Do you know the difference between an agreement and a contract? Sometimes these terms are used interchangeably, but there is a difference. An agreement is a general term referring to an understanding reached between two or more parties. A contract is a type of agreement that establishes obligations that make the understanding agreed upon legally enforceable; once the deal is made, the parties are bound to act according to the terms of the contract or face the possibility of legal action. In this post, our Irvine business lawyers will explain what makes an agreement a legally enforceable contract.
What are the Elements of a Legal Contract?
In general, in order to create a legal and binding contract, there must be an offer, an acceptance, and an exchange of something of value, known as “consideration.”
The offering party must communicate the offer to another person or persons in a way that indicates that the offering party is willing to enter a contract based on the specific terms communicated in the offer. Further, based on that offering communication, the other party could reasonably conclude that a contract with those terms would result if the offer were accepted.
Let’s consider an example: This morning, your neighbor, John, told you, “If you clean my pool this afternoon by 4 pm, I’ll pay you $40.” You look over his shoulder into the pool and can see that it clearly needs cleaning, and it seems John is serious about paying you to do it. You recognize this as an offer, and you respond with an enthusiastic “Yes!” Under the circumstances, this constitutes a legal offer: John told you what he would pay you; what you need to do to be paid and when you need to do it; and his tone was serious.
In contrast, this would not have been an offer if John had said, “Gee, I sure wish my pool were cleaned for my evening swim.” A wish or a hope is not an offer. Likewise, a vague hint is not an offer. If John had been talking with you and several of his other friends and said, “I’m looking for someone to clean my pool,” this would not be an offer. John did not direct the statement to you specifically, and you don’t know the terms of any deal. When does he want it cleaned? What will he give in exchange for cleaning the pool? John could elaborate on these issues after his first statement, thereby turning it into an offer, but the initial statement alone would not make it an offer that could create a legally enforceable contract with you.
Practically speaking, the test is whether a reasonable person would think the person making the offer is willing to enter a contract and be bound by its terms; thus, an offer must be sufficiently definite to convey the idea that the value promised in the offer (e.g., a payment or an action of some kind) is reasonably certain. Preliminary negotiations and agreements for future negotiations, for example, are not offers.
An offer is accepted when one agrees, by conduct or words, to be bound by the terms of the offer, and communicates that agreement to the offering party. If the offer is accepted, but only on certain terms, or if a new term is proposed to the offering party, there is no acceptance, and no contract has been formed. This is a qualified acceptance, or a counteroffer, which extinguishes the original offer. Also, if an offer delineates one way, and only one way, for the offer to be accepted, then acceptance by any other means is a counteroffer, not an acceptance.
An offer also can be accepted by performing the act requested. For example, if instead of responding “Yes!” to John’s offer, you simply smiled, but later in the afternoon you cleaned John’s pool, John would be obligated to pay you for your efforts.
Further, although silence in the face of an offer usually is not acceptance, offers may be accepted by silence if there is a previous course of dealing between the parties. For example, if John regularly or even irregularly left a voicemail for you on certain mornings indicating he would pay you $40 for cleaning his pool, and you always cleaned the pool by the late afternoon, then your lack of response to each voicemail he left (essentially, your silence), would be an acceptance, as would your act of cleaning the pool. If, after establishing this course of conduct, John failed to pay you, claiming that you never accepted the offer because you didn’t verbally let him know you accepted, you would be able to legally enforce that contract.
Consideration is the value the parties give each other as part of the deal. Without consideration, a contract is not created. The value exchanged does not have to be monetary; it can be the act of doing something or the promise not to do something. For example, assume today is John’s birthday and, rather than John asking you to clean the pool for $40, you offer to clean it this afternoon as a gift to him. In response, John smiles and thanks you. If something suddenly comes up, and you can’t get around to cleaning the pool today (or ever), John cannot enforce your promise in court. A contract was never formed here, in part, because John gave you nothing of value in return for your promise to clean the pool.
Contact our Knowledgeable Irvine Business Lawyers
If you have questions about the existence or enforceability of a contract, talk to an experienced breach of contract lawyer as soon as possible. You can reach us by phone, at 949-861-2524, or by completing the email form on this page. We will be happy to review your situation and assess your legal rights and options.