1. What is a “contract”?
A contract is a legally enforceable promise or an exchange of promises. To be enforceable, the contract must meet certain elements. There must be an offer, acceptance of that offer, and then an intended exchange of value between the parties. These elements demonstrate a “meeting of the minds” between the parties. That is, the parties have a common understanding of the material terms of the agreement. A contract does not have to be a formal, written document. It can be a verbal agreement or it can arise through the conduct of the parties. Those who make a contract do not have to use the word contract or even recognize that they have made a legally enforceable promise. Each state develops its own contract law. Contract law provides confidence and promotes productivity by making private agreements between individuals legally enforceable. Plainly stated, it helps make buyer and seller willing to do business together.
• Example: One individual offers to purchase a widget from another person for $1. The other person agrees. This is a contract, as there is an offer and acceptance of that offer, a planned exchange of value, and a meeting of the minds as to these primary terms of the agreement.
• Note: As you can see, a contract does not necessarily have to be formal or in writing. A simple conversation or even actions of two or more individuals can be a contact.
• Discussion: Does it surprise you how easy it is to form a contact? Why or why not? Why do you think it is so easy to form an enforceable contract? Are there any negatives to this? How do you judge whether there is a meeting of the minds between the parties? How do you account for the subjective nature of one person’s understanding?
• Practice Question: Mark goes to an antiques auction. A nice painting comes up for auction and Mark love it. The auction provides extensive background on all of the items being offered. The auctioneer begins taking bids and Mark the winning bidder. Has a contract been formed in this situation?