Contract Formation Requirements FAQ

Under California Civil Code Section 1550, four essential elements must exist for a valid contract: (1) parties capable of contracting; (2) their consent to the contract; (3) a lawful object; and (4) sufficient cause or consideration. Additionally, mutual assent (meeting of the minds) is required, typically manifested through offer and acceptance.

The parties must have contractual capacity, meaning they are of sound mind, not minors (with certain exceptions), and not otherwise legally incapacitated. The consent must be genuine, free from fraud, duress, undue influence, or mistake. The object of the contract must be lawful and possible, and consideration must flow between the parties—each must receive some legal benefit or incur some legal detriment.

These requirements apply to all contracts, whether oral or written, though certain contracts must be evidenced by a signed writing under the Statute of Frauds. If any essential element is missing, no valid contract exists, though equitable remedies like promissory estoppel or restitution may sometimes be available.

A valid offer under California law is a manifestation of willingness to enter into a bargain, made in such a way that another person is justified in understanding that their assent will conclude the bargain. California Civil Code Section 1585 provides that an offer must be communicated to the offeree—there is no contract until the offeree knows of the offer.

A valid offer must contain definite and certain terms, including identification of the parties, description of the subject matter, price or other consideration, and time for performance (or a reasonable time if not specified). The offer must demonstrate present contractual intent, not mere preliminary negotiations, advertisements (which are generally invitations to make offers), or statements of future intention.

The offeror is the "master of the offer" and can specify the method of acceptance, time limits, and other conditions. Once communicated, an offer creates in the offeree the power of acceptance—the ability to form a binding contract by manifesting assent to the offer's terms. This power continues until the offer is terminated by revocation, rejection, counteroffer, lapse of time, death or incapacity of either party, or destruction of the subject matter.

Under California Civil Code Section 1584, acceptance is consent to the terms of an offer. For acceptance to be valid, it must be absolute and unqualified—it must accept all terms of the offer without modification. Any material change to the terms constitutes a counteroffer rather than acceptance, which rejects the original offer and creates a new offer that the original offeror may accept or reject.

Section 1581 states that acceptance may be express (through words, oral or written) or implied by conduct that clearly indicates assent. The acceptance must be communicated to the offeror unless the offer waives notification or the circumstances make notification unnecessary, such as in unilateral contracts where performance itself constitutes acceptance. Under Section 1583, consent can be revoked until acceptance is communicated, and acceptance is deemed communicated when put into the course of transmission to the offeror (the mailbox rule).

For contracts governed by the Uniform Commercial Code (sale of goods), California Commercial Code Section 2206 provides that unless otherwise unambiguously indicated by the language or circumstances, an offer to make a contract invites acceptance in any manner and by any medium reasonable in the circumstances. The offeror may specify the exclusive method of acceptance, and if so, only that method will be effective. Silence or inaction generally does not constitute acceptance unless the parties' course of dealing or trade usage indicates otherwise.

Consideration is defined in California Civil Code Section 1605 as any benefit conferred or agreed to be conferred upon the promisor, or any detriment suffered or agreed to be suffered by the promisee. It represents the bargained-for exchange that distinguishes an enforceable contract from a mere gift or gratuitous promise. Consideration embodies the concept of quid pro quo—something given in exchange for something else.

Consideration must have value in the eyes of the law, though courts generally do not inquire into the adequacy of consideration under the principle that parties are free to make their own bargains. Even nominal consideration (such as one dollar) can support a contract if it was actually bargained for, though purely sham consideration will not suffice. Section 1606 provides that existing legal duties do not constitute valid consideration; performing what one is already legally obligated to do is insufficient consideration for a new promise. This is known as the preexisting duty rule.

Past consideration—something already given or performed before the promise was made—is generally not valid consideration for a new promise because it was not given in exchange for the promise. However, exceptions exist under the doctrine of promissory estoppel (Section 1589), where a promise that the promisor should reasonably expect to induce action or forbearance, and which does induce such action or forbearance, may be enforceable without consideration if injustice can be avoided only by enforcement of the promise.

California law establishes specific rules regarding contractual capacity. Under California Family Code Section 6700, minors (persons under age 18) generally lack capacity to contract, and their contracts are voidable at their option. This means a minor can choose to either enforce or disaffirm a contract they entered into, but the adult party is bound unless the minor exercises the power to avoid the contract.

Sections 6700-6701 identify contracts that minors cannot disaffirm: contracts for necessaries (food, clothing, shelter, medical care), contracts related to their business or employment, contracts made with court approval, and certain contracts for student loans or automobile insurance. When a minor disaffirms a contract, they must return any consideration still in their possession, but they are not required to compensate the other party for depreciation or damage.

Mentally incapacitated persons lack capacity to contract during periods when they cannot understand the nature and consequences of their actions. California Probate Code Sections 811-813 address mental capacity and provide that a contract entered into by a person lacking mental capacity is voidable. However, contracts for necessaries entered into by persons lacking capacity may be enforceable to the extent of the reasonable value of the goods or services provided. Intoxicated persons may lack capacity if their intoxication prevented them from understanding the nature of the transaction and the other party knew or should have known of the intoxication. Corporations and other legal entities have capacity to contract to the extent authorized by their governing documents and applicable law.

The mirror image rule is a common law principle requiring that acceptance must exactly match the terms of the offer—any variance, no matter how minor, operates as a rejection of the original offer and a counteroffer rather than acceptance. California generally follows this rule for contracts not governed by the Uniform Commercial Code. Under California Civil Code Section 1585, acceptance must be absolute and unqualified.

However, for contracts for the sale of goods, California has adopted the UCC's more flexible approach in Commercial Code Section 2207, which significantly modifies the mirror image rule. Under Section 2207, a definite and seasonable expression of acceptance or a written confirmation operates as acceptance even if it contains additional or different terms, unless acceptance is expressly made conditional on assent to the additional or different terms.

Between merchants (persons who deal in goods of the kind or otherwise hold themselves out as having special knowledge or skill with respect to the practices or goods involved), additional terms in the acceptance become part of the contract unless: (1) the offer expressly limits acceptance to its terms; (2) the additional terms materially alter the contract; or (3) the offeror objects to the additional terms within a reasonable time. Between a merchant and a non-merchant, or when the additional terms are material, they are treated as proposals for addition to the contract and do not become part of it unless expressly agreed to. This creates a significant practical distinction: the strict mirror image rule applies to service contracts, real estate transactions, and other common law contracts, while the more flexible UCC rule applies to sales of goods.

Under California Civil Code Section 1586, a proposal (offer) may be revoked at any time before its acceptance is communicated to the offeror. This is the general rule—an offeror has the power to revoke an offer even if they promised to hold it open, unless an exception applies. Revocation is effective only when actually communicated to the offeree or their agent—attempted revocation that never reaches the offeree is ineffective.

However, several important exceptions limit the offeror's power to revoke. First, an option contract—where the offeree gives separate consideration to keep the offer open for a specified period—creates an irrevocable offer under Section 1587. The consideration for the option need not be substantial; what matters is that some bargained-for value was exchanged for the promise to keep the offer open. Second, a merchant's firm offer under Commercial Code Section 2205 is irrevocable if made in a signed writing assuring the offer will remain open, even without consideration, for the time stated or a reasonable time not exceeding three months.

Third, when an offeree begins performance in response to an offer for a unilateral contract (one requiring full performance rather than a promise), the offer becomes irrevocable for a reasonable time to allow completion of performance. This prevents the offeror from revoking after the offeree has partially performed. Fourth, under the doctrine of promissory estoppel (Civil Code Section 1589), if the offeror should reasonably expect the offer to induce substantial detrimental reliance by the offeree and such reliance occurs, the offer may become irrevocable to prevent injustice. This doctrine is frequently applied in construction bidding situations where a general contractor relies on subcontractors' bids in preparing its own bid.

Mutual assent, often called meeting of the minds, is a fundamental requirement for contract formation. California Civil Code Section 1565 provides that consent is not mutual unless the parties all agree upon the same thing in the same sense. This means the parties must have a common understanding regarding the essential terms of their agreement. However, courts apply an objective standard to determine mutual assent—they examine what a reasonable person would understand from the parties' words and conduct, rather than their unexpressed subjective intentions.

Section 1639 states that when a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone if possible. This is known as the parol evidence rule, which generally excludes prior or contemporaneous oral agreements that contradict a written contract. However, when contract terms are ambiguous or uncertain, courts may consider extrinsic evidence (evidence outside the written contract) to determine the parties' mutual intent. California follows the rule established in Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., which permits extrinsic evidence to explain the meaning of a contract even when the language appears clear on its face.

Mutual assent requires not only that the parties intended to contract, but that they agreed to all material terms of their agreement. If the parties never reached agreement on essential terms, or if they had fundamentally different understandings of a material term (a situation known as mutual mistake), mutual assent is lacking and no contract was formed. The objective theory prevents parties from avoiding contractual obligations by later claiming they subjectively intended something different from what they objectively manifested through their words and actions.

The mailbox rule, codified in California Civil Code Section 1583, addresses when acceptance becomes effective and thus when a contract is formed. Under this rule, acceptance is deemed communicated and the contract is formed when the acceptance is put into the proper course of transmission to the offeror, not when the offeror actually receives it. Section 1583 specifically states that consent is deemed communicated when deposited in the mail properly addressed with postage prepaid, or when given to a proper messenger or other appropriate agent for delivery.

This creates a significant and often surprising distinction from the general rule for other contract communications. Revocation of offers, rejection of offers, and counteroffers are generally effective only upon receipt, not upon dispatch. For example, if an offeree mails an acceptance on Monday, but the offeror receives it on Wednesday, the contract is formed on Monday under the mailbox rule. If the offeror attempted to revoke the offer by mail on Tuesday, that revocation would be ineffective because the contract was already formed on Monday when the acceptance was mailed.

However, the mailbox rule applies only when the method of acceptance is authorized—either explicitly by the offer, or implicitly by the circumstances, custom, or the method used to make the offer. If an offer is made by mail, acceptance by mail is impliedly authorized. If the offeror specifies that acceptance is effective only upon receipt, the mailbox rule does not apply. Additionally, Commercial Code Section 2206 modifies this rule for sale of goods contracts, providing that acceptance may be made in any manner and by any reasonable medium unless the offer unambiguously indicates otherwise. The mailbox rule has important practical implications: it protects offerees from offers being revoked while acceptance is in transit, and it determines which party bears the risk of the acceptance being lost or delayed in transmission.

California Civil Code Section 1550(3) requires that a contract have a lawful object for it to be valid and enforceable. Section 1667 further provides that the object of a contract must be lawful when the contract is made, possible, and determinate or capable of being made determinate. Section 1598 defines lawful object comprehensively: the object of a contract must not be forbidden by law, must not be contrary to an express provision of law, must not be contrary to the policy of express law though not expressly forbidden, and must not be otherwise contrary to good morals.

Contracts with illegal objects are void ab initio (from the beginning) and unenforceable—courts will not aid either party to an illegal contract and will generally leave the parties where it finds them. Examples of unlawful objects include contracts to commit crimes or torts, contracts that violate regulatory statutes (such as contracts requiring unlicensed persons to perform work requiring a license), contracts in restraint of trade beyond what is reasonably necessary to protect legitimate business interests, unconscionable contracts that shock the conscience, and contracts that contravene established public policy.

Under Business and Professions Code Section 16600, every contract that restrains anyone from engaging in a lawful profession, trade, or business is void, with narrow exceptions for business sale agreements, partnership dissolution agreements, and LLC member dissociation agreements. This makes California's treatment of non-compete agreements more restrictive than most states. Contracts requiring actions that are physically or legally impossible when made are void for lacking a possible object. The determination of whether a contract violates public policy requires courts to balance the parties' freedom to contract against broader societal interests in preventing harm and promoting the general welfare. Even if part of a contract has an unlawful object, courts may sever the unlawful portion and enforce the remainder if the illegal provision is not central to the parties' purpose and severance would not effectively rewrite the contract.

California law recognizes important distinctions between void, voidable, and unenforceable contracts—categories with significantly different legal consequences. A void contract is one that has no legal effect from the beginning—it is a complete nullity as if no contract ever existed. California Civil Code Section 1598 identifies contracts with unlawful objects as void. Contracts entered into by persons entirely without capacity (such as those adjudicated mentally incompetent), contracts procured by duress amounting to actual violence or threat of violence, and contracts fundamentally against public policy are typically void.

Neither party can enforce a void contract, and any party may raise its invalidity as a defense at any time. Courts will not enforce void contracts under any circumstances. However, parties who have conferred benefits under a void contract may sometimes recover restitution based on unjust enrichment to prevent one party from being unjustly enriched at the other's expense. A voidable contract, by contrast, is valid and enforceable unless and until the party with the power to avoid it elects to do so.

Section 1555 provides that a contract is voidable when one party's consent was obtained through duress, menace, fraud, undue influence, or certain mistakes. Contracts entered into by minors are generally voidable at the minor's option under Family Code Section 6700, but binding on the adult party. The party with the power to avoid the contract may choose either to enforce it or rescind it, giving them leverage in the relationship. However, once a party with knowledge of the grounds for avoidance affirms the contract through words or conduct, the right to rescind is lost. Voidable contracts remain valid and enforceable until actually avoided.

An unenforceable contract is one that was valid when made but cannot be enforced due to operation of law, most commonly because it violates the Statute of Frauds by not being in writing when the law requires a writing. Under Civil Code Section 1624, certain categories of contracts must be evidenced by a writing signed by the party to be charged—without the required writing, the contract may be unenforceable even though the parties had mutual assent, capacity, consideration, and a lawful object. Unlike void contracts, unenforceable contracts may become enforceable if the defect is cured (such as by obtaining the required writing) or if the party entitled to raise the defense waives it.