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According to law, a contract is a legally recognized agreement enforceable in court and/or by binding arbitration. In other words, it is a deal comprised of promises with a solution for resolving any breach. If an offer capable of immediate acceptance is reciprocated with an exactly similar acceptance, it is generally agreed that an agreement has been reached. It follows from the above that the sides (could be more than two) should have the necessary capacity to contract. It is also necessary that  the contract is not trifling, indeterminate, impossible, or illegal. The guiding principle is expressed in the Latin phrase “pacta sunt servanda” meaning pacts must be kept or agreements are to be kept, failing which there are legal remedies.

When the good or service provided is legal, any oral agreement between two parties constitutes a binding legal contract. There is, however, a  practical limitation, which is that only parties to a written agreement have actual evidence, that is, the written contract itself, to prove the real terms employed at the time the agreement was reached. Generally, in daily life contracts can be and are made by word of mouth, like purchasing a shovel or a pack of gum. There are occasions when written contracts are required by the parties or by statutory law within various jurisdictions for certain types of agreements; for instance, in buying a residence or a piece of land (i.e. Real Estate or Real Property). Usually, in civil law systems, a contract is classified as part of a general law of obligations along with tort, unjust enrichment or restitution. Yet another definition is that a contract is an agreement creating and defining the obligations between two or more parties. For contracts, the jurisdiction is almost always common law jurisdictions (i.e. Case Law and prior precedence on similar cases arising out of contract disputes). As common law maintains a high degree of freedom of contract, endowing parties with a space broad enough to set their own terms, it is the universal preference of people entering into contracts. As opposed to this, civil law systems typically apply certain over-arching principles to disputes arising out of contract. In view of this, it is not uncommon for businesses located outside common law jurisdictions to opt for common law through “choice of law” clauses in the actual agreement.

Framing a Contract

There are five key requirements for the creation of a contract in common law systems.  That is, there must be:

  1. An agreement, or offer and acceptance;
  2. Money exchanged or some kind or form of consideration;
  3. A demonstrable intention to create legal relations; and
  4. Formalities (terms whether in writing or not).

The concept of consideration is not important in civil law systems. Also, there is what is known as the Statute of Frauds, with which some types of contracts have to comply with certain formalities (e.g. such as purchasing or selling Real Estate). A typical agreement or contract is simply stated as an inducement in the form of a reward being promised under certain conditions, such that the promise is legally binding subject to those conditions.

Offer and Acceptance

A controversial but otherwise regarded as the most important feature of a contract is that one party makes an offer for something which is accepted by the other. Sometimes it is called a “concurrence of wills” or “ad idem“, that is, a “meeting of the minds” of two or more parties. It is stressed that a court cannot read minds, and therefore the existence or otherwise of an agreement is judged objectively, with only limited room for questioning subjective intention. It has been suggested that the perpetuation of the idea of the “meeting of minds” has come from a misunderstanding of the Latin term “consensus ad idem“, which actually means “agreement to the same thing“. There has to be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent,  where a contract was to be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, and not that they actually did want to form a contract. In a unilateral contract, the obligations are only imposed upon one party upon acceptance by performance of a condition. The general rule in the U.S.  is that in “case of doubt, an offer is interpreted as inviting the seller to accept either by promising to perform what the offer requests or by rendering the performance, as the seller chooses.”

The offer and acceptance need not always be expressed orally or in writing. There can also be implied contracts in which some of the terms are not expressed in words. This occurs when the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to an auto mechanic for a car checkup, the car-owner agrees that a fair price would be paid for the service. If there is a refusal to pay after the service, the owner has breached a contract implied in fact. When a contract is implied in law, it is also called a quasi-contract because it is not in fact a contract but a means for the court to remedy situations in which one party would be unjustly enriched if he or she was not required to compensate the other. It is like somebody knowingly taking advantage of someone else’s mistake, and then refusing to compensate (e.g. like forgeting your change at the cashier). If it is proved that this was done deliberately, with full knowledge, the court would deliver a punishing verdict. If not, then there could be reprieve.

Nevertheless, entering into a contract whether it is in writing or not could be just as enforceable, regardless of your true intentions or failure to actively negotiate the terms.  Contracts are binding, and allow us to create our own laws amongst ourselves as persons and even corporations, without having  courts or laws for every type of scenario.  Contact the lawyers at Levy Zavet PC to ensure that you negotiate your position and understand your obligations before entering into any agreement.