to contract: children can be bound only for necessities, and a person who was drunk or mentally incapable at the time may escape the bargain if the other side knew. A contract to do something illegal is void from the start, and neither side can sue on it.

Mistake is narrower than people expect. Regretting a bad deal is not a mistake in the legal sense; a shared, fundamental error about what was being bought might be. If both parties contract to sell a cargo that, unknown to either, sank the day before, there is no contract, because there was nothing to contract about.

A broken contract, a breach, gives the injured side a claim for damages, and the measure is what they lost, not what the other side gained. The aim is to put them in the position they would have been in had the promise been kept. A buyer who paid 500 for goods that never came and had to buy the same goods elsewhere for 600 recovers the 100 difference plus any reasonably foreseeable extra losses. A court will only rarely order the promise itself to be performed, usually where the subject is unique, such as a particular house.

The injured party must also take reasonable steps to limit the loss rather than letting it mount, and cannot recover for a chain of consequences the other side could not have foreseen. The questions a court asks are the same ones worth asking before you agree to anything:

• •Was there a clear offer and an acceptance that matched it?
• •Did each side give something, or was it a one-way promise?
• •Did both sides mean it to be legally binding?
• •Were the terms brought to your attention before you agreed?
• •Was anyone pressured, misled or unable to consent?

Many of the most important terms in a contract are never discussed at all, because the law puts them there. In the United Kingdom the Consumer Rights Act 2015 says that goods a trader sells to a consumer must be of satisfactory quality, fit for their purpose and as described, and that services must be carried out with reasonable care and skill. These terms apply whether or not the receipt mentions them, and a shop cannot sign them away in its small print. Many other countries have similar statutory guarantees for consumers.

Take a kettle that stops working after a week. The buyer never negotiated anything about quality, but the implied term has been broken, and under the UK rules a consumer who rejects faulty goods within thirty days is entitled to a full refund; after that, the trader normally gets a chance to repair or replace first. Courts also imply terms into business contracts where they are so obvious that both sides must have assumed them, a test sometimes pictured as an officious bystander asking about the term and both parties replying, of course.

Many people believe they always have a few days to change their mind after buying something. In the United Kingdom there is no general right to return goods that are not faulty if you bought them in a shop; a store that takes them back is offering goodwill or its own returns policy. The legal cooling-off right applies to contracts made at a distance or away from business premises, such as online, by phone or on the doorstep. For those, consumers usually have fourteen days to cancel, because they could not inspect the goods first.

A second myth is that a contract must be a fair deal to be valid. Courts insist that each side gives something, but they do not ask whether the exchange is balanced. A lease for a single peppercorn a year is perfectly valid, which is where the phrase peppercorn rent comes from. In a well-known 1959 case, the House of Lords held that chocolate bar wrappers sent in with money to obtain a record formed part of the price, even though the company threw them away. Adults are left to make their own bargains, good or bad.

Offers and acceptances used to travel by letter, which raised an awkward question: if a reply takes days to arrive, when exactly is the deal done? English courts answered in 1818 in Adams v Lindsell, a dispute over a sale of wool in which the sellers, hearing nothing by the day they expected, sold the wool elsewhere while the buyers' letter of acceptance was still on its way. The court held that an acceptance sent by post takes effect the moment it is posted, not when it arrives. This postal rule still applies in English law, even if the letter is lost and never delivered.

The rule produces a neat result. A withdrawal of an offer counts only when it arrives, so if a seller posts a withdrawal on Monday and you post your acceptance on Tuesday, before the withdrawal reaches you on Wednesday, you have a binding contract. For instant methods the courts took the opposite view: in a 1955 case about telex messages, they held that an acceptance sent by instantaneous communication counts only when it is received. How email fits is still not fully settled, and a careful offeror can avoid the question by stating that acceptance only counts once it actually reaches them.

Sometimes a contract becomes impossible to perform through nobody's fault, and the law has a doctrine for that called frustration. Its foundation is an English case of 1863, Taylor v Caldwell. A music hall had been hired for a series of concerts, and before the first one it burned down. The hirers sued for their wasted expenses, but the court held that both sides were released: the contract had depended on the hall continuing to exist, and once it was gone neither party was bound. This differs from the sunken cargo example, where the thing was already gone before the contract was made.

The coronation cases of 1902 stretched the idea. When Edward VII fell ill and his coronation procession was postponed, people who had hired rooms overlooking the route refused to pay. In Krell v Henry the court let a hirer off, because the whole point of the bargain had been to watch the procession, even though the room itself could still be used. But in a similar case about a boat hired to see the king's naval review, the hirer had to pay, because the fleet was still there to sail around. Courts keep frustration narrow: a contract that merely becomes more expensive or inconvenient to perform is not frustrated.

A contract is an agreement the law will enforce, and it needs an offer, a matching acceptance, something given by each side and an intention to be bound. Form rarely matters, so most contracts are spoken or clicked, and when one is broken the remedy is normally money measured by what the injured party lost.