Elements of Contract

The first step in a contract question is always to make sure that a contract actually exists. There are certain elements that must be present for a legally binding contract to be in place.
The first two are the most obvious:

An offer: an expression of willingness to contract on a specific set of terms, made by the offeror with the intention that, if the offer is accepted, he or she will be bound by a contract.

Acceptance: an expression of absolute and unconditional agreement to all the terms set out in the offer. It can be oral or in writing. The acceptance must exactly mirror the original offer made.

A counter-offer is not the same as an acceptance. A counter-offer extinguishes the original offer: you can’t make a counter-offer and then decide to accept the original offer! But…
A request for information is not a counter-offer. If you ask the offeror for information or clarification about the offer, that doesn’t extinguish the offer; you’re still free to accept it if you want.

It is very important to distinguish an offer from an invitation to treat – that is, an invitation for other people to submit offers. Some everyday situations which we might think are offers are in fact invitations to treat: Goods displayed in a shop window or on a shelf. When a book is placed in a shop window priced at £7.99, the bookshop owner has made an invitation to treat. When I pick up that book and take it to the till, I make the offer to buy the book for £7.99. When the person at the till takes my money, the shop accepts my offer, and a contract comes into being.
Adverts basically work in the same way as the scenario above. Advertising something is like putting it in a shop window.

Auctions:
The original advertising of the auction is just an invitation to treat.
When I make a bid, I am making an offer.
When the hammer falls, the winning ‘offer’ has been accepted. The seller now has a legally binding contract with the winning bidder (so long as there is no reserve price that hasn’t been reached)

N.B: an offer can be revoked at any time before it is accepted, so long as you inform the person you made the offer to that the offer no longer stands.

Consideration: each party to the contract must receive something of value.
This is best illustrated by an example: suppose I promise to give you my watch, but you don’t give me anything in return. If I break my promise and keep my watch, you can’t then go to court and make me give it to you. The contract isn’t legally binding: you didn’t give me any consideration for my promise.
So put simply, consideration is the price paid for the other’s promise.

There are four legal maxims that apply to consideration:
Consideration must move from the promisor;
Consideration need not move to the promisee;
Past consideration is not good consideration;
The consideration given must be sufficient, but it need not be adequate.
The detail isn’t necessary here, but there is a separate note on them if you’re interested.

Intention to create legal relations: if my brother offers me a lift to London, and I say I’ll contribute to the cost of the petrol and then don’t, there isn’t necessarily a binding contract that he can sue me under. If the arrangement is an informal, social one, then my offer to pay for petrol probably wasn’t made with the intention of being legally bound (see the definition of ‘offer’ above).

In general, arrangements of a social nature are presumed not to be legally binding, whilst commercial arrangements are presumed to be intended as binding contracts. Of course, these presumptions can always be rebutted in court by producing evidence to the contrary.