A contract is an exchange of promises between two or more parties to do or refrain from doing an act which is enforceable in a court of law. Contract law is based on the Latin phrase pacta sunt servanda (pacts must be kept). Breach of contract is recognised by the law and remedies can be provided. Sometimes written contracts are required, such as when buying a house. However, most contracts can be and are made orally, like buying a law textbook, or purchasing coffee at a shop. Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).

According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining the obligations between two or more parties".

Contractual formation

In common law, there are five key requirements for the creation of a contract. These are offer and acceptance (agreement), consideration, an intention to create legal relations, capacity and Formalities. In civil law systems, the concept of consideration is not central. In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.

One of the most famous cases on forming a contract is Carlill v. Carbolic Smoke Ball Company decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would cure people's flu, and if it did not, buyers would receive £100. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, and a gimmick. But the court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer, primarily because of the reference to the £1000 deposited into the bank. People had given good "consideration" for it by going to the "distinct inconvenience" of using a faulty product. "Read the advertisement how you will, and twist it about as you will," said Lindley LJ, "here is a distinct promise expressed in language which is perfectly unmistakable".

Where a product in large quantities is advertised in a newspaper or on a poster, it is generally regarded as an offer; however, if the person who is to buy the advertised product is of importance, for instance because of his personality, etc., when buying a good such as land, it is regarded merely as an invitation to treat. In Carbolic Smoke Ball, the major difference was that a reward was included in the advertisement, which is a general exception to the rule and is then treated as an offer.

Offer and acceptance

main: Offer and acceptance The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a 'concurrence of wills' or 'ad idem' (meeting of the minds) of two or more parties. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to form a contract.