Chapter 6: Contracts

You have likely been in a situation where someone told you that they were going to do something, but that person did not follow through.  In response, you may have screamed “But we had a deal!!!” And while the other person to your “deal” may not have done held up his or her end of the bargain, the “deal” may have been a legally enforceable “contract.”

Fun Fact: A contract is an agreement between two people or businesses

What is required for the creation of a legally enforceable contract?

For a contract to be legally enforceable, there must be an offer to enter into the contract, an acceptance of the same offer, and an exchange of “consideration.” These three “elements” are required for a legally enforceable contract to be created.

The Offer

The first element of contract creation is the “offer.” In order to make an offer, a person must make a statement, either out loud or in writing. This statement must say what the contract is about, and what is being exchanged.

Statements such as “I’d like to sell my house for $250,000” or “I think my car is worth $10,000” are not offers. These are merely wishes or opinions. But saying, “I will sell you my house for $250,000” or “I will sell you my car for $10,000” are offers.

The Acceptance

The next step is “acceptance” of the offer.  Generally, the person to whom the offer was made may only accept an offer. So if your friend’s mom told him that she would pay him $20 if he mowed the yard, you could not jump in expect to get that $20 by saying “I’ll do it.” That is because the offer was not directed at you.

Instead, your statement would actually be considered an offer in of itself, which your friend’s mom could accept. You could even offer to mow the yard for less than $20, but then you might not have any friends.

Like an offer, an acceptance needs to be definitive, or clear. Statements such as “that sounds good” or “that’s a great deal” are probably not enough to make a contract. Also, the acceptance normally needs to be made on the same terms as the original offer.

If someone offered to sell you a car for $10,000, and you responded with “deal, but I want new tires as well” then you do not have a contract. That is because you did not accept the original offer. What you did was make a counteroffer to the original offer, which could be accepted or rejected by the owner of the car.

What is consideration?

The last step to the creation of a legally enforceable contract is “consideration.” Consideration is what the parties are exchanging.  In the scenario above, the exchange of the car for $10,000 was the consideration for the contract. If there is no exchange of consideration there is no contract.

For example, if your parents promised to take you to Hawaii, and then didn’t follow through, you cannot claim they violated a contract. You didn’t give anything up in exchange for their promise, so that means there was no consideration.

But if your parents’ promise required you to perform 200 hours of community service during the summer, then you would have a contract because you gave something up (your free time during the summer) in exchange for their promise to take you to Hawaii.

What happens when someone breaches a contract?

Once a contract is formed, the parties are supposed to fulfill their obligations under the contract.  If one party doesn’t fulfill his or her obligations it is called a “breach” of the contract. For example, looking back to the lawn mowing example, if your parents paid you $100.00 at the beginning of the summer in exchange for you mowing the lawn ten times, and you quit mowing the lawn after five times, you would be in breach of contract.

In terms of lawsuits involving contracts, breach is often the primary issue in dispute. One side will claim the other party has breached, and the other side will either deny that there was a breach and/or claim the other side also breached the contract.

Classroom Activity: Have the students break up into pairs.  Ask each pair to come up with an example of what they believe to be a legally binding contract, and an example of an agreement that is not legally binding. The purpose of this exercise is to demonstrate the difference between agreements that the law will enforce, and general everyday agreements the law will not generally enforce.

by Jay Preston

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