FAQ: Elements of Establishing A Contract

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1 Question 1: What is the procedure for analyzing a set of facts to establish the existence of a contract? Answer 1: The procedure involves an examination of the facts to determine whether each element of a contract is present according to those facts. If the facts support the existence of the four contract essentials, you have a contract; if the facts do not support each contract essential, you do not have a contract, although there may be other means by which a party s promises are enforceable (e.g., promissory estoppel). The first essential contract, mutual assent, is generally the result of offer and acceptance. The process of offer and acceptance requires that one party (the offeror) make an offer that is accepted by another party (the offeree) while that offer is open or on the table. To establish mutual assent, you should do the following: Identify any purported offer and make sure that it is, in fact, an offer. Identify any acceptance and establish the time at which it became effective. Check to see whether the offer was open or on the table at the effective moment of acceptance. Assuming that the facts establish mutual assent, you must identify the promise(s) contained in the parties agreement and determine whether there is consideration that will support the promise(s) made. Once you have established mutual assent, together with consideration, you should satisfy yourself that the parties have contractual capacity (i.e., that state of being necessary to enter into a valid contract). As a general rule, persons over the age of 18 years (21 in some jurisdictions) have capacity to enter into a contract. To be enforceable, a contract must be for a legal purpose. This legality of object requirement precludes enforcement of contracts that would achieve some illegal purpose or contravene public policy. Examples of such contracts are gambling contracts, contracts to commit a crime or a tort, usurious contracts, and contracts that unduly restrict trade. Question 2: You say that in establishing offer and acceptance, one must identify any purported offer and make sure that is in fact an offer. How 1

2 exactly is this done? Answer 2: Examine the facts for any proposal to enter into a contract, then see whether that proposal meets the requirements of an offer, which are the following: It must be intentionally communicated to the offeree. It must manifest an objective intent to enter into a contract. It must be definite enough. By its very nature, an offer cannot be effective until it is communicated. The requirement of intentional communication prevents an offer from becoming effective when it has been communicated by someone who was not acting on behalf of the offeror. In requiring that an offer manifest an objective intent to enter into a contract, the law is addressing possible situations where a supposed offer has been made in jest or as the result of anger, passion, or frustration. The point here is that to be considered an offer, the purported offer must appear serious and legitimate to a reasonable person with knowledge of the surrounding circumstances. Remember also that an offer must be definite enough. This requirement is designed to ensure that a court will have a sufficient basis for enforcing any resulting contract. As a general rule, an offer must indicate the essential terms of any proposed contract, such as amount and terms of payment, quantity and quality of anticipated performance, and duration of the contract. Question 3: How does one identify an acceptance and establish the time at which it becomes effective? Answer 3: Acceptance is an unequivocal and unqualified agreement with the proposal(s) contained in an offer. An acceptance must accept the offer as it is; if it attempts to change any part of the offer, it is not an acceptance. Assuming such an acceptance, the following rules establish the effective moment of acceptance: As a general rule, acceptance is effective as soon as it is dispatched by some authorized means. Note that this rule does not require that an acceptance be received by the offeror, only that it be sent. Generally, acceptance is authorized by any reasonable means, but 2

3 where an offer specifies the manner of acceptance, acceptance must be communicated as specified. If an acceptance is dispatched by some unauthorized means, some jurisdictions will deem it effective upon receipt by the offeror. Some jurisdictions apply an equal dignity rule providing that an acceptance must be communicated by the same means as the offer. An offer may provide that any acceptance must be actually received by the offer or to become effective. Generally, where rejection of an offer is followed by an acceptance of that offer, the first communication received by the offeror is effective. Question 4: An offer must be accepted while it is open. How long will an offer remain open? Answer 4: The following rules determine the time for which an offer will remain open: An offer terminates at the time, if any, specified in the offer; where no time is specified, the offer will remain open for a time that is reasonable under the circumstances. As a general rule, an offer may be terminated by the offeror at any time, even if the offer states that it will be held open. An offer for performance of a unilateral contract may not be terminated after the offeree has commenced performance according to the offer. An offer is terminated by a rejection of the offer. An offer is terminated by a counteroffer made in response to the offer. An offer is terminated by a purported acceptance that introduces additional contract terms that were not stated in the offer. An offer is terminated by the death or incapacity of the offeror or offeree. An offer is terminated by the destruction of the subject matter of the offer. An offer is terminated where some provision of law makes the terms or object of the proposed contract illegal. Question 5: How exactly does one determine whether promises contained in a contract are supported by consideration? Answer 5: A promise is nothing more than an assurance that something will be done or not done. A promisor is the party that makes a promise; the party 3

4 to whom a promise is made is called a promisee. A unilateral contract is a contract having only one promisor and one promisee. A bilateral contract is a contract having two promisors and two promisees, which is to say that each party to the contract (assuming only two parties) is both a promisor and a promisee. Consideration is something of value paid or done or not done in exchange for the promise(s) made by a promisor (i.e., it is the value that the promisor extracts in return for his or her promise). In a unilateral contract, there is only one promisor and only one promise (or set of promises); the consideration that supports a unilateral contract consists of some act done or not done by the promisee in response to the promise. Remember that there are two promisors and two promisees in a bilateral contract; in such a contract, the consideration that supports one party s promise (or set of promises) is the promise (or set of promises) that the other party gives in exchange. Once you have identified the promise(s), promisor(s), and promisee(s) to a possible contract, you must analyze the consideration to see whether or not it will support the promise(s) made. In doing so, you must ascertain whether the consideration is legally sufficient and the product of a bargained for exchange. Consideration is legally sufficient when it does the following: It allows the promisor to obtain something to which he or she is not otherwise entitled. It obligates the promisee to do something that he or she is not otherwise obligated to do. It obligates the promisee to refrain from doing something that he or she is otherwise entitled to do. Give particular attention here to the phrases not otherwise entitled, not otherwise obligated, and otherwise entitled. This is to say that consideration cannot consist of the following: Allowing the promisor to receive something that he or she is entitled to receive in the absence of the contract The promisee doing or promising to do something that he or she is legally obligated to do in the absence of the contract (such as obey the law or perform an existing contractual obligation) The promisee refraining or promising to refrain from doing something 4

5 that he or she is legally required not to do (such as to violate the law or fail to perform an existing contractual obligation) Recall that consideration must be the product of a bargained for exchange. When a promisee does or promises to do something in return for a promise, there is an exchange. The principal effect of the requirement of an exchange is that promises of a gift are legally unenforceable because a gift, by its very nature, entails no exchange. The additional requirement that the exchange be bargained for means that promises made on account of something already paid, done, or not done are not enforceable as a contract. Note the special situation presented in the case of a bilateral contract: one party s promise is the consideration that supports enforcement of the other party s promise. Therefore, in a bilateral contract, the consideration purportedly supporting each party s promise must be tested to see whether it is legally sufficient and the product of a bargained for exchange. An enforceable bilateral contract will exist only if both party s promise or set of promises is legally sufficient and the product of a bargained for exchange. Question 6: What are some examples of quasi contract? Answer 6: A quasi contract is sometimes referred to as a contract implied in law or an implied-in-law contract. This means that in some cases where the parties do not reach agreement, the law will imply an agreement to pay the reasonable value of services rendered so that injustice or unjust enrichment may be avoided. Consider the case of an elderly who suffers a stroke and collapses at a shopping mall. She is unconscious when EMS arrives at the scene and only regains consciousness some days later after receiving intensive medical treatment. Upon being presented with a bill for her hospital stay, the woman may argue that she never agreed to pay for the care that she received and that she is under no contractual obligation to pay for it. Obviously, the woman received valuable services, services that may have saved her life; under such circumstances, the law will imply her promise to pay the reasonable value of the benefit conferred upon her (e.g., the reasonable value of the medical services that were furnished). Next, consider Dennis, who owns a small yacht that he uses to go up and down the east coast. One evening, Dennis docked the boat at the harbor and headed for the nearest bar. While Dennis was otherwise occupied, the boat 5

6 slipped its moorings and began drifting toward a dangerous coral reef. As the boat was about to ground upon the reef, a tugboat appeared and towed Dennis yacht to safety. Dennis refused to pay the tugboat captain for his services on the basis that nothing had been agreed to. Here, the law may imply a promise to pay so the tugboat captain can recover the reasonable value of his services (i.e., the benefit conferred upon Dennis). Failure to compensate the captain would unjustly enrich Dennis, who owes the safety of his yacht to the captain s efforts. Question 7: What are some examples of promissory estoppel? Answer 7: Promissory estoppel is a doctrine that will allow for the enforcement of a noncontractual promise (i.e., a promise not supported by consideration, where one party has materially changed his position in reliance on that promise and justice requires enforcement of the promise). Maria is a graduate student studying biology. In November, Maria was notified by a foundation that she had been awarded a grant of $100,000 to conduct research on gypsy moths. In reliance on the communication from the foundation, Maria immediately rented a building and began to outfit it as a laboratory. On January 1st, the foundation notified Maria that the grant had been rescinded. In renting a building and beginning to outfit it, Maria materially changed her position by incurring significant liabilities and costs. Maria s change of position was significant and material and induced by her reliance on the foundation s announcement of a grant. She may, therefore, use promissory estoppel as a basis for enforcing the foundation s promise of a grant. Dr. Lambert was a tenured member of the faculty at Ivory Towers University. A biotech company promised Dr. Lambert a job as head of its research department. The company was specific as to Dr. Lambert s duties, salary, and benefits. In reliance on the company s promise of a job, Dr. Lambert resigned his teaching position and moved to be closer to the company. Although the facts reveal no consideration to support the company's promise of a job, it appears that Dr. Lambert materially changed his position in resigning his tenured faculty position and relocating and that he relied on the company's offer in doing so. While justice is in the eye of the beholder, it could be convincingly argued that justice requires enforcement of the company s promise. Accordingly, promissory estoppel would enable Dr. Lambert to recover against the company. 6