What is contract function and contract formation?

The main function of a contract is to record transactions between entities that exist between parties legally. Contracts can be as simple as handshake between people or as complex deal between companies (which takes months of negotiations and preparation of pages of legal terms with help of team of lawyers). Components of contract are Offer (promiser made an offer to promisee), Acceptance (Promisee accepts the offer made by promisor), Capacity (ability of promisee and promisor to fulfill offer and acceptance), Consideration (Obligation are created and made accepted), creating legal Document (agreement enforced by court of law), Certainty (No ambiguity) and Free consent (both promisor and promisee enter the agreement on their free will).

Function of contract

A contract between the two parties can be made as easily by shaking hands or can be made as complex (takes months to negotiate). Some contracts are complex because of its legal terms as both party lawyers will be involved.

The main function of contract is legal recording of business transactions (either between business parties or individually). Each party involved in the contract will gain a value from the contract.

Contract formation

The contract formation is explained below (with the help of diagram for basic understanding)


  • Parties can plan for the future by a sense of normalcy
  • Assurance is provided to meet obligations
  • Apportion risk between promisor and promisee
  • Seek remedies, if fail to meet obligations