Contracts 101

What is a Contract?

Simply put, a contract is a promise to do something in exchange for someone else’s promise.  The difference between a contract and any other promise is that contracts are promises enforceable in a court of law if they’re breached.   To be legally binding as a contract, a promise must be exchanged for adequate consideration.  Consideration is a benefit or detriment which a party receives which reasonably and fairly induces them to make the promise.For example, if I promise to give you my antique cookie jar, I’m promising to give you a gift, and that promise is not enforceable as a contract, because I’m getting nothing in return.  In contrast, if you promise to give me $100 if I give you the cookie jar, the promises rely on each other- we’re both giving up something in exchange for the other’s promise.  Me, my cookie jar, and you, the money.  However, certain promises that are not considered contracts may, in limited circumstances, be enforced if one party has relied on the other party’s promise to his detriment.

Contract Law

Contracts are are governed by three sets of laws.  Statutory law (laws that are passed by state and federal governments), common law (laws based on court cases), and private law, which is more commonly known as “law of the contract.”  Private law principally includes the terms of the agreement between the parties who are exchanging promises, and may override many of the rules otherwise established by statutory or common law.

Most of the principles of the common law of contracts are outlined in the Restatement of the Law Second, Contracts, published by the American Law Institute. The Uniform Commercial Code, whose original articles have been adopted in nearly every state, represents a body of statutory law that governs important categories of contracts. The main articles that deal with the law of contracts are Article 1 (General Provisions) and Article 2 (Sales). Sections of Article 9 (Secured Transactions) govern contracts assigning the rights to payment in security interest agreements. Contracts related to particular activities or business sectors may be highly regulated by state and/or federal law. 

The Elements of a Contract

An enforceable contract consists of the following four basic elements, each of which is discussed below.

Offer.  One of the parties must make a promise to do or refrain from doing some specified action in the future.

Consideration.   Consideration is the value that induces the parties to enter into the contract.  One party must promise something of value in exchange for the action (or non action) promised by the other party.  Consideration can be money, a service, an agreement to do something, or or reliance on the promise of the other party.  The existence of consideration distinguishes a contract from a gift.

Acceptance.   The offer must be clearly accepted through words, deeds, or performance as called for in the contract. Generally, the acceptance must mirror the terms of the offer. If not, the acceptance is viewed as a rejection and counteroffer.  If the contract involves a sale of goods (i.e. items that are movable) between merchants, then the acceptance does not have to mirror the terms of the offer for a valid contract to exist, unless:  (a) the terms of the acceptance significantly alter the original contract; or (b) the offeror objects within a reasonable time.

Mutuality.  The contracting parties must have had “a meeting of the minds” regarding the agreement, meaning they both understood and agreed to the basic substance and terms.

When the complaining party provides proof that all of these elements occurred, that party meets its burden of making a prima facie case that a contract existed. For a defending party to challenge the existence of the contract, that party must provide evidence undermining one or more elements.