CONTRACT

THE FORMATION OF A CONTRACT VS. ITS LEGAL ENFORCEABILITY

Brief Overview

A contract involves an exchange of promises between two or more parties. In legal terms, a contract is formed in any transaction in which one or both parties make a legally enforceable promise—a commitment to perform or refrain from doing some act now or in the future. 

There are different types of contracts. These include the following: (1) Express – an agreement manifested by words; (2) Implied-in-fact – an agreement manifested by conduct; and (3) Implied-in-law ("quasi-contract") – not a true contract but an obligation imposed by a court despite the absence of a promise in order to avoid an injustice. 

Enforceability of a contract

The mere formation of a contract does not guarantee its legal enforceability. Accordingly, a contract is legally enforceable if one or more of the following conditions are met:

(a) The contract was made as a part of a bargain for valid consideration;

(b) The contract reasonably convinced the promisee to depend on the promise to his detriment; or

(c) The contract is deemed enforceable by a statute even though it is lack of consideration.

On the following discussion of the specifics of a contract, it will be explicitly shown how the formation of a contract is different from its legal enforceability.

Requirements of a contract

Not all exchanges of promises between parties are legally enforceable. For an instance, a promise to meet someone at a specific date and at a particular place does not create enforceable contract. Based on the law, a legally enforceable contract must satisfy four requirements, namely agreement, consideration, legal purpose, and contractual capacity. In other words, a contract is legally enforceable if: there is an agreement between the parties involved; there is an exchange of consideration; the parties have the legal capacity to enter into a contract; and the contract has a legal purpose. If one of the said four requirements is not met, no contract is formed.

1. Agreement

One of the requirements to form a contract is agreement, which is commonly referred to as the “meeting of the minds.” This implies that the parties to the contract must agree on the same subject matter at the same time. To determine whether there is actually meeting of the minds, the two elements of an agreement must be present. These include offer and acceptance. 

a. Offer 

An offer refers to a promise of future action. An offer can be a promise to do something or not to do something. A promise to pay someone to fix the floorings of a house makes up an offer. A promise not to sue someone in return for a settlement also makes up an offer. This also implies that an offer is not required to be in any particular form, as long as it is intentional, definite, and communicated. 

The intentionality of an offer requires that the offer must indicate intent to be bound by its terms. Unintentional offers include those which are obviously a joke, or made in anger or excitement. As a rule of thumb, an offer that sounds too good to be true will not satisfy the requirement that the offer be intentional.

One of the requirements of an offer is that it must be definite or be reasonably certain. The certainty of the offer allows the court to define the terms of the contract and to decide on the remedy for failure to satisfy the terms of the contract. For an instance, an offer to pay someone US$1,500 for maintaining a garden for 30 days is a definite offer since the court can easily determine whether the garden is kept and maintained during the said period and whether the US$1,500 was actually paid. In contrast, an offer to pay someone some amount of money for cleaning the house is regarded as indefinite and cannot be enforced since the court has no way to ascertain what amount of money the parties agreed on from the cleaning of the house.

Lastly, an offer must be communicated to the party entitled to accept the offer. The law accepts the following types of communication—orally, in writing, by e-mail, or in any other reasonable way. Moreover, an offer must be made to a particular person even if that person cannot be identified at the time the offer is made. For an instance, when someone posted an offer to pay a reward for a lost object, I promise to pay the reward to whoever returns the object.

b. Acceptance

By means of accepting the offer, the person who receives the offer creates a legally enforceable contract. Accordingly, the expression of the acceptance must be unequivocal. Moreover, to satisfy the requirements of meeting of the minds, the acceptance must be the mirror image of the offer.

An acceptance should not change any of the terms of the offer because if it changes the terms of the offer, then it is not an acceptance at all. Instead, it becomes a counteroffer—an offer to form a contract on the new terms. Moreover, no contract is formed if the acceptance contains terms that are different from or additional to those set forth in the original offer.  However, a contract is formed if the offeree unequivocally accepts the terms of the offeror, despite a simultaneous suggestion or attempt of giving alternative terms.  Such circumstances merely represent an attempt to modify the terms of an already formed contract based on the original terms, as long as the acceptance is not contingent on the offeror accepting the proposed changes.  

Just like an offer, it is required that the acceptance is communicated to the person making the offer. Historically, many disputes over contract formation concerned the method and timeliness of acceptance of an offer. Communication of acceptance must be made in a reasonable manner and within a reasonable period of time.

There are also other terms of acceptance. For an instance an exception to the earlier rule mentioned above is for transactions governed by the CISG. A trivial difference of terms in an acceptance from those set forth in the offer does not prevent the formation of a contract unless the offeror objects. Moreover under contract formation, a contract is formed with agreed terms and any standard terms that are not knocked out due to inconsistency.  However, if one party objects to the knocking out of any of its standard terms, no contract is formed. 

2. Consideration

The enforceability of the exchange of promises a contract comes from the requirement of consideration. It is required that both parties to the contract provide consideration. Moreover, the consideration must have value—not just value of the parties but also legal value (e.g. the exchange of money for property or the exchange of legal right to do or not to do something). 

However, aside from the value requirement, it is also required that for a consideration to support a legally enforceable contract, it must be bargained for, which means that the offer and acceptance must both be premised on the exchange of the consideration. More specifically, a consideration requires a bargained exchange in wherein each of the parties involved in the contract incurs a legal detriment. Accordingly, consideration is a bargained-for performance or return promise which is given by the promisee in exchange for the promise of the promisor.  Consideration need not be furnished by or to the parties themselves as long as it is part of the bargained exchange. However, if the promise of the promisor induced performance or a return promise by the promisee was not sought by the promisor, there is no bargained exchange.  In that case, the promise is just an unenforceable gift. 

A consideration also requires the existence of legal detriment. According to the law, a legal detriment exists where—the party engages in an act that he was not previously obligated – whether statutorily or contractually – to perform; or the party refrains from exercising a legal right. Courts require the consideration to be sufficient, which relates to whether there is a legal detriment incurred as part of a bargained exchange of promises or performances. Legally sufficient consideration has two aspects—it must be legally detrimental to the person promising the consideration or it must be legally beneficial to the person receiving the consideration. Under the pre-existing duty rule, a promise on a pre-existing obligation to the other party does not constitute a legal detriment.

However, there are also exceptions to the rule. There are types of promises that are enforceable even without the existence of consideration. These types of promises include the following: (a) promises that induce a foreseeable and detrimental change of position by the promisee (promissory estoppel); (b) a new express or implied promise to pay a debt that has become barred by the statute of limitations; (c) a new express promise to perform all or part of a pre-existing obligation that has become discharged in bankruptcy; (d) where an original promise is voidable due to the promisor's incapacity, a new promise by such promisor upon attaining capacity; (e) where an original promise is voidable due to a valid defense by the promisor such as mistake, misrepresentation or undue influence, a subsequent promise by such promisor; (f) in contracts for the sale of goods, contract modifications, release of a claim by a signed writing, and a written promise by a merchant not to revoke an offer; and (f) in some U.S. states, contract modifications in non-sale-of-goods transactions.

3. Legal purpose

Another requirement of a contract is that it must be of legal purpose. Accordingly, if the obligation is prohibited by a state or federal statute or by public policy, no contract can be formed. Examples of obligations or promises that lack legal purpose include the following—contracts to commit murder, contracts to sell a body organ, or to refuse to employ women. Since such contracts involve violations of the law, those said contracts are void and unenforceable. Another example of a contract without legal purpose is a promise to provide legal services by a person who is not actually a lawyer and does not have a license to do so. Since this is illegal, the contract becomes unenforceable.

4. Contractual capacity

The last requirement of a contract is that of contractual capacity. For a contract to be legally enforceable, it must take place between parties or persons capable of making those promises or a person who sufficiently understands the nature of obligations that are required in the said contract. In most instances, capacity is not an issue. It only becomes a very serious issue when one of the parties involved in the contract is a minor, under the influence of drugs or alcohol, or suffering from a mental disability, among others. Any contract that violates that said condition generally becomes unenforceable becomes it prevents the requirement of a meeting of the minds. However, unlike those mentally incompetent people, those minors and intoxicated people will eventually become an adult and become sober, respectively. This is the reason why contracts with these persons are not automatically void. Rather, they are voidable. This implies that the person making the contract has a choice about whether to live up to the contractual obligations or not once the issue of capacity is removed. The contract can be ratified or can be disaffirmed. On the other hand, if a person suffers from mental disability which prevents him from appreciating the consequences of the contract, there is no contract formed since it is voidable. However, if the person’s metal disability is cured, the parties may ratify the contract. However, in cases where the person is mentally incompetent, the contract becomes void and can never be enforceable since incompetence permanently removes the contractual capacity of the said person. As shown above, the formation of a contract does not guarantee its legal enforceability.

References

“LexisNexis capsule summary: contracts.” Washington University Law. n.d. Web. 5 May 2014.

 “Formation of contracts.” Out-Law.com. February 2008. Web. 5 May 2014.

Schneider, S. “The formation of a contract.” Net Places. n.d. Web. 5 May 2014.

“The formation and enforceability of contract.” Law Teacher. n.d. Web. 5 May 2014.