Business Contracts Office

Defining a Contract

What is a Contract?

A contract is an agreement between two parties that creates an obligation to perform (or not perform) a particular duty.

A legally enforceable contract requires:

  1. An Offer (I’ll mow your lawn this weekend if you pay me $30)
  2. An Acceptance (You’ve got a deal)
  3. Consideration (the value received and given – the money and the lawn mowed)

Mutual Assent: A "Meeting of the Minds"

A legally recognized offer and an acceptance create a "meeting of the minds", or mutual assent, between the parties. The law requires the parties to a contract to demonstrate mutual assent to the contracts' terms.

The Offer

The Offer is the key element that defines the relevant issues in the contract. To be a legally valid offer, the offer must be effectively communicated so that the receiving party has the ability to accept or reject the offer. Whether or not the receiving party reads the contract has no bearing in determining the clarity of the offer. The offer must only provide the recipient with a clear opportunity to accept or reject the contract. Someone who signs a contract without reading it does so at his/her own risk.

In addition, a valid offer must contain certain and definite terms. For the terms to be considered definite, a reasonable person must be capable of readily understanding the terms. In determining whether the terms are definite, courts will review the clarity within four primary elements:

  1. the parties;
  2. the length of time for performance (term or service schedule)
  3. the price; and
  4. the subject matter or scope of services;

Examples:

A vendor offers to store UTSA’s back-up data for $1000 a month, and UTSA accepts. Because of the ambiguity of the service terms, it is unlikely that this arrangement would be considered an enforceable contract. Among other issues, the arrangement contains no storage location, no description of the storage structure, no information related to storage security, and no details on how the data would be transported to storage. Additionally, the arrangement fails to determine the length of time the data would be stored. Because the subject matter of this offer is subject to numerous interpretations, the arrangement would probably be deemed ambiguous and unenforceable.

Similarly, if two parties agree to the performance of a service for a price to be determined at a later date, an enforceable contract would not exist. Mutual assent cannot occur when the value is undetermined.

Note that Purchasing solicitations such as Bids or Request for Proposals are not considered offers. Among other issues, these solicitations are not communicated to any particular party and can be rescinded at any time. Generally speaking, Purchasing solicitations are considered merely invitations to the public to make an offer.

The Acceptance

For acceptance of an offer to be valid, the acceptance must be unequivocal and unqualified. In other words, the acceptance must conform to the exact terms of the offer. This is termed the "mirror image" rule. If the acceptance is conditional on another event or stipulation, it creates a counteroffer and the roles of the parties become reversed. The conditional acceptance becomes a new offer.

Note that an exception to the Mirror Image rule is found in the Uniform Commercial Code ("UCC") for contracts between merchants for the sale of goods (the UCC does not apply to services). Under the UCC (codified in Texas under the Tex. Bus. & Commerce Code), an acceptance with conditional terms will form a part of the contract unless the additional provisions materially change the offer.

Consideration: The Importance of the "Bargained Exchange."

In order to be considered an enforceable contract, the parties to the contract must exchange something of value. If a buyer contracts for lawn service, for example, the buyer receives his/her lawn mowed, and the seller receives money.

Consideration must be mutual. Both parties must give something of value and receive something of value. If only one party receives value from an arrangement, the arrangement is generally defined as a gift rather than an enforceable contract.

Although the exchange of currency is typically included, the consideration does not need to include money. For instance, an athletic apparel company may provide the Athletics Department with basketball shoes in exchange for the exclusive rights to advertise its logo on sports uniforms. Although no money exchanged hands, this type of arrangement would represent legitimate consideration to both parties.

The market value of the consideration is, for the most part, irrelevant from a legal perspective. The law is concerned with whether the parties desired and assented to the contractual arrangement, not whether the exchange represented a fair market bargain.

What Authority Defines a Contract?

There are two primary sources of Contract Law: Common Law and the UCC

  • Common Law(Court-made case law)

    Most business service contracts (as opposed to contracts for goods) are controlled by common law -- a tradition-based but constantly evolving set of judge-made laws that derives primarily from past court decisions. Which state’s common law prevails can be determined by factors such as where the contract was performed or where it was executed. Typically, the parties will establish the governing state law within the contract itself.

  • Uniform Commercial Code [Tex. Bus. & Comm. Code] -

    The Uniform Commercial Code (UCC), is a standardized collection of guidelines governing the law of commerce, The UCC does not apply to service contracts. It is particularly concerned with the sale of tangible goods and secured transactions. The UCC is a model act created by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. Every state has adopted some version of the UCC. Texas has adopted the UCC and codified it under the Texas Business and Commerce Code.

See http://www.statutes.legis.state.tx.us/

Note that courts have yet to definitively define software licenses in either category, but they have generally been reviewed under common law principles rather than under the UCC

Specific Statutes–Certain areas, such as intellectual property issues, securities, and fraudulent actions, may be governed by other specific statutes.

See http://www.capitol.state.tx.us

What’s in a Name? Does the Name Matter?

Regardless of whether you call it a “contract” or an “agreement”, or even a “memorandum of understanding”, the test remains the same: offer-acceptance-consideration. If all the elements are present, then it is an enforceable contract.

Important Note : The above information presupposes that the contract is for a legal purpose and the parties are of legal age. An agreement to purchase marijuana, for example, is not a legal contract. Because the subject matter of the agreement is illegal, the contract is not enforceable and the parties have no legal remedies for breach. Similarly, a contract with a minor is not legally enforceable. Because of age and presumable lack of experience, the law considers a minor contractually incapable.