What Defines a Contract?
Contract Law 101
A contract is an agreement between two parties that creates an obligation to perform (or not perform) a particular duty.
A legally enforceable contract requires the following elements, all of which are discussed in more detail below.
- An Offer (I’ll mow your lawn this Saturday if you pay me $40)
- An Acceptance (You’ve got a deal)
- Mutual Consideration (the value received and given – the money and the lawn mowed)
- Legal Parties*
- Legal Purpose **
* A contract with a minor is not legally enforceable. Because of age and presumable lack of experience, the law considers a minor contractually incapable.
** An agreement to purchase marijuana, for example, is not a legal contract. Because the subject matter of the agreement is illegal, the contract is not enforceable and the parties have no legal remedies for breach.
Does what you Name the Document Determine Whether it’s a Contract?
The quick answer is no. As long as all the basic elements of a contract are present, then what you name it has no impact on determining whether it’s an enforceable contract. Whether you name a document a Letter of Agreement (LOA), or a Memorandum of Understanding (MOU), or a Letter of Intent (LOI), or any other name, if it contains all the referenced elements, then it’s a contract.
Mutual Assent: A "Meeting of the Minds" of Offer & Acceptance
The Offer is the key element that defines the relevant issues in the contract. To be a legally valid offer, the offer must be effectively communicated so that the receiving party has the ability to accept or reject the offer. Whether or not the receiving party reads the contract has no bearing in determining the clarity of the offer. The offer must only provide the recipient with a clear opportunity to accept or reject the contract. Someone who signs a contract without reading it does so at his/her own risk.
In addition, a valid offer must contain certain and definite terms. For the terms to be considered definite, a reasonable person must be capable of readily understanding the terms. For example, in determining whether the terms of a procurement contract are definite, courts will often review the clarity within four primary elements:
- the parties;
- the length of time for performance (term or service schedule)
- the price/value; and
- the subject matter or scope of services;
A vendor offers to store UTSA’s back-up data for $1000 a month, and UTSA accepts. Because of the ambiguity of the service terms, this arrangement might not be considered an enforceable contract. Among other issues, the arrangement contains no storage location, no description of the storage structure, no information related to storage security, and no details on how the data would be transported to storage. Additionally, the arrangement fails to determine the length of time the data would be stored. Because the subject matter of this offer is subject to numerous interpretations, the arrangement might be deemed ambiguous and unenforceable.
Similarly, if two parties agree to the performance of a service for a price to be determined at a later date, an enforceable contract may not exist. Mutual assent typically cannot occur when the value is undetermined.
Note that Procurement solicitations such as Bids or Request for Proposals are not considered offers. Among other issues, these solicitations are not communicated to any particular party and can be rescinded at any time. Generally speaking, Purchasing solicitations are considered merely invitations to the public to make an offer.
For acceptance of an offer to be valid, the acceptance must be unequivocal and unqualified. In other words, the acceptance must conform to the exact terms of the offer. This is termed the "mirror image" rule. If the acceptance is conditional on another event or stipulation, it creates a counteroffer and the roles of the parties become reversed. The conditional acceptance becomes a new offer.
Note that an exception to the Mirror Image rule is found in the Uniform Commercial Code ("UCC") for contracts between merchants for the sale of goods (the UCC does not apply to services). Under the UCC (in Texas under the Tex. Bus. & Commerce Code), an acceptance with conditional terms will form a part of the contract unless the additional provisions materially change the offer.
Consideration: The Importance of the "Bargained Exchange"
In order to be considered an enforceable contract, the parties to the contract must exchange something of value. If a buyer contracts for lawn service, for example, the buyer receives lawn mowing service, and the seller receives money.
Consideration must be mutual. Both parties must give something of value and receive something of value. If only one party receives value from an arrangement, the arrangement is generally defined as a gift rather than an enforceable contract.
The consideration does not need to include money. For instance, an athletic apparel company may provide the Athletics Department with basketball shoes in exchange for the exclusive rights to advertise its logo on sports uniforms. Although no money exchanged hands, this type of arrangement would represent legitimate consideration to both parties.
The market value of the consideration is, for the most part, irrelevant from a legal perspective. The law is concerned with whether the parties desired and assented to the contractual arrangement, not whether the exchange represented a fair market bargain.
What Authority Defines a Contract?
- Most Business Contracts - Common Law (Court-made case law)
Most business contracts are defined by common law -- a tradition-based but constantly evolving set of laws that derive primarily from past court decisions. Which state’s common law prevails can be determined by factors such as where the contract was performed or where it was executed. Typically, the parties will establish the governing state law within the contract itself.
- Contracts for Goods - Uniform Commercial Code [Tex. Bus. & Comm. Code]
Contracts for goods & products are typically defined by the Uniform Commercial Code (UCC). The UCC is a standardized collection of guidelines governing the law of commerce, particularly with the sale of tangible goods and secured transactions. The UCC does not apply to service contracts. The UCC is a model act created by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. Every state has adopted some version of the UCC. Texas has adopted the UCC under the Texas Business and Commerce Code. Note that courts have generally reviewed software and related technology licenses under Common Law and not the UCC.
- Specific Statutes
Many fields, such as utilities and real estate, have specific statutes that impact the contracting process. Government entities, like UTSA, also must abide by various statutory requirements and limitations when entering into contracts. Some of these statutory requirements are explained on the Business Contracts Website under the page “Common Contract Terms Explained.”