At the heart of most professional relationships is a contract. If you’re striking a bargain, coming to an agreement, or closing a deal, a contract is what cements the obligations, rights, and duties of all parties involved. And even though contracts are infinitely varied in length, terms, and complexity, all contracts must contain these six essential elements.
When these six elements are present, a contract evolves from a simple agreement to a binding legal document. But if you lack just one of them, a contract may not be enforceable at all. It’s helpful to have digital contracting software that manages all the elements for you. Let’s take a look at each element.
All contracts start with desire and responsibility. Someone wants (desires) something, and someone can fulfill (take responsibility for) that want. Known as “the offer,” this first essential element encompasses the duties and responsibilities of each party, but must also demonstrate an exchange of value. That value can be money, or it can relate to a desired action or outcome. Technically, an offer does not exist until it is received by the requesting party (the offeree). After the offer has been received, it can still be revoked, altered, or terminated at any time before acceptance. The offeree is also free to extend a counter-offer. When a counter-offer is made, the original offer is terminated, and the parties are now in the process of bargaining for a new desired outcome.
Once the offer is presented, the offeree can decide whether to accept or reject the proposal. The offeree can communicate acceptance either verbally or in writing (including mail or email)*. Acceptance can take many forms, including:
In general, a counter-offer is considered a termination of the original offer, but some circumstances allow for conditional acceptance. For example, the Universal Commercial Code (UCC) acknowledges the validity of new conditions to an offer, as long as those conditions are made known to both parties and do not cause surprise or hardship. Inaction is not considered acceptance for the purposes of a contract. This goes back to a legal tenant established in 19th Century Britain. In that contract case, a man offering to buy a horse declared that he would consider the horse purchased unless he heard otherwise from the seller. The court determined that assumption cannot create a contract. Acceptance must be explicit; merely taking action on one side (for example, shipping unsolicited materials) is not enough. Both sides must act, but if the actions are explicit and declarative, they will rise to the level of acceptance for the purposes of the contract. *In most states, an offer is considered accepted once it has been placed in a mailbox. The “mailbox rule” applies even if the acceptance is never received by the offeror. The main rule of validity for an acceptance is that it must be a clear and direct statement that all terms and responsibilities in the contract are accepted.
For a contract to be binding, both parties must first be aware that they are entering into an agreement. Often called “a meeting of the minds,” both parties to a contract must be active participants. They must recognize the contract exists and are freely agreeing to be bound by that document’s obligations. In fact, contracts can be voided if awareness is not adequately established. For example, if one of the parties signed an agreement under duress or can prove undue influence, fraud, or misrepresentation, the contract will be invalidated. As a result, it is crucial for all parties entering into a contract to clearly and decisively establish that the agreement is genuine, mutual, and all parties consent to its contents. In short, it’s crucial that both parties know what they’re getting into.
Ultimately the purpose of the contract relates to what it provides: the consideration. For contractual purposes, consideration includes the value that has been agreed upon, whether that be an action or an item. Property, services, even protection from harm, are all examples of contractual consideration. It’s important to note that there does not need to be a financial component for consideration to be valid. An agreement of an exchange of services, for example, is enough to meet the legal burden of consideration. The key is that the consideration has an agreed-upon value between the signatories to the contract.
In simplest terms, an individual cannot sign away their rights. Of course, the reality is a bit more complicated, which is why contract law requires that all signatories demonstrate that they clearly understand the obligations, terms, and consequences of the contract before they sign. The court defines that understanding as “legal capacity,” and each party signing a contract must demonstrate this legal capacity for the contract to be valid. Generally speaking, people who fall into one or more of these categories may not have legal capacity to validate a contract:
There are, of course, ways to overcome these capacity hurdles. A minor may have a court-appointed representative, for example. In the case of a foreign language, a translated copy of the contract could suffice. The final determination on capacity ultimately rests on understanding: does each party fully comprehend the contract’s words and meaning?
Finally, all contracts are subject to the laws of the jurisdiction in which they operate, including any applicable federal, state, and local laws and ordinances. Obviously, a contract for an illegal action or product cannot be enforced. Even if the parties initially had no knowledge, if their agreement runs afoul of local laws, that lack of awareness is insufficient to overcome the legality burden. It also goes without saying that a contract that involves criminal activity is not valid. As always, there are nuances. In general, the contract must adhere to the law in the jurisdiction where it’s signed. Sometimes state and federal laws are not in alignment, and in those cases, the Contract Clause (Article I, Section 10, Clause 1 of the United States Constitution) will be the guiding authority. In addition, there are certain instances where a contract is no longer legal, including:
Contracts are critical business tools. That means establishing a valid contract is crucial, as is ensuring all the terms and conditions are clear and that both parties are aware, competent, and able to enter into a legally binding agreement. Reviewing contracts with an eye towards these six key elements will help ensure that your document meets all the legal requirements and will be enforceable and actionable. ‘ Learn why contract management is so important, and the evolution of systems — including digital contracting — has been designed to do just that. Module 2: Elements of a Contract: Offer and Acceptance Every enforceable contract consists of three basic elements: offer, acceptance and consideration. In this module, we’ll explore offer and acceptance, which constitute mutual assent, the basic building block of a contract. Mutual Assent Mutual assent requires (1) an intent to be bound; and (2) definiteness of essential terms. In the popular case of Lucy v. Zehmer, the defendant was out at a restaurant and signed away his farm to the plaintiff on the back of a guest check. When the plaintiff sued to enforce the agreement the defendant claimed to have made the offer jokingly. The court adopted an objective test with a subjective element to determine whether there was an intent to be bound, and – more specifically – a manifestation of mutual assent: 1. Would a reasonable person in the position of the promisee understand from the promisor’s words and conduct an intent to be bound by the agreement? 2. Did the promisee, in fact, believe that a legitimate offer was made? Objectively, the court found the words and conduct surrounding the agreement warranted a reasonable belief that parties intended to be bound by an enforceable agreement. The parties had discussed the contract for over forty minutes, there were revisions made to the original agreement and there was a provision to examine title. The court held that the undisclosed intention by the defendant that he did not believe he was making a real offer, and was merely joking, was immaterial because the plaintiff was unaware of the defendant’s uncommunicated intent. It is irrelevant what the parties actually intended, rather – what matters – is what a normal person would understand under the circumstances. The subjective element is fairly simple to demonstrate. Here, the plaintiff did in fact believe the defendant had made a legitimate offer. Courts will commonly rely on these five factors to determine whether the parties have manifested an intent to be bound: (1) the language of any preliminary agreement (2) whether there are terms left open (3) whether there has been partial performance (4) the overall context of the negotiations, and (5) any relevant customs involving those types of transaction. For example, whether a standard form is typical for transactions of that kind. The Restatement of Contracts, which is a series of rules written by experts in the field that represents contract law as applied by most courts, lists additional factors, including whether the agreement is highly detailed or relatively simple, whether the amount is large or small and whether the contract is unusual or common. Indefiniteness Indefiniteness or missing terms does not generally invalidate a contract. Rather, a contract can be enforceable even if important terms are missing. Courts can supply reasonable terms under the circumstances as “gap fillers” to make up for the missing terms. Article 2 of the Uniform Commercial Code, which applies in all states to contracts for the sale of goods, lists several such gap fillers. The UCC even goes so far as to enforce a contract when the price is missing, allowing the court to enforce the sale for a “reasonable” price at the time of delivery. In the English case of Raffles v. Wichelhaus, the plaintiff contracted to sell cotton arriving on a ship named Peerless. The defendant believed that there was only one ship named Peerless that would arrive from Bombay in October. However, the Plaintiff’s shipment was expected to arrive in December from a different ship named Peerless. When the cotton arrived, the defendant was unwilling to accept the delivery. There were no terms in the contract regarding delivery or time of shipment. The court held that since the parties failed to state at the time of contracting which ship would carry the goods, the contract was enforceable as written and defendant was obligated to accept the shipment. However, where the contract is indefinite to the point that the parties cannot be said to have had a meeting of the minds or where one party clearly anticipates that something will be settled as part of the negotiations and where it is never settled, the contract may be unenforceable. Offers The Restatement states that an offer requires a “manifestation of willingness to enter into a bargain.” Therefore, an offer requires some act that gives another person the power to create a contractual relationship between the parties. An offer is made if the other person would be justified in believing “his assent to that bargain is invited and will conclude it.” This person then has the power of acceptance. Typically, price quotes or price lists – by themselves – are not sufficient to constitute offers. Rather, a legally enforceable contract does not arise until an order is given “in accordance with the proposed terms.” Therefore, the order is considered the offer. Most cases hold that the transaction is not complete until the order is then accepted. So, for example, if you see a price listed on an e-commerce website, that listing it not yet an offer. When you order the product, you are making an offer, which the merchant can accept or reject (such as, for example, if the product is out of stock or if the price has increased). When the merchant confirms your order, that is an acceptance and creates a binding agreement. However, the language used in responding to a prospective purchaser is key. In one Kentucky case, a purchaser sent a letter to the seller inquiring about the price of mason jars. The seller responded, listing prices for certain sizes and included the language “for immediate acceptance.” The Purchaser responded attempting to purchase ten mason jars, however the seller did not fulfill the order because the mason jars were already sold to another party. The purchaser then sued for breach of contract. The Court of Appeals held the letter including the terms “for immediate acceptance” was strong evidence of an offer – rather than a price quote – which, upon acceptance, would create a binding contract. Therefore, seller was liable for breach of contract since purchaser had accepted the offer by requesting the ten mason jars. Advertisements Advertisements are generally not considered offers and are generally treated as an invitation to make an offer. Therefore, no contract is formed until acceptance by the seller. In one New York case, for example, Pepsico aired a commercial advertisement indicating that customers could cash in Pepsi rewards for various prizes, including one for a military fighter jet. When one person attempted to turn in the required number of points for the jet, the court held that no contract was formed. The court stated that advertisements are not offers unless the terms are sufficiently clear to leave nothing open for further negotiation. However, there is an exception to the rule that advertisements are not considered offers. If the advertisement is “clear, definite, explicit, and leaves nothing open for negotiations,” it is an offer. To determine whether an advertisement to the public constitutes an offer depends on “whether the facts show that some performance was promised in positive terms in return for something requested.” A Minnesota court treated a newspaper advertisement – for fur coat accessories selling at $1.00 – as an offer. The defendant placed two advertisements in the local newspaper a week apart from one another. In the advertisements, the defendant listed the quantity, type of item, price, and included the term “first come, first served.” Since the advertisement was targeted towards the offeree (the “first come”), it was considered an offer. Thus, its acceptance by a purchaser would create a contract. An example of an indefinite communication not being considered an offer occurred in Kolodziei v. Mason in 2014 in a decision by the Eleventh Circuit Court of Appeals. That case involved a contract dispute between a law student and a defense attorney in a prominent murder case. A television station interviewed the attorney and the attorney, to illustrate publicly that his client could not have committed the crime in the timeframe alleged by the government, said that he would pay one million dollars to anyone who could complete a drive from an airport to a nearby hotel in the amount of time his client was alleged to have made the trip. An eager law student tried to accept the lawyer’s proposal by completing the task, but the attorney refused to pay him when he attempted to redeem the reward. The court disagreed with the law student and found that the attorney did not demonstrate the intent required to make an offer. The attorney’s statement was not definite or certain enough to constitute an offer because he didn’t specify the starting and ending points of the challenge. The court also pointed to other elements of the attorney’s statement to demonstrate that a reasonable person listening to the interview should have realized that the attorney had no intent to make a serious offer. Termination of an Offer An offer can be terminated in several ways before the offer is accepted. · The first is rejection, which terminates the power of acceptance. An example of an indirect rejection is a counter-offer. Whether a counter offer is express or implied, it counts as rejection and terminates the offer. · The second is revocation. Revocation occurs when the offeror manifests an intention not to enter into the proposed agreement. At any time before acceptance, the offeror retains control over the offer. This includes the right to modify or terminate the offer. · The third is lapse – an offer will lapse within the time stated in the offer, or – in the event that no time for expiration is specified – at the end of a reasonable time. · Finally, death terminates an offer. Death deprives a person of the legal capacity to enter into a proposed contract. Revocation can be direct or indirect. In one case, the defendant promised the plaintiff he would leave an offer open to sell a tract of land until the following Monday. The plaintiff was notified by a third party that the defendant had made an offer to sell the same land to another party. With this new knowledge, the plaintiff attempted to accept the offer, but the defendant refused. Although the revocation wasn’t communicated directly to the plaintiff, the court held the offer was indirectly revoked because it was unambiguously made known to the plaintiff that he no longer had the power of acceptance. In that case, there was no offer even though the plaintiff had promised to leave the offer open. The promise to leave the offer open was unenforceable because it was unsupported by consideration. That is, the promisor had not received anything of value in exchange for the promise to keep the offer open. As we’ll see in module 3, all contracts require consideration to be binding. Occasionally, the parties entering into a contract may want to ensure that an offer to enter into a contract is held open for a certain period of time. An offer can be enforceably preserved for a period of time with an option contract. An option contract requires some consideration, such as payment, in exchange for the ability to prevent the offeror from revoking the offer. This payment must be separate from the consideration required to form the underlying contract. For example: Marissa and David are looking at venues for their upcoming wedding. Sam offers them a venue for the date they are hoping to marry. Though they love it, they are not yet ready to sign the agreement to book the venue. Sam agrees, in writing, to allow Marissa and David to decide by next Monday whether to retain the venue for that specified date. Marissa and David pay Sam two hundred dollars in exchange for the right to decide by next Monday. This is an option contract. Under an option contract, Marissa and David can accept or reject the offer by next Monday. After that date, the option contract expires, and the offer becomes revocable. Acceptance The general rule is that a contract invites acceptance in any manner and by any means reasonable under the circumstances, unless the language and circumstances clearly indicate otherwise. Therefore, courts will consider whether there is any language controlling the method of acceptance. Without any specific language, any reasonable method will constitute acceptance. An offeree can accept an offer by undertaking the performance requested or by making an oral or written statement indicating acceptance of the offer. What is important is that the acceptance is communicated to the offeror. An offer becomes a legally enforceable contract once it is accepted. Silence is rarely a valid form of acceptance unless one of the following exceptions apply: · “The parties had agreed previously that silence would be an acceptance” · “The offeree has taken the benefit of the offer” or · Through “previous dealings between the parties, it is reasonable that the offeree should notify the offeror if she does not intend to accept.” Mirror Image Rule The “Mirror Image Rule” is the requirement that the offeree must accept all of the offer’s original terms. The offeree may not modify or add any terms to the offer. If acceptance alters any terms or adds additional terms, no contract is formed. Therefore, it is said that acceptance must “mirror” the offer. In a case before the Supreme Court of North Dakota, the plaintiff, hoping to purchase a tract of land from the defendants, drafted a purchase agreement, signed it, and sent it to the defendants for a signature. The defendants modified the document by writing additional terms and changes to the existing terms directly on the document. They signed the agreement and sent it back to the plaintiff after making these changes. The plaintiff sued to enforce the original agreement, arguing that a contract had formed when the defendants had signed it. The state supreme court disagreed and found that no contract was formed, reasoning that the defendants didn’t adhere to the mirror image rule. They had made material changes to the original offer and the plaintiff never consented to them. The UCC Rules on Acceptance Contracts for the sale of goods fall under the Uniform Commercial Code’s Section 2-207, which modifies the mirror image rule. Under §2-207 of the Uniform Commercial Code, acceptance does not have to mirror the initial offer. Rather, an acceptance that varies from the offer is a valid acceptance without the changes, and the changes become proposals for new agreements, which the offeror can accept or reject. The UCC, though, provides for different rules if the agreement is between merchants. A merchant is a person who deals in goods of that kind or otherwise holds himself out as having the skill or knowledge special to the particular practice. If the contract is between merchants, the additional terms do become a part of the contract unless the additional terms are “material.” “Material” terms are those that would cause undue hardship or surprise if enforced. Examples of undue hardship or surprise normally include arbitration clauses or those that waive essential warranties. Also, the terms will not become a part of the contract if the offeror has expressly limited acceptance to the contract terms or if the terms have already been objected to previously. Whether between merchants or non-merchants, if the parties act as though there is a valid contract even though there are contradictory terms, the Uniform Commercial Code will presume there is a binding contract between the parties. The terms that conflict will not be considered a part of the contract. Rather, the court will insert “reasonable” terms in their places. The Mailbox Rule The mailbox rule’s purpose is to assist a court in deciding which action is valid when the communication of an acceptance and revocation aren’t instantaneous. Under the mailbox rule, acceptance of an offer by the offeree is valid as soon as he sends it. Once an offeree accepts the offer, the offeror cannot revoke the offer. On the other hand, if an offeror wishes to revoke the offer, that revocation is valid only when the offeree receives it. A rejection by the offeree is also valid only once the offeror receives it. The rule is commonly stated as “acceptance upon dispatch, and rejection or revocation upon receipt.” With more instantaneous forms of communication like telephone and email, unless a rejection or revocation takes place before the acceptance, the acceptance is valid upon communicating it over the phone. The rules related to email are governed by the Uniform Electronic Transactions Act, adopted by almost every state. This Act provides that, in electronic communications, acceptance is valid when it has been sent. To have been “sent,” the communication must be properly addressed or directed to the recipient, must be in a form the recipient can process, and must be in a system outside the sender’s control or within the recipient’s control. In our next module, we will turn to the last building block of a binding contract: the rule requiring consideration for a contract to be enforceable.
Lucy, 196 Va. at 503 (citing the Restatement (Second) of Contracts § 71). The court noted that the undisclosed intention of a party is immaterial except when an unreasonable meaning which he attaches to his manifestation is known to the other party.
I & R Mech. v. Hazelton Mfg. Co., 817 N.E. 2d 799, 802. |
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