This post provides a closer look at what are arguably the most important principles of contract law. Specifically, there are three fundamental contract law questions that we will examine and answer in the following:
What is an offer in contract law?
What is acceptance in contract law?
What is agreement in contract law?
- What is Agreement in Contract Law?
- What is an Offer in Contract Law?
- Objective Intent to Make an Offer
- Definite Material Terms
- Offer Communicated to Offeree
- Duration of the Offer
- Non-Revocable Offers
- What is Acceptance in Contract Law?
What is Agreement in Contract Law?
Elements of Agreement
The existence of an agreement is an essential basis and precondition of a contract.
But what exactly is agreement in contract law?
To understand the concept of agreement, we need to break it down into its individual elements: offer and acceptance.
There can only be an agreement, and hence a contract, if there has been a valid offer and a valid acceptance of that offer.
The party making the offer can be referred to as the offeror, while the party that receives the offer – and may or may not accept it – can be referred to as the offeree.
Meeting of the Minds
If there is, in fact, an offer by the offeror and an acceptance by the offeree, then there is a so-called ‘meeting of the minds’ between the offeror and the offeree, which is a necessary prerequisite for the formation of a contract. Meeting of the minds, in the contract law context, simply means that there is a common understanding between the parties that are forming a contract.
Whether or not there is a meeting of the minds is determined based on an objective basis. This is sometimes referred to as the objective theory of contracts. That is, what counts is whether an objective observer would reasonably assume, based on the parties statements and behavior, that there was an understanding.
The parties may subjectively not think that there is a meeting of the minds, but from the perspective of a reasonable person or bystander, this is the case. That’s the reason why there may be a contract despite one of the party’s unwillingness to enter into an agreement.
An example for this would be the case of Lucy v. Zehmer, where one of the parties to an agreement claimed that he was only joking and had no intention to enter into a binding agreement. However, since this was not apparent from his actions, the court found that there was nevertheless a binding agreement.
What is an Offer in Contract Law?
Every contract begins with an offer.
In order to be valid, an offer must contain the following elements:
- An objective intent to make an offer by the party that is attempting to make the offer
- The offer must contain definite material terms that would govern the contract
- The offer and its contents must be communicated to the offeree
Objective Intent to Make an Offer
Whether there is an objective intent to make an offer is determined by the words and actions of the offeror.
There is no objective intent if the offeror uses words that a reasonable person would interpret as an opinion, joke, future plan, a simple suggestion to engage in preliminary negotiations, or an invitation to the other party to make an offer.
Let’s assume a friend says to you:
“I really like your old car, and I would like to buy it for $15,000.”
In reality, your friend hates your car but is just trying to be polite.
Looking at the statement objectively suggests that this would be a valid offer. Subjective intent or so-called ‘mental reservations’ that are not shared with the other party are immaterial.
Next, let’s assume that your friend says to you she will pay you a million dollars if you go to the store and pick up a sandwich and drink for her.
Would this be an objective intent to make an offer? Normally not, because – unless perhaps your friend is a somewhat reckless billionaire – it’s very clearly a joke and not a serious offer that you could accept.
Definite Material Terms
The second element is that the offer needs to include definite material terms.
This means that the terms of the offer must be sufficiently clear and unambiguous so that the essential terms of the offer can be determined and, if the need for enforcement would arise, that a court would be able to fashion a remedy.
For instance, saying to a car dealer “I would like to purchase this blue Ford Fiesta for $15,000” contains definite material terms. The essential terms are clear and, if necessary, a court would have no problems enforcing this contract or fashioning a suitable remedy.
Conversely, mentioning to a car dealer “I would like to purchase one of your cars for a good price” would not meet that requirement.
Offer Communicated to Offeree
The third element is that the offer needs to be communicated to the offeree, that is the person to whom the offer is being extended.
An uncommunicated offer is not an offer.
Also, the offer must be communicated by the offeror to the offeree in the manner chosen by the offeror.
For example, let’s say that Joel writes on a piece of paper: “George, I want to buy your car for $15’000”. He then puts that paper in his own desk drawer as he is not yet sure whether he is ready to make the offer.
Two days later, George finds the note.
Is there an offer? No, there would be no offer in this case. While it was communicated to the offeror, it was not willingly communicated by the offeror, Joel.
However, if Joel would have instructed George to go into his study, open his drawer and read the note, there would have been a valid offer.
Duration of the Offer
Time – or duration – also plays a considerable role in assessing the validity of an offer.
First off, offers are not indefinite – they only last for a certain amount of time. Once an offer has expired, it doesn’t exist anymore and therefore an offeree cannot accept it.
A new offer would have to be made, if the offeror is inclined to do so, and only that new offer can be accepted.
However, once it has been accepted, an offer cannot be revoked anymore.
The acceptance completes the formation of the contract, and the offeror cannot unilaterally withdraw the offer and avoid the contract.
In contrast, if an offer is rejected by the offeree, then the offer is terminated and it cannot be reinstated.
Again, the offeror would have to make a new offer if he still wishes to try to enter into a contract.
Certain events prior to acceptance may also end the offer by operation of law. This means that the offer ends without the offeror having to specifically revoke the offer. This includes situations where the subject matter of the offer has been destroyed.
For instance, if someone makes an offer for the purchase of a house, and before the offer has been accepted the house burns down, the offer would be automatically revoked by operation of law.
It also includes offers where the offeror, after having made an offer, dies or becomes incompetent, for instance due to mental illness or otherwise. Again, the offer would be revoked under these circumstances.
Finally, an offer would also be revoked by operation of law when it becomes illegal.
An example of this would be an offer for the purchase of a health or dietary supplement, and the supplement is subsequently banned by the government due to concerns about its safety. Once the ban is implemented, the offer ends and an offeree could not accept it anymore, even if they wanted to do so.
As an exception to the general rule, there are some types of offers that cannot be revoked prior to acceptance.
This includes in particular so-called option contracts.
Option contracts are instances where a party provides consideration – that is something of value – to keep the offer open for a specified amount of time. In those cases, a separate option contract is formed and the offer to enter into the main contract is irrevocable during that time period.
Options often entail the right to buy or sell something in the future. For example, a call option gives the holder of the option the right to buy shares, while put options give the right to sell shares. The right to buy or sell is the option, while the actual purchase or sale of shares is the main contract, which however only comes to fruition if the party that has been given the option decides to exercise its right to buy or sell.
The holder of the option pays specifically for the right to exercise the option at some point in the future, and it would undermine the very nature of the option if that right could be unilaterally revoked by an offeror who revokes the offer.
What is Acceptance in Contract Law?
An agreement requires offer and acceptance. We’ve already looked at the concept of offer. Now, let’s examine its counterpart, the acceptance.
Once a valid offer has been made, this gives the offeree the power to accept the offer. If and when that happens, a contract has been formed between the parties, that is between the offeror and the offeree.
A valid acceptance has the following elements:
- There needs to be an objective intent to accept an offer.
- The acceptance has to mirror all the material terms of the offer
- The offeree needs to communicate the acceptance to the offeror
Intent to Accept
Whether someone has manifested an intent to accept is once more interpreted according to the objective theory of contracts.
The question is, therefore, whether a reasonable person in the shoes of the offeror – the person that made the offer – would find that the words or actions of the party receiving the offer are an acceptance.
Again, subjective elements such as jokes or “not being serious” about an acceptance are immaterial if they are not obvious to a reasonable observer.
Acceptance Mirrors the Offer’s Material Terms
The acceptance has to mirror the material terms of the offer
The “common-law mirror image rule” provides that the acceptance should be the mirror image of the offer, i.e. not materially change the terms of the offer.
If the acceptance materially changes the offer then the original offer has been rejected and instead a new “counteroffer” has been made, which the original offeror could now accept.
For example, let’s say that someone says to you: “I would like to buy your car for $15,000”. And you respond: “Ok, I will sell it to you for $20,000”. In that case, you did not accept the offer. Instead, you rejected the original offer and made a new offer yourself.
This new offer, for a sale of a car for $20,000, can be accepted. But the original offer, unless renewed, is off the table.
Communication to Offeror
The acceptance has to be properly communicated to the offeror in order to be valid.
This can be done in various ways, although if the offeror specifies that the offer needs to be accepted in a particular manner, then acceptance by any other method is not valid.
For instance, the offer could stipulate that acceptances have to be in writing, or via email or post. Oral acceptances would in such cases be invalid.
If no particular method of acceptance is stipulated, then the common-law “mailbox rule” applies:
This rule provides that an acceptance that has been communicated using an authorized method is valid as soon as it is dispatched – that is at a point in time when the offeror may not yet have received the offer.
For instance, when someone mails an acceptance to the offeror, the acceptance becomes valid when the letter is dropped in the mailbox.
The requirement of using an authorized means of acceptance is met when the party attempting to accept uses either the method of communication that the offeror used, or uses a faster method of communication than the offeror. Hence, the acceptance cannot be using a slower means of communication.
For example, unless something else is stipulated by the offeror, a mailed offer can be accepted by mail, which would be the same method, or email, which would be a faster method.
The mailbox rule also provides that if an acceptance is made using an unauthorized means, or if the acceptance is not properly dispatched, then the acceptance is only effective on receipt, not on dispatch.
An example of unauthorized means would be accepting an emailed offer suing regular mail. This would be a slower method, and therefore unauthorized. An example of an improper dispatch is using the wrong address or postage on letter.
But again, the mailbox rule is a default rule. It only applies when the offeror doesn’t expressly specify the requirements for acceptance.