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 And an offer can be withdrawn at any time before it is accepted, as long as the withdrawal reaches the other side first.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?

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.