Definition of a Contract

Fundamental, if you understand the definition of a contract you can come out of any negotiation knowing your obligations and the counterparty's obligations.
By Gail J. Koff
February/March 1994
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The definition of a contract is "an agreement upon sufficient consideration to do or not do a particular thing." (Or things)
ILLUSTRATION: FOTOLIA/AKS


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Which of he following five transactions are contracts: buying a newspaper, getting married, using your credit card, making a phone call, or sharing a car pool?

If you answered yes to all five, you were right. That's because each of those transactions falls within the definition of a contract, which is "an agreement upon sufficient consideration to do or not do a particular thing."

Here's how that definition works out in a sampling of those types of transactions:

When you buy a newspaper, the sufficient consideration is the price of the paper. For it, the newspaper boy agrees to do a particular service—namely, hand over today's copy of the Daily Planet (or whatever paper it is that you are buying). If you shortchange him or if he hands over a copy of yesterday's Tribune, that's a breach of the contract.

When you get married, the sufficient considerations are your emotional, physical, and financial services. For it, your spouse agrees to do a particular thing: provide equivalent services for you.

When you make a phone call, the sufficient consideration is the number of coins you put in the slot. For it, the telephone company agrees to do a particular thing: put you through clearly for three minutes to the local number called. If you use a slug, or the phone company connects you to a wrong number or a line heavy with static, that's a breach of the contract.

We are by tradition and practice a society based on contractual relations—from the informal and commonplace (switching on electric power for the TV, getting on a bus, ordering a hamburger) to the rigidly structured and significant (buying a house or car, taking out a bank loan, signing an employment contract). The legal definition of a contract is "an agreement upon sufficient consideration to do or not do a particular thing:" Comment legal authorities M. J. and J. S. Ross: "In civil law, the contract is the basic legal concept, the foundation of all legal relations:"

That's why common law considers contracts binding and enforceable in courts of law. Today's statutes on contracts, which have grown out of the common law, are incorporated in the Uniform Commercial Code (UCC), adopted by most states. Those states that have not subscribed to the UCC have enacted their own statutory versions of it. In all states, the law gives you the right to enter into contracts and to go the courts, if necessary, to have them carried out or to provide redress when breached.

The Basic Rules Governing Contracts

What are the essential elements of a contract?   

A. The offer. The offer is a promise to do (or not do) something specific in return for the other party or parties doing something specific (or not doing something specific). When you promise your brother-in-law you'll pay him X dollars to repair your plumbing if he promises to do the job by such-and-such a date, that's an offer.

B. The acceptance. This is when your brother-in-law agrees to your offer.

C. The consideration. Consideration is when you get something in return (repaired plumbing) for what you give (X dollars). Although there are some exceptions, without consideration for each party to an agreement, there's no contract.

These three essential elements apply whether a contract is implied or expressed. When all the terms are specifically expressed, that's an expressed contract. Your life insurance policy is an example. When the terms are not specifically expressed, but rather implied by the actions and behavior of the parties in certain circumstances, the law says a contract exists. That's an implied contract, the kind you enter into when you step into a cab.

The Offer

How do I make my offer?  

Any way—orally, in writing, even by sign language—provided the person to whom you're making the offer is aware that you're doing so. If you're making the offer by mail, it's a good idea to send it certified. Then you'll have proof that the person to whom you made the offer actually received it.

If I say to my brother-in-law as a joke, "I'll give you the house if you fix the plumbing" am I stuck with a contract? 

No. The law does not regard an offer made in jest as valid.

How specific must I make my offer in order for it to be valid?   

As specific as you can. When you offer your brother-in-law X dollars to repair your plumbing, it's wise to also specify when the job is to be done, who pays for the supplies, when your brother-in-law will receive payment, whether payment is subject to your approval of the job, and so on. An offer that's vague about who, what, when, or how much is not valid.

After I make an offer, do I have the right to withdraw it?  

Yes. You can withdraw it at any time before it's accepted. If you've set a deadline for acceptance, your offer is automatically withdrawn if it's not accepted by that deadline. If you don't set a deadline for acceptance, your otter expires within a reasonable time.

My brother-in-law rejected my offer.   

Then a few days later, he said he's changed his mind and is ready to do the job. I told him, "Sorry, but the offer no longer stands." He says it does. Who's right?   

You are. A rejection terminates an offer. Another offer must be made before he can accept. Contract negotiation is basically a matter of offers and counteroffers.

Does my offer, once it's accepted, automatically become part of the contract?   

Not necessarily. An offer covers only basic terms (subject of the contract, price, and so on). It need not include all details, as anyone who's ever bought a house knows. Amendments to the offer can appear by mutual consent in the eventual contract.

The Acceptance

My brother-in-lain wants his plumbing fixed, and he's made me an offer. How do I accept the offer?   

That depends on the type of contract that can be created by the offer.

Should your brother-in-law say, "I promise to pay you X dollars if you promise to repair my plumbing by such and such a date," he is offering you a bilateral contract—an exchange of mutual promises. You can accept a bilateral contract in any way that clearly communicates assent—a handshake will do; so will a nod or grunt.

But should your brother-in-law say, "I'll pay you X dollars when you finish repairing my plumbing," he's offering you a unilateral contract—one that becomes binding only on performance of a specific action (or actions). You can accept this offer only by completing the action (or actions) called for—in this case, repairing the plumbing.

On the basis of my brother-in-law's offer to pay me X dollars when I've repaired the plumbing, I began the job. Now he wants to take me off the job and give it to somebody else. Can he do it?   

No. On a unilateral contract, such as this one, the person who makes the offer cannot withdraw it once the party to whom the offer has been made has begun to perform.

I want to accept an offer, but I want to make some changes. Okay?   

Not okay. Your changes constitute a rejection. You'll have to negotiate with the person who made the offer and come to mutually acceptable terms in order to create a contract.

I had two weeks to accept an offer from my brother-in-law. I rejected it after one week. But a few days later I changed my mind and accepted. Since I got in my acceptance before the deadline, l think I have a contract. My brother-in-law says no. Who's right?   

Your brother-in-law. Once you've made your rejection, the offer is no longer open, even though the deadline for acceptance has not been reached.

My brother-in law withdrew his offer while my acceptance was in the mail. Where do I stand?   

If his offer came to you by mail, then your acceptance becomes effective the day you mailed it, not the day he received it. Your brother-in-law may not like it, but he has a contract.

On the other hand, if the offer did not come to you by mail, your acceptance only becomes effective on the date he receives it. Since he withdrew his offer before that date, there's no contract.

The Consideration

Must the consideration be money?   

No. It can be almost anything, even just promises made by each party. "I promise to teach you to play chess if you promise to teach me how to play the piano" contains the element of consideration necessary to create a contract.

What things cannot be regarded as consideration?   

There are three major types of quid pro quo-the legal term for "something in return for something"—that the law does not look upon as consideration.

1. An illegal quid pro quo. If your brother-in-law promises you a percentage of the take if you promise to stash his marijuana, there's no consideration.

2. A quid pro quo arising out of moral obligation. If you promise to do something for your brother-in-law because he's done something for you for nothing, like taking your kids to the ball game, there's no consideration.

3. A quid pro quo involving the payment of a debt to a third party without receiving some benefit from that party. If your brother-in-law promises to repair your plumbing in return for your paying off part of his debt to the finance company, and you gain in no way from the finance company, there's no consideration.

My brother-in-law agreed to repair my plumbing for nothing. A few weeks after he finished the job, he asked for X dollars for his work. l say I don't have to pay. He says I do. Who's right?   

You are. Consideration must be created at the same time a contract is made—not after and not before. Without consideration in this instance, you have no contract and you don't have to pay.

Creating a Contract

Not all contracts must be in writing. But putting it in writing helps prevent misunderstandings. Also keep in mind that there are some kinds of contracts that are not valid unless they are in writing. These vary from state to state; so when in doubt, put it in writing.

An easy way to create a contract is to put it in the form of a business letter. Prepare it in duplicate.

There are six elements to a contract and they must all be present in the letter if it is to be considered valid.

1. A definite offer:

Dear George:   

I want you to inspect the plumbing in my house, located at the address on this letter, and make the necessary repairs. l want this work to be completed in 10 business days, commencing on May 17th of this year, during the hours from 10 A.M. to 4 P .M.   

2. Consideration:

In return for material and labor supplied by you, l will pay you X dollars when you begin the job, and another X dollars when you finish it.   

3. Duration of offer:

I will hold this offer open for 31 calendar days from the date of this letter. Should you fail to accept by that date, the offer will be automatically withdrawn.   

4. Provision in case of partial performance or nonperformance: 

In the event you do not begin the job on the date specified in this letter, the contract will be void. In the event you begin the job but do not finish it, the down payment is returnable to me on demand, and you will receive no further payment.   

5. Other provisions:

Should any of the plumbing become defective within two years after you make your repairs, you will make additional repairs at no cost within three business days after I notify you of the defects. 

6. Manner of acceptance:

If you agree to the terms set forth in this letter of agreement, kindly sign the attached copy and return it to me by mail or by hand.   

Cordially yours,
(your signature)
Agreed:
Date:
George Simon

(George's signature)

Excerpted from The New Jacoby & Meyers Practical Guide to Everyday Law (Simon & Schuster) by Gail /. Koff. Copyright © 1994 by Gail J. Koff.   


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