What Makes a Contract Enforceable?
A valid contract must have 1) assent, 2) mutuality of obligations, and 3) definite terms.
Assent. Assent usually means one party makes an offer to sell something or provide a service, and the other party accepts the offer. This can be straight forward, but it can also be very complicated. If the party receiving the offer “accepts” but changes a material term (later delivery, lower price, different material), this is not acceptance, this is a counter-offer. An offer may be open for a few days. What if it is accepted late? What if the acceptance gets lost in the mail or cyberspace, but one of the parties perform their obligations anyway? All these very specific facts must be analyzed to determine if a valid contract has been created.
Mutuality. Mutuality of obligation is often expressed as “consideration.” In a typical commercial transaction, one party is selling a product or service and the other party is paying for it. Each is exchanging something of value (the good or service in exchange for money). A promise to make a gift is generally not an enforceable contract — the recipient has not given up something of value, and cannot sue for breach of contract if the gift is not made. It is possible, however, to create valid consideration by promising not to do something. Non-compete contracts rely on this principle: the employer pays a sum of money, and the employee promises not to compete for a time after leaving the job. If there is no mutuality of obligation, there is no contract.
Definite Terms. Finally, a valid contract must contain definite terms. It must be clear who the parties are and what they have agreed to. Definitive terms tend to vary contract to contract, depending on what goods or services are being sold, the custom in that industry and the relationship of the parties. At a minimum, a contract must state the names of the parties, state valid consideration, have a mechanism for determining price and payment terms, and be signed (physically or electronically) by the parties. If the contract is for real property, the legal description or tax parcel number of the property must be included.
In addition, it is a good idea to specify in detail key understandings of the contract, such as the obligations of each party, what standard of performance will be acceptable, what happens if that standard is not met, payment terms, delivery terms, insurance terms and what happens if there is a breach. These terms must not be too vague or overbroad, so that a court can tell what the agreement was. Sometimes the court will consider only the words of the contract, and sometimes the court will be able to consider evidence outside the “four corners” of the contract.
If you have questions about a contract, please contact your business lawyer.
