I often get this question or a variation of it from prospective clients and friends. This is a common misconception that all too often leads to problems. Invariably the next question is: if I haven’t signed anything, then how do I know if I have a contract?
There are four basic requirements for the formation of a contract:
- Consideration; and
- Meeting of the minds between the contracting parties on all essential elements or terms of the transaction.
Although some of these terms may be intuitive, others are not, so it is useful to consider each of them one by one.
The “offer” is an element that’s typically intuitive: you are “offering” to enter into a contract with someone. Examples would include “I will pay you $50.00 to mow my lawn,” and “I am willing to purchase your table for $100.00.” If you receive a contract from someone, such as a loan document from a bank, that document is also considered an “offer” to enter into a contract.
“Acceptance” is where the waters can become a bit murkier, and also where the title to this article becomes relevant. All that is required for acceptance is for you to demonstrate that you agree to the important terms of the “offer.” One of the clearest ways to do this would be to sign a document containing important terms (such as the loan document above). However, you can also demonstrate your acceptance of a contract by performing (such as retrieving your lawn mower and mowing the lawn in the example above), or in some cases by merely saying “I accept” (such as “I accept your offer of $100.00 to purchase my table.”). So in answer to the title of this article, there are various ways to “accept” a contract other than signing a document, and just because you did not sign something, does not necessarily mean you do not have a valid contract.
The third requirement, “consideration,” is a promise to do something or giving up a legal right; generally, “consideration” may be thought of as simply something of value, and both parties must receive “consideration.” In the lawn mowing example, one person receives “consideration” in the form of a mowed lawn, and the other person receives “consideration” in the form of $50.00. If you buy something at a store, the money you pay is the “consideration” for receiving the item, and giving you the item is the store’s “consideration” for receiving your money. “Consideration” does not have to be something that you receive; it can also be something that you have a legal right to do that you give up (such as signing a non-compete agreement). On the other hand, if I offered to mow your lawn for free and did so, it would be a gift to you, and there would be no consideration and therefore no contract.
The last requirement, the so-called “meeting of the minds as to essential terms,” is probably the most often litigated part of contract formation and consists of two subparts: “meeting of the minds” and “essential terms.” In essence, what this means is that the parties forming the contract must all agree on the important parts of the contract. For example, if you offer to buy my “table” for $100.00 and I accept, but you meant my dining room table and I thought you meant my bedside table, there was no “meeting of the minds,” and therefore no contract. One of the essential terms (what was being purchased and sold) was not actually agreed upon. Conversely, two parties may have a contract even if they have not agreed on non-essential terms, but determining what terms are “essential” depends on the situation. By way of example, if you’re buying a water heater for your basement, the color probably isn’t an “essential term,” but if you’re buying paint, the color is almost certainly an “essential term.”
If all four of these elements are present, a contract is formed (however, enforcement of the contract and what terms constitute the formed contract are entirely different matters). Determining whether you have a contract is an important first step, but this is merely the beginning of a complex legal analysis. This article is not intended to be a definitive discussion regarding the complexities of the issues discussed above, and contract formation is highly dependent on the facts of each individual situation. If you’re interested in determining whether you have a contract, or you have another contract related question, please contact Christopher Park (firstname.lastname@example.org) or any of our other attorneys here. We would be happy to discuss the intricacies of contract law with you.