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Offer, acceptance and consideration in contract negotiations

Offer, acceptance and consideration are the main building blocks of any contract. Until all three of those things are present, there isn't a legally enforceable agreement.

This is an overview of the basics that everyone should understand when negotiating a contract in business or any other aspect of life.

What is an offer?

An offer is actually a type of promise in exchange for another party's specific performance. To be valid for the purposes of a contract, an offer needs to be communicated to the other party, and the other party must have a chance to either accept or reject the offer.

Once made, an offer can be easily withdrawn prior to acceptance. After an offer is accepted by the other party, however, it can be far more difficult to legally rescind.

What is an acceptance?

An acceptance means that the party receiving the offer agrees to its terms.

If you're on the receiving end of an offer, it's important to understand that if your acceptance doesn't match the original offer -- if you try to change the terms in any fashion -- you are actually rejecting the offer and making a counteroffer. That essentially ends the legal obligation of the other party to continue negotiations (if they so desire).

What is consideration?

Consideration is whatever each party stands to gain from entering into the contract. It has to exist on both sides for a contract to be enforceable.

Contracts often fail the legal test over consideration because the consideration a party offered is:

  • Something a party was already legally obligated to do
  • Something illegal to offer
  • Something that was already provided (past consideration)
  • Something that was actually a gift, not something that was bargained over

It's also important to note that consideration doesn't have to be objectively valuable. It just has to have value to the parties involved.

How long does a contract have to be?

Contracts should be simple enough to be understandable but complicated enough to address all foreseeable problems before they happen. A contract is valid, however, as long as it has those three critical elements (offer, acceptance and consideration). Contracts can be written or verbal -- so be careful what you say during negotiations!

The better you understand the ins and outs of contracts, the better you can avoid contentious litigation. If you need help, don't hesitate to look for legal guidance.

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