Making a Contract

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by People's Law School in March 2017.

Every time you buy a pair of shoes, sign up for cellphone service, or call a plumber, you are making a contract. Given how common contracts are in our daily lives, it’s helpful to know something about how they are created.

How a contract is created

A contract is a legally recognized agreement made between two or more people (called “the parties”). If one of the parties fails to do what it promised, the other can ask a court to enforce the contract.

To be valid, a contract needs these three elements:

• Agreement: The parties must agree or have a “meeting of the minds” on the terms.   
• Consideration: There must be an exchange of something of value to each party.  
• Intention: Both parties must intend the agreement to be legally binding.

What is a meeting of the minds?

To form a contract, the parties must come to an agreement or a “meeting of the minds” on the essential terms. The agreement is formed by one party making an offer to another party of certain terms and the other party freely indicating their acceptance of those terms.

This can be done in a number of ways. It can be a conversation that results in an agreement. There may be an exchange of emails in which the parties agree on something. Or it can happen without any real formalities, as when you buy something from a store. By presenting the goods and your money to the store clerk, you are offering to buy the items, and by taking your money, the clerk is accepting your offer.  

The acceptance of the offer may consist of words or acts, but it must be an acceptance of the offer as made. A response to an offer that makes any material change in the terms of the offer is not an acceptance; it is a counteroffer.

What is consideration?

Making a contract involves an exchange of something of value to each party. Most often, one person pays money to another in exchange for a good or service. But money doesn’t have to be involved. As long as both parties give up something of value, they can make a valid contract. Whatever is given or paid is called consideration.

Although there must be something of value exchanged in order for a contract to be created, the exchange doesn’t need to be even. What is paid by one party need not be comparable in value to what the other party is giving. There can still be a contract, for example, when a person rents out a room in their house to a friend for a nominal amount like $10 per month. As long as there is an exchange of something of value to each party, the contract will typically be enforceable.

What does “intention” to be bound mean?

Not all agreements are contracts. For an agreement to be legally enforceable as a contract, both parties must intend to be bound by their promise.

This intention will rarely be stated explicitly but will usually be able to be inferred from the circumstances in which the agreement was made.

For example, offering a friend a ride in your car is not usually intended to create a legally binding relation. But consider if you agree with your friend to drive them to work on a regular basis in exchange for the friend paying you $20 each week towards the fuel and maintenance costs of the car. Here, the law is more likely to recognize that a contract was entered into.

Consumer Law Essentials © People's Law School is, except for the images, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International Licence.