When we think of contracts we probably have an image of a lengthy legal document with a few “initial here” and “sign here” prompts. But contracts, at their most basic, are simply agreements. They represent an understanding between two parties as to what is going to happen. It could be an employment contract that lays out the duties and responsibilities of an employee and what compensation and benefits will be provided in exchange. Or it could be a verbal agreement that tomorrow morning I’m going to show up and paint your house. Just to be clear, I’m not going to show up and paint your house, so there is no contract here.

Contract Formation:

To form a contract, there needs to be both mutual assent between the parties and there needs to be some bargained for exchange, referred to as “consideration.”

Mutual Assent: Mutual Assent simply means that both parties need to agree on what is going to happen and give some indication of their intention of that agreement. Essentially, it is when both parties agree to the terms of the contract, but it requires a bit more than simply stating that you have the same desire. In the simplest sense, mutual assent is demonstrated through an offer by one party and an acceptance of that offer by the other. More complicated transactions are going to be the result of negotiations, rather than a simple offer, but in the end it all works out to the same thing “here is our offer” followed by “we accept.”

Offer: There must first be an offer before there can be an acceptance. An offer occurs where one party makes a proposal to another party, including the terms of the proposed deal. An offer only becomes definite enough to accept when the proposed terms are fixed, so that once the other party accepts them a contract is formed (assuming consideration exists – more on this later). For example, if John proposes to enter into a contract where he will wash my car in exchange for $20 this is a valid offer because the terms are definitive. Alternatively, if John proposed to wash my car and tell me later how much it costs there would not be an offer because this merely invites me to negotiate more definitive terms with John. In a valid offer the terms should be definite enough so that one party does not have sole discretion over the important terms of the agreement. We should also note that an advertisement will generally not be seen as an offer; it is simply an invitation for prospective customers.

Acceptance: Once an offer has been made, the focus turns to the person to whom the offer has been extended (the offeree). The offeree has the power to either accept the offer, reject it, or counter with another proposal. If the offeree rejects the proposal, she may no longer accept the deal, and any subsequent attempt to accept is likely to be viewed as a new offer directed at the original offeror and the whole process goes back to the beginning. An offeree may counter by changing the terms of the offer (i.e. negotiate the terms). The law views a counter as an offer in and of itself, with the ability of acceptance going back to the original offeror. As an offer needs to be accepted to form a contract, the process of acceptance will be viewed more closely. Simply saying “yes” to an offer may be sufficient to accept some offers, but in other cases this will not be enough to demonstrate acceptance. This is because the offeror holds the power to set the manner of acceptance. However, like the terms of the offer, the manner by which it is accepted must also be definitively stated. If a manner is not specified, then the offeree may accept by any reasonable manner. Acceptance by promise and acceptance by performance are the main ways to accept an offer. Offerors tend to ask for acceptance by promise, where the offeree merely must agree to the exact terms of the offer by promising to perform his end of the bargain through the method of the offeror’s choosing –thereby giving notice of their acceptance of the offer. Alternatively, acceptance by performance may be acceptable in some contracts, and is satisfied by simply performing the offeror’s desired action – no notice of acceptance is needed because the performance is the acceptance. For example, if you offer John $20 to mow your lawn and he immediately goes outside and starts cutting the grass you’re going to owe him the $20 when he finishes. However, if John only mows half the lawn, gets bored, and quits, you won’t owe him $20, or even $10 because the acceptance is not effective until the performance is complete.

Consideration: Virtually anything can serve as adequate consideration to form a contract, but what consideration really means is a promise. Both parties to a contract need to agree to be bound to do something. In most cases, it is that one party agrees to provide goods or services, and the other party agrees to pay them a certain amount. The tricky part is that “I agree to pay you” is not the same thing as “I agree to pay you $49.95.” Consideration has to be reasonably precise and certain. You can agree to pay someone based on an hourly rate without specifying exactly how many hours of work will be performed, but simply agreeing to pay something is not really sufficient consideration.

As long as these requirements are fulfilled, the contract does not necessarily need to be written or appear in a formal document. Some types of contracts must be in writing, but most can be formed verbally. Proving the terms of a verbal contract can be quite tricky if a disagreement arises later on, so it is always best to write down the terms of the deal.

Contract law can be very complex, with many rules, exceptions to those rules, and specific requirements for certain types of contracts. A business owner does not need to know all of the nuances of contract law, that’s why you rely on your friendly neighborhood lawyers, but it is important to know when the business or owner is legally bound by a contract. To recap, a business owner should look out for:

  • Was there an offer with definitive terms?
  • Was there acceptance to the terms without changing the terms?
  • Did the accepting party use the proper method of acceptance if one is specified?
  • Was there consideration?

If all of these are satisfied, then the parties will be bound by contract and will need to perform their respective ends of the bargain.

Breaching a Contract

It is important to know when a breach of contract may take place both to avoid doing so and to recognize when the other contracting party has done so. While there are a number of ways that a breach may occur, but the two most common are “anticipatory repudiation” and a “material breach.”

Anticipatory repudiation occurs where one party of the contract expresses that he will not be performing his end of the bargain. It does not matter whether this has been done through their words or their actions, it merely must be clear that they intend not to perform, and it must be clear to the suffering party that the breaching party likely is not to perform. For example, if John agrees to sell his car for $100 and deliver it to on Friday, and then either flat out tells the buyer “I’ve changed my mind and don’t intend to sell you the car,” or if he sells the car to another buyer before Friday John has committed anticipatory repudiation because he has made it clear that he has no intention of performing his end of the bargain.

A material breach is much simpler; it only requires that one party fail to perform their obligation under the contract. To use our previous example, if John simply doesn’t turn up to deliver the car on Friday as promised, or shows up with a different car, then he has materially breached the contract.

In either case, the remedies available will depend on what was being contracted (goods or services) and the language of the contract itself.

Sometimes a contract can be invalidated even once it has formed. Typically, if there was a mistake, a misunderstanding, or a misrepresentation regarding the material terms of the contract there may be grounds to void the agreement. These aren’t tools to rely on, but rather things to watch out for; so when you are forming a contract you should do your best to make sure that the contract is understood by both parties and that it does not contain any misrepresentations.

A Word of Warning

When it comes to contracts we know that they can be verbal contracts or written agreements. If the contract is written pay very close attention to everything that is on the page or pages. The law presumes that you read the whole agreement, even if you didn’t actually read it. If you agree to a term in the contract by signing at the bottom you cannot then dispute a provision of that contract as “something I didn’t agree to.” This also holds for “click-through” contracts; agreements typically found with software but also increasingly common on many forms of electronic media. They typically look something like this “Click here to acknowledge our Terms of Service” and when you click the button to proceed you have entered into a contract, and it is often a contract that severely restricts your rights. Various states have differing approaches to contract law, but here in Virginia you have quite a bit of latitude to enter into contracts, and that can get you into trouble if you end up entering into an unfair contract. So, if you or your attorney didn’t write the agreement be very sure that you understand exactly what is included so that you don’t end up with an unpleasant surprise later on.

© 2016 John V. Robinson, P.C.