Elements of Contracts
Yesterday, we looked at the different types of contracts.
But for there to be a common law enforceable contract (that is, for a court to find that a binding agreement exists between or among the parties), a contract requires:
1. a certain offer
2. a mirror image acceptance
3. valid consideration
4. capacity of the parties to enter the contract
Starting tomorrow, we’ll look at each element in more detail, but for the rest of this lesson, let’s do a FAQ on contracts so you’ll see the big picture.
Does every contract require every element?
Yes. If the court finds a “meeting of the minds”—meaning the intention of the two parties match up and they have reached a mutual understanding as to their obligations—then it will work to make an agreement happen, even if the parties skip steps to reach an agreement.
Let’s say the parties forget to include a price, which might make the offer and acceptance uncertain. If there’s a history of dealing between the parties, then past price history can be used to “fill in the blank.” If the contract is for the sale of goods, then the UCC can imply a price. In other words, even if an element appears to be missing, it’s possible to use legal means to imply that element into the agreement so as to make a binding contract.
Is there a minimum or maximum number of parties to contracts?
The minimum is one. Perry agrees to pay Lisa $300 if she agrees to kennel his dog while he goes on vacation. Lisa is not obligated to act, but if she kennels the dog, then there is a unilateral contract and Perry owes her $300. As we may see later, unilateral contracts look a lot like offers that haven’t been accepted yet.
In terms of maximums, the vast majority of contracts are between two parties. But it’s not uncommon for there to be multiply-party agreements. For example, the many owners of a corporation typically agree to manage the company using shareholder agreements. Sometimes, multi-party agreements are valid even when all the parties are not yet identified. For this example, think of the Homeowner’s Association agreement for a new condominium.
Do contracts have to be contained in a single document?
No, contracts can be formed from a combination of documents and verbal agreements. Many agreements are contained in multiple communications like emails, so long as there is a thread in these dialogues that demonstrate a mutuality and meeting of minds.
Let’s say you sign an agreement to deliver chicken to a restaurant. Then your business expands to fish, then vegetables, and then wine. You may not sign a new agreement with each new shipment. But there is still going to be a valid contract in place for each new delivery.
That said, you’ll sometimes see a “four corners” clause in the fine print (sometimes called the “boilerplate”) of contracts that says that the agreement is contained within the four corners of this single document. In that case, yes, a single document contains the entire agreement. Also, the Parol Evidence Rule excludes evidence of prior agreements and negotiation when everything’s been written down in a single document. For example, let’s say a salesperson entices you into signing a subscription by promising you a new Kindle. If that Kindle is not in the subscription agreement, then the Parol Evidence says you’re out of luck and you can no longer claim it.
But the law is flexible enough to realize that contracts, particularly long-term or complex ones, will have situations that are not always covered by the formal agreement. So, there is a general presumption that the parties will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract (so called “implied covenant of good faith and fair dealing”). Kind of a “be nice” clause.
Tomorrow, we’ll jump into the first required element: the offer.
See you then.
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