What is a Contract?
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.