Contract Formation

MBEMax wiki article — paired with the Contracts question set on mbemax.com.

One-line summary

A contract forms when the parties manifest mutual assent (through offer and acceptance) supported by consideration, with legal capacity and a legal purpose, and satisfying any writing requirement imposed by the Statute of Frauds.

Mnemonic

M-C-C-L-W — Mutual assent, Consideration, Capacity, Legality, Writing if required.

Five boxes to check. Miss one and the contract may fail.

The formation elements

1. Mutual assent

• Objective theory — outward manifestations; secret intent ignored (Lucy v. Zehmer).
• Offer + acceptance — see Offer and Acceptance.
• No meeting of minds — rare true failures (material ambiguity known to one side; cross-purposes re: material term).
• Misunderstanding (Raffles v. Wichelhaus — Peerless case) — no contract if reasonable misunderstanding on material term.

2. Consideration

• Bargained-for legal detriment — see Consideration.
• Substitutes: promissory estoppel, material-benefit rule, firm offer (UCC).

3. Capacity

• Minors. Generally voidable at minor's option until reasonable time after majority; affirmed by express ratification or continued enjoyment. Exceptions: contracts for necessities (food, shelter, medical care) — minor liable for reasonable value (restitution).
• Mental incapacity. Voidable if party cannot understand nature and consequences of transaction (cognitive test) or cannot act reasonably and other party knew or should have known (volitional test, Restatement § 15).
• Intoxication. Voidable if other party had reason to know. Harder to establish.
• Guardianship. Court-declared incompetence — contracts void or voidable depending on jurisdiction.

4. Legality

• Contracts for illegal purposes (drugs, murder, unlicensed practice, gambling where illegal) are void.
• Contracts in restraint of trade — unenforceable unless reasonable in scope (geography, duration, interest protected).
• Contracts against public policy — unenforceable (e.g., clauses limiting tort liability for gross negligence, pre-nuptial clauses encouraging divorce).
• Severance. Courts may sever unlawful portion if minor and not central to bargain; "blue pencil" for non-compete.

5. Writing (Statute of Frauds)

• Certain contracts must be in writing — see Statute of Frauds.
• MY-LEGS — Marriage, over-one-Year, Land, Executor, Goods $500+, Suretyship.

Defenses that negate formation

• Fraud in the factum / execution — party doesn't know they're signing a contract. Void, not merely voidable.
• Fraud in the inducement — misrepresentation as to content or material facts induces assent. Voidable.
• Duress. Physical — void. Economic — voidable if improper threat + no reasonable alternative.
• Undue influence — unfair persuasion by party in dominant/trust position.
• Mutual mistake — both parties mistaken as to basic assumption + material effect + risk not assigned. Sherwood v. Walker (barren cow).
• Unilateral mistake — generally not a defense unless other party knew/should have known OR enforcement would be unconscionable.
• Misrepresentation (innocent, negligent, fraudulent) — voidable if material and induces assent.
• Unconscionability — procedural (process) + substantive (terms) unfairness; often adhesion contracts.

NCBE loves to test

• Objective theory. Outward manifestations — secret reservations irrelevant.
• Minor's restitution. Necessities covered via quasi-contract.
• Mental capacity tests. Cognitive vs. volitional. Volitional requires other party's awareness.
• Illegality severance. Blue-pencil for non-compete.
• Mutual vs. unilateral mistake. Mutual = mutual mistake on basic assumption. Unilateral = limited defense.
• Duress modern scope. Economic duress recognized in business settings.
• Unconscionability. UCC § 2-302 codifies; courts apply both substantive + procedural.
• Misrepresentation vs. fraud. Fraud requires scienter (knowledge of falsity). Misrepresentation may be innocent.

Fast hypos

Hypo 1. 17-year-old signs contract for a new phone. Voidable at minor's option; upon disaffirmance, minor restores phone; contract void going forward.

Hypo 2. Buyer signs contract believing item is genuine antique. Seller knew it was replica. Fraudulent misrepresentation; buyer may rescind.

Hypo 3. A and B contract for sale of a specific cow both believe barren; cow turns out pregnant. Mutual mistake on basic assumption; *Sherwood v. Walker; may rescind.*

Hypo 4. Employee signs non-compete prohibiting work in the industry worldwide for life. Restraint of trade — overbroad; court may blue-pencil or deny enforcement.

Hypo 5. D forced P to sign at gunpoint. Physical duress — void; not merely voidable.

Hypo 6. Contract written in 2-point font, one-sided terms favoring merchant, taking-it-or-leaving-it. Unconscionability analysis — procedural (process) and substantive (terms).

Case anchors

• Lucy v. Zehmer, 84 S.E.2d 516 (Va. 1954) — objective theory.
• Sherwood v. Walker, 33 N.W. 919 (Mich. 1887) — mutual mistake.
• Raffles v. Wichelhaus, 2 H. & C. 906 (1864) — cross-purposes (Peerless).
• Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965) — unconscionability.
• Odorizzi v. Bloomfield School District, 54 Cal. Rptr. 533 (Ct. App. 1966) — undue influence.
• Halbman v. Lemke, 298 N.W.2d 562 (Wis. 1980) — minor's disaffirmance.

See also

• Offer and Acceptance
• Consideration
• Statute of Frauds
• Parol Evidence
• Modification
• UCC — Sales

Sources

Restatement (Second) of Contracts §§ 1–34, 50–86, 151–161, 174–177, 208, 261; UCC §§ 2-204, 2-207, 2-302; Lucy v. Zehmer, 84 S.E.2d 516 (Va. 1954); Sherwood v. Walker, 33 N.W. 919 (Mich. 1887); Raffles v. Wichelhaus, 2 H. & C. 906 (1864); Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965).