Contracts

A contract is an agreement among two or more parties. It includes a promise, or mutual set of promises, freely agreed to and in exchange for something of value. Once properly set in place, the agreement will be enforced by the court. We will now take a closer look at how contracts are formed, how contracts are voided and how contracts are enforced by the courts.

What Makes a Contract?

A contract is formed when the two essential contract elements are in place: mutual assent and consideration. Mutual assent refers to an offer made by one party, plus the acceptance of this offer by the other [Page 383]party. Consideration is something of value: Each party must promise to give something of value to the other in order to bind the contract. When mutual assent and consideration come together, the law claims there has been a “meeting of the minds” and a contract is formed. Memorializing it on paper will make it more certain to be enforced in court, but an oral contract is as legally binding as a written one.

When determining if a party has made or accepted an offer, the courts use an objective interpretation of contract formation. The court considers: Would the reasonable person believe she or he had just entered into an agreement? A defense of “but that's not what I really meant” will not move the court. The court makes no attempt to peer into a person's mind, it looks only at behavior. If Tom behaves in a way to lead Fred to reasonably conclude that Tom and Fred have a contract, the court will likely honor Fred's reasonable belief.

The creation of a contract begins with the offer. In order to fulfill the legal definition of an offer, it must convey that the one making the offer (the offeror) has a serious intention to enter a contract; to be bound to the agreement if the offer is accepted. The courts employ their objective standard here: Was it reasonable to believe that the offer was sincere? When Tom says to Fred, “I'm so sick of repairing my house, I'd sell it for a dollar,” Fred has no reasonable expectation that he may now pull four quarters out of his pocket and complete a cash transaction for Tom's home.

The key characteristic of a legal offer is its completeness: It contains all the essential components of the deal and nothing of substance remains to be negotiated. It should be specific in terms of quantity, price, and description. It should state who may accept and spell out the appropriate manner of acceptance, including the time limit for acceptance. And it must be communicated to the potential buyer (offeree). An offer is not an offer until the potential buyer hears it.

The offeror is the master of the offer: She or he is free to revoke the offer at any time prior to a communication of acceptance, even if the offeror has stated that the offer will remain open. For example, let's assume you are a musician and you enter negotiations to sell a recording to Bighits Records. You tell Bighits, “I'll give you the exclusive right to buy my recording for $50,000 at any time in the next 90 days.” Later you change your mind, and send a letter to Bighits revoking the offer. The offer is now null and void, even though we are still within the 90 days.

...