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Contract formation in the USA

January 29, 2024

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This article is written by Shreya Patra. This article covers what exactly a contract is and its importance. Mutual assent – its meaning and role in contract formation; certainty – its meaning and role in contract formation; the intention of the parties to create legal relations; parties having capacity to contract (majors, individuals free from mental disabilities, voluntarily intoxicated persons); parties not having the capacity to contract (minors, intoxicated individuals, persons suffering from mental disabilities); the meaning of the offer to contract and the discrepancies associated with it; consideration – its meaning and role in contract formation; acceptance – its meaning and role in contract formation, formalities in a contract; the contents of a contract – terms and conditions of a contract, and unfair contract terms to be avoided.

Table of Contents

Introduction

A contract is an essential part of our lives. From agreeing to the terms and conditions of an app we sign up for, to providing our oral consent for paying the bills for the services we have availed of, an individual goes through several contracts in our everyday lives. Therefore, we cannot stress but say that a contract is an intrinsic part of human life. It exists concealed from plain sight before us.

If we were to understand what it means, the formation of a contract simply means the parties coming to a mutual agreement that imposes some obligations on them as a result of the contract being formed, and most importantly the law can enforce it. Now there are several reasons why a party might be willing to form a contract with another: it could be to avail the remedies in case of any breach that takes place, convert an informal promise into a more formal note, or translate their oral consent into a written form.

The University of California was met with widespread protests after the university failed to honor the contracts and failed to make timely payments to its students who had graduated. The union has also highlighted the unfair pay rates that do not compensate them for the work that is done by them, along with other practices.

Thus, through this article, we will explore all that is required for the formation of a contract, from its essential elements that help in the formation of the contract to the capacity of the parties to enter into a contract, the absence of which will render the contract invalid and unrecognizable in the eyes of law.

Mutual assent in contract formation

Meaning of mutual assent

Before we understand the role mutual assent plays in contract formation, we have to first understand what mutual assent means. Mutual assent is simply the consent to enter into a contract provided by all the parties to it. It is an important part of contract formation. A contract is a legal document that is sacred to the parties as it ties them to one another and imposes other legal obligations and consequences in case of breach or negligence of any sort. Thus, it becomes important for the parties to provide their consent on their own terms while understanding the kind of binding nature it would have on them.

For example, A, B, and C enter into a contract, where A would supply “X” grade apples to C, which are used in desserts, and B would supply “Y” grade apples to C, which are used for making jam. Thus A, B, and C, in their capacity, looking at the terms and conditions must provide their assent. They must agree to enter into the contract with the same objective in mind (meeting of mind) which will be discussed next.

Concept of mutual assent

The concept of mutual assent is very similar to the concept of a meeting of minds. As each person has their interpretation and understanding of what is presented before them, it becomes important for the person entering into a contract to be on the same page. It can be very simply understood, as, for example, A enters into a contract with B for the supply of a special grade of rice known as “Blue”, but this special grade “Blue” rice has two more varieties known as “X” and “Y”. A assumes he’s being provided “X” but B provides him with ‘Y’, it becomes evident here that there is no meeting of minds; they both did not clear this out and fulfilled their respective obligations on the basis of their understanding and interpretation of the situation.

Thus, it becomes important for the parties’ minds to meet as they are providing their consent for a specific purpose and objective that binds them to the contract. In the above case, A and B are not obliged to fulfill their obligations as they did not agree on the same thing for which the contract was formed. As times have changed, this traditional concept has evolved; outward expressions of parties would be counted as mutual assent. So, for example, A states that he is willing to purchase a “Black” type apple from B and conveys the same to B. B provides a nod. This would count as mutual assent, as the outward expression of a nod to A conveys that B is willing to provide such goods to A.

Role of mutual assent in contract formation

Mutual assent plays an important role in empowering the parties to form a contract. Since a contract is essentially formed by the parties agreeing to a certain objective, it becomes essential for the parties to agree to the same thing and mutually provide their assent to it.

Mutual assent is one of the important elements of the formation, without which it cannot exist. The role of mutual assent is to validate the formation of the contract and give it the legal identity it requires to represent both parties on paper. Mats Hummels has rightly said, “At the end of the day, everyone is responsible for their own contracts. Nobody has forced us to sign them”. The same responsibility shall be undertaken by the parties that enter into a contract of their own free will.

Certainty in contract formation

Meaning of certainty in contract

Certainty is an important part of contracts. Certainty is simply free from ambiguity and/or suspicion. As per terms in contract law, it means that the conditions that are laid down in a contract must be clear and certain. This is to ensure that no question about it arises. It is also tied to the fact that if there is any sort of confusion as to these terms and conditions, there are chances that there might be no meeting of mind between the parties to the contract.

Courts have stressed that even though the term certainty is not absolute, a reasonable certainty must be followed in order to ensure that no ambiguity arises. Ways in which such ambiguity can be resolved to ensure certainty are as follows:

Reasonableness

The parties to the contract must be reasonable if they intend to create legal relations with one another. The parties must exercise reasonableness as they enter into a contract to ensure that they get rid of any uncertainties that might prove to be an obstacle for them later on.

For example, if A enters into a contract to supply B with rice, B has to convey to A the kind of rice he wants and the quantity of it, and similarly, A has to convey if he has the capacity to do so. Therefore, specificity and detailing the terms of the contract ensure that reasonableness is followed and help to avoid any such uncertainty.

Doctrine of severability

The doctrine of severability can also act as a shield and prevent any vague clauses from having any effect on the contract it exists. The doctrine of severability applied to contract law simply means that if a contract contains both constitutional and unconstitutional elements, the constitutional elements would remain as they are, and the law would not consider the unconstitutional elements. This is so because the constitutional elements of the contract would not be tainted as invalid just because there are some unconstitutional elements to it. However, if the whole contract is unconstitutional, then it would be deemed to be void in that case.

In the case of Marathon Entertainment, Inc. v. Blasi (2008), the plaintiff, Marathon, was engaged in providing services like counseling for career and promotion to the defendant, Blasi. The defendant made certain changes to the contract, like reducing the commission percentage, and furthermore, stopped paying altogether.

The defendant filed for breach of contractual terms. One of the important issues that arose is whether personally employed managers, regulated by the laws related to talent agencies contained in Talent Agencies Act (1959), can recover the fees for services of a legal nature. The Court highlighted that the use of the doctrine of severability allows the recovery of such amounts in part.

Contract

The parties that enter into the contract must ensure they take reasonable care and caution regarding the terms of the contract. The parties must go through the contract carefully and voice out any ambiguities and discrepancies that they feel might cause confusion in establishing legal intentions with one another.

The parties can also adopt another measure in the contract itself to prevent any uncertainty. They can insert a clause for the resolution of the dispute that arises due to any ambiguity by taking legal recourse or approaching an arbitration center, depending on the mutual agreement of the pirates for the same.

Making use of any business customs and trade practices

It is not possible for each and every contract to be free from flaws. Therefore, this gap of flaws can be bridged by accompanying it with any business customs or trade practices that are undertaken. For example, if there is a common trade practice to first advertise a new product before it comes out, then in that case, even if it is not explicitly mentioned in the contract, the advertising will take place as per the common trade practice followed.

Role of certainty in contract formation

Certainty plays an important role in determining the enforceability of a contract. If the terms of the contract are clear and free from indefiniteness, then it is enforceable by law, but if it lacks such certainty, it is deemed to be unenforceable due to the cloud of doubt it might create between parties. There must be a clear idea between the parties about the elements of the contract.

For example, A sells two kinds of cycles: a traditional cycle and a gear cycle which is a much more modernized version of a cycle. B approaches A to purchase a cycle. Now that it is evident that B is purchasing the cycle from A, he is not clear on the kind of cycle, which would make the contract seem ambiguous about his needs and requirements. The absence of specificity makes this contract ambiguous and prone to confusion and further disputes. Therefore it becomes pertinent for B to provide some details about his needs and requirements in the cycle, which can help A to choose from his available stock and show it to B before final confirmation or selection.

Thus, certainty plays an important role in transforming the contract. It provides it with the legal strength to make it enforceable by law, without which it would not be recognized as valid under law. It becomes essential for the contract to be enforceable and recognized by law to ensure that the parties agree to each and every word that is present in the contract and that the same is defined in a detailed manner.

Intention to create legal relations

“Animus contrahendi”, the Latin term that means the intention to contract, simply signifies the intention and willingness of the parties to enter into a contract and bind themselves to the legal relations created as a result of it. In this case, it becomes essential for the parties to distinguish whether the other party proposing it or the one accepting it is ready to assume responsibility as a result of such a contract being formed.

For example, Alex invites David for dinner. David accepts this and shows up, but Alex is absent from there. In such a case, Alex cannot be sued by David for not adhering to the promise, as the promise was a casual one in a social setting. There was no intention to form any contractual obligations with one another. Thus, a lack of compliance with this would result in a breach, and the party suffering can bring a claim for action.

It is important to ensure that the parties have the willingness to create legal relations with one another because it ensures that the parties are serious about the contract and the terms laid down in it. The absence of such an intention makes such a contract unenforceable in law. If the parties do not show any legal intention to enter into a contract, then the consequences that arise cannot be challenged under the law; thus a legal intention gives rise to legal recourse.

As in the above example, we discussed how one party invited the other for a meal. Neither of the parties wanted to create any legal intention or obligation on the other, and thus it ended up being a simple promise. Because of the absence of intention, the contract is no longer binding on them and the other parties to it, as it is a simple promise.

The law in the United States follows that agreements of a commercial nature are enforceable naturally unless there is no intention to be legally bound, whereas agreements of non-commercial nature are assumed to be unenforceable unless the intention to be bound legally is proved before the Court. It can be understood in detail as follows:

Commercial agreements or contracts

Commercial agreements are generally seen as binding legally on the parties. These agreements are created by parties whose objective is to engage in any business or commercial activity. This is so because they take place in a more formal setting and are often in written form, which conveys the seriousness and willingness of the parties to enter into a contract. Such agreements are binding in nature because they contain all the elements that make them valid contracts, which will be discussed further.

For example, Taylor, a supplier enters into an agreement with Brandon, a distributor, this is a contract of commercial nature as the objective of the parties is to enter into a business with one another.

Non-commercial agreements or contracts, i.e., domestic agreements or contracts

Non-commercial agreements are also known as domestic agreements. Such non-commercial agreements do not have any legal objective or intention between the parties. And as such, they are based on simple promises, so it becomes very easy to state that the nature of such agreements is not in any way serious. Such agreements are created in an informal setting when the parties are casually stating something. The parties do not want to assume any legal responsibility or impose penalties on each other for the breach.

Thus, such social agreements are not binding and cannot be assumed to be contracts at all, as they are just a promise at the end, and such a promise is not binding. It is just a casual appointment between acquaintances, family, relatives, or even friends for a casual meet up.

Capacity to contract

Meaning of capacity

The capacity to contract is an important element in the formation of a contract. A contract in addition to the above discussed elements, has to satisfy the capacity of the parties to enter into a contract. Under contract law, capacity to contract means that the party has the legal ability to enter into the contract and has the capability to comprehend and grasp the terms and conditions of the contract and enforce the contract by fulfilling its terms and conditions.

An individual who is of legal age, in a sane state of mind, not involuntarily intoxicated, and is capable of understanding the effect of signing the contract on himself and the other parties to it is generally considered to be suitable to enter into a contract and such a contract entered by him would be deemed to be valid under the eyes of the law. The capable and incapable persons to contract are discussed in detail as follows:

Individuals who have the capacity

Majors

A major is an individual who is considered to be of legal age and independent from his guardians and parents to make his own legal responsibilities and decisions. Thus, they can obtain a license to drive, enter into contracts, and vote, among other benefits. The age of majority differs from state to state, and activity varies across states in the United States. As they assume such a status through their age, they are free to enter into contracts, and such contracts entered into by them would be legally binding on them. If they fail to abide by the terms and conditions of the contract, they can be sued for breach of it and tried in a court of law.

Sober person (not intoxicated)

A sober person is one who has not been intoxicated in any manner. He/she is sane and is in their senses. Thus, they can enter into contracts as they are free from any substance abuse, which could potentially alter their understanding and ability to grasp and comprehend the circumstances, especially if they enter into a contract. If a sober person enters into any contract, they would be held responsible for the failure to comply with it and would be sued for such failure as they have already assumed responsibility for it by signing it.

Voluntarily intoxicated person

Not all intoxicated individuals are barred from entering into binding contracts. If a person has voluntarily agreed to intake any alcohol and subsequently enters into a contract, they have to uphold their obligations. Courts would not accept the defense of intoxication done voluntarily because they would take advantage of them entering such a state and escape from their contractual obligations. However, even if there is voluntary intoxication, it can be taken as a defense, that is, a contract would be deemed t void in the following cases:

The other party knew the person to be intoxicated

For example, if Alice approaches Cindy while she is intoxicated, and knowing her to be intoxicated, takes advantage of her and gets her to sign the contract for the benefit of Alice herself.

The other party had reason to believe that the person is intoxicated

For example, Greg informs Harry that he is heading out for drinks. After a while, Harry meets up with Greg and gets him to provide his consent and signature to a contract. It can be reasonably interpreted that Harry is aware of Greg being intoxicated because he was informed of Greg’s plans by Greg himself.

The intoxicated person did not have a reasonable understanding of the contract, its terms, and the consequences of it

When a person is in an intoxicated state, the level of intoxication matters, as it helps to determine whether or not the person is in a state to understand and comprehend his actions and their consequences. At the same time, the ability of the person to handle alcohol and the capacity they have to drink become important to understand as they differ from person to person.

For example, Nathan is a habitual drinker and can understand and comprehend his actions and remain in his senses even after 4 shots of tequila. Therefore, during this time, if he is in his senses and can reasonably comprehend, he would be made liable for failure to comply with his contractual obligations. However, Ryan is not a habitual drinker; he is usually out of his senses and is intoxicated after one shot of tequila. Therefore, any contract he enters into during this time would result in him being free from any liability arising out of the contract, as he was not in a state to understand the contract when he entered into it.

Individuals who do not have the capacity

Minors

Minors are those individuals who have not attained legal age. The legal age differs from state to state, and most of the states have 18 as their common age. Minors do not have the capacity to enter into a contract because they are said not to have the ability to understand the consequences of entering into a contract and assume the legal obligations and responsibilities that come with it.

For example, a minor enters into a contract with the shop owner to provide him with a skateboard. Then this contract will be declared void as the minor firstly does not have the capacity to enter into a contract. Secondly, a minor cannot understand the terms and conditions of the contract and assume any legal responsibility or liability that arises from the contract.

However, a minor has to state their intention to not engage in the contract before they reach the age of majority. Because once they reach the age of majority, they have to assume the legal responsibility and liability that arises from the contract.

For example, a minor has entered into a contract with the bookstore to supply him with any 2 story books of his choice per month. Now, once he reaches the age of majority, he cannot take the defense that he was a minor when he first initiated and entered into such a kind of contract. The Court will not permit the minor who has not turned major to terminate the contract, and the contract would remain valid in the eyes of the law.

Intoxicated persons

An intoxicated person is one who has taken any alcohol that renders him incapable of taking rational decisions and understanding the consequences of his actions. As a result of such incapability, the intoxicated person is deemed to be unable to enter into any binding contracts as they cannot assume the legal responsibility for them.

In the case of Johnson v. Harmon (1876), a deed was executed by the plaintiff during which he was intoxicated to such an extent that he lost his ability to understand the consequences of his actions. He took the plea that, due to such a state of intoxication, the deed that has been executed should be void. The Supreme Court held that the deed that has been executed can be voided at the option of the plaintiff himself.

Persons suffering from mental disabilities

A person who is suffering from mental disabilities is deemed to be incapable of entering into a contract because they do not have the capacity to comprehend the contract itself. And such a contract entered into by them would be deemed to be void in the eyes of the law. The law uses different tests across states in order to determine if the person has the required mental capacity to enter into a contract. The tests are as follows:

The cognitive test or the understanding test

The cognitive test aims to determine whether or not the party that was assumed to be mentally incapable of entering into a contract has the ability to understand the meaning formed by the words present in the contract. If the party understands the same, the party is assumed to be mentally capable, and if not, the party is assumed to be mentally incapable.

The affective test

The affective test aims to determine whether the actions of the parties are reasonable or not. If even one of the parties has acted in an unreasonable manner, it can be assumed that there is absence of proper mental capacity and the other party has all the right reasons to know about such conditions. Such a contract is deemed to be void.

Using this test, we first determine if the party has an understanding of the nature, purpose and effect of their actions and what they conveyed during their communication, like certain gestures, omission of words, and other non-communicative behaviors (shaky hands, avoiding eye contact, etc.) which contribute to understanding their state of mind.

Additionally, the courts stress the ability of the party to understand what is happening more than anything. Just because a party has a mental disability, that does not render them incapable of entering into contracts. But what renders them incapable of entering into a contract is their lack of ability to understand the contract.

Using this test, the Court protects those who have mental disabilities, cannot understand the contract they have entered into, and are put in a disadvantageous position because they have no ability to protect themselves or bargain in the negotiations. It also protects those who have entered into contracts with those who have an understanding of the contract but claim mental disability as a defense to escape contractual obligations.

The motivational test

The motivational test is used in order to measure the capacity of the party to decide whether or not they should enter into such a contract. Any mental disability that renders the party incapable of understanding the contract would be deemed to make the contract void and the party incapable of entering into a contract; however, anything that impairs a person from making a decision would not compel the Court to terminate the contract and deem it to be invalid in the eyes of law.

The insane delusion test

The insane delusion test is applied to those circumstances wherein there is any impairment in judgment, decision, or reasoning making due to the mental disability or deficiency of the person. The Court established such a test in order to protect those suffering from such insane delusions and entered into a contract as a result of this. For example, the wife is suffering from an insane delusion that her husband is having an affair, and as a result, she transfers the property she owns in the name of her son. For example, a man has to present a check in the name of his friend or else he will be kidnapped and killed.

The insane delusion test exists as it is and does not require compliance with the cognitive or understanding test. But similar to an understanding or cognitive test, which protects people who do not have the cognitive ability to understand the contract, the insane delusion test protests those people who, under the false belief due to their mental disability, are forced to enter into the contract.

Role of capacity in contract formation

Capacity is an important part of contract formation. Even before forming a contract, it is essential to determine whether or not a party is capable of entering into it. There are certain groups and categories of people that have the ability to enter into a contract, like those who are majors, those who are sober and free from any intoxication, and those who are voluntarily intoxicated and have understanding. Such persons are not deemed to be incapable of entering into a contract because they understand the contract, the consequences of entering into it and the obligations it imposes on them.

There exists another group of people that are exempted from entering into a contract of any sort. These include minors, intoxicated persons, and persons suffering from mental disabilities. Such people are exempt because they lack the required understanding and mental ability to understand the consequences of their actions and the consequences and obligations that arise from entering into such a contract.

Offers to contract

Under contract, an offer is made in the initial state to signify the willingness to contract. An offer in contract and an offer to contract are different. An offer in contract signifies the promise of providing any money or other consideration in exchange for goods from the other contracting party. More often, it specifically states the parties to the contract.

Whereas an offer to contract is the willingness of the party to contract with another party that is unknown by its willingness to do so. In an offer to contract, the party states their interest in entering into a binding contract with a party that is often unknown to him but shows his interest in entering into the contract.

An offer to contract usually happens through invitations, advertisements, posters, and advertisements on television, newspapers, and other mediums of communication, which help to advertise the offer to multiple people or the public at once. The main motto of using public broadcasting of such an offer is to find someone who is interested in such an offer.

The person who makes the offer is known as the offeror, and the one who receives the offer is known as the offeree. In an offer in contract, the offeror makes an offer to the offeree, who then accepts the offer, and it becomes binding on both of them. Each of them has to fulfill the obligations that are laid down for them as per the contract. If the offeree does not accept such an offer, the offer ends, and they cannot accept it later.

Sometimes, the offeror makes an offer to the offeree, which the offeree feels is not suitably or reasonably priced, and thus a new offer is made. In this new offer, the old offer is invalidated. In the new offer, the offeree becomes the offeror, and the offeror becomes the offeree.

Problems with offers

There are several problems in the offer that is made during contract formation. Some of them are as follows:

Any new terms or negotiation of the offer would alter it and give rise to a counteroffer:

An offer is very sensitive to the introduction of any new terms, as a new term would end the offer that was first made and give rise to a new offer. This new offer is termed a counter offer because the position of the parties changes. Hence, an offer is highly conditional as it depends on those specific terms and conditions; the denial of the same ends its existence, and it cannot be accepted later on once such a denial is communicated. If the offer is accepted, it must be fulfilled as per the set circumstances laid down for its fulfillment.

An offer provides for limited acceptance of the terms and conditions it presents:

An offer provides for limited acceptance conveyed to the offeror by the offeree about the terms and conditions it has elaborated. The offeree now has to fulfill the terms and conditions as stated in order to show that the obligations have been met. If the offeree fulfills only a few of the obligations and not all of them, the offer ends up being invalid between them. There is no express communication of acceptance, and the offeree is free to, say, give up on the offer. Thus, it becomes difficult to distinguish whether there is any possible way for a party to be tied to their legal obligations resulting from the offer.

Consideration in contract formation

Meaning of consideration

Consideration is basically any promise made in the form of performance or abstinence from any act for the fulfillment of the promise. It is basically the benefit the parties to the contract get as a result of fulfilling their obligations. For example, you enter into a contract and rent a dress. The dress shop gets the rent amount from you, and you get the dress for yourself; thus, both parties benefit from one another.

Consideration is of two different types. One that requires consideration and one that does not require consideration. It is as follows:

Requirement of consideration

Any promise, property, performance, or abstinence of any act that has to it attached anything of legal value would require consideration to be provided as a part of fulfillment of the contract.

No requirement of consideration

Any gift, any promise that is gratuitous, or any past performance is considered free from the requirement of consideration. This is so because there is no bargaining or negotiation of any sort here. Therefore, the receiver receives it without being burdened to provide anything in return or exchange for it.

There are certain instances where consideration can be substituted but still remain enforceable. Under the Uniform Commercial Code, these are as follows:

Promissory estoppel or detrimental reliance

While generally a contract is unenforceable in the absence of consideration, a contract without consideration is in fact enforceable if its non-performance causes the promisor some injustice. In order to qualify as promissory estoppel, the following elements have to be satisfied:

The promise that has been made must have some reasonable, foreseeable, and detrimental reliance on the promisor
The promise that has been made has to be enforced in order to prevent any unnecessary injustice from happening
Good faith modification

A contract has all the terms and conditions specified in it for both parties to abide by. If it so happens that the contract is to be modified to form a new agreement or there are any modifications in the obligations of the parties that might require the contract to have a new consideration stated in it, the parties need not worry, as long as the changes have been made in good faith, which has been elaborated in Section 1-304 and Section 1-305 of the Uniform Commercial Code. For example, a contract has been made between Trevor and Chad. In their contract, they have laid down certain terms and conditions which they agree to fulfill for one another. After a few days, they learn of the growing demand for a certain author’s book, which is part of their business. So, Chad asks for an extra supply of such an author’s book, and Trevor promises to do the same given extra time, which allows him to build an inventory for the same to provide Chad with all of his demands. If any modifications are made related to meeting extra demands, changes in payment for extra books, or supply time, it would be in good faith and would not require a new consideration to be paid.

Role of consideration in contract formation

Consideration plays an important role in establishing the parties’ willingness to form a contract with one another. The consideration differs from contract to contract and situation, but one thing that remains constant is that the party has to showcase their consent to enter into a contract. A consideration can be said to be the second form of consent after the parties agree to the offer they are presented.

When the parties are first presented with the contract, they agree to it and sign it, which is the first form of acceptance, and the consideration that they present to one another is the second form of acceptance. This second form of consideration can be said to be materialistic since it is in the form of money or property in exchange for the goods and services availed.

Acceptance in contract formation

Meaning of acceptance

Acceptance simply means providing positive or affirmative consent to anything that is offered. If one were to talk about acceptance in the context of contract law, it would mean that they are interested in entering into a contract with the other party, are showcasing this interest in the form of provisioning their assent to it, and are accepting of the terms, conditions, and obligations attached to the contract.

Intention of parties to accept

Thus, it becomes important to determine whether the parties have any intention to accept the offer presented to them or not. Because acceptance finally results in the formation of the contract. The different rules that are followed in order to determine the same are as follows:

Traditional rule under common law

Under the common law, the traditional rule is followed, which is also commonly known as the mirror image. As per this rule, the acceptance and the offer must be a mirror image of one another. If there is any new addition or even a deletion of the terms and conditions it would give rise to a counteroffer. A counteroffer nullifies the older offer, basically creates a new offer, and showcases the intent to not be tied to specific terms and conditions and negotiate on some new terms.

Under the common law rule, if a possible future offeree makes an inquiry into the offer without explicitly stating their decline for the same, it does not mean that they are rejecting the offer as a whole, but rather they are asking about it. Meanwhile, if they continue to mumble while providing their acceptance of the offer, it does not render the offer meaningless as it stands to be already accepted. But it is still difficult to truly determine from the grumbling and inquiry whether there was an acceptance of the offer.

Uniform commercial code provisions

The Uniform Commercial Code stands in stark contrast to the traditional rule under common law. The common law cannot keep up with the transactions of contracts in the modern world, which are much more complex than they seem. There are several issues with modern-day contracts that the older common law cannot resolve.

One of the major issues that the parties to the contract face is the standard form of the contract. These standard contracts do not clearly indicate the parties’ desires and agreements because, at the end of the day, it is not possible for the parties to agree to the terms and conditions they present to one another. This results in disputes, and thus it becomes important to engage counsel who would personalize the contracts to such an extent that they are free from their appearance like any other standard contract, and even if the parties do not go through it thoroughly, it would be the closest to perfect contact for them.

In the situation where there is a dispute between the parties, the court would cite the absence of mirroring between the acceptance and offer if it is prepared without any personalization or changes, which makes it an invalid contract in the eyes of the law. If it is done, then it would be deemed to be a valid contract, and the court would step forward to resolve the issues with it. It is important to note that if the dispute arose during the course of the performance of the contract, then the court would state there had been an implied acceptance of the counteroffer, which caused confusion amongst the parties as to what terms they would be bound to.

To prevent such confusion, changes have been made to Section 2-207 of the Uniform Commercial Code, which is also known as the Battle of the Forms. As per the changes, any contract for the sale of goods would not follow the mirror image rule, but rather, it would continue to be a contract even if there is some modification in the terms of the offer and the terms of the acceptance as well, and they do not need to mirror one another.

The traditional contract rules bind the parties to perform the contract in a certain way, leaving little to no room for flexibility in the contract. However, this change in modern law envisages the parties to the contract of sale being able to freely propose additional terms from which they might both benefit. However, there are certain limitations. The new proposed terms become part of the contract unless there is limited acceptance of the proposed terms by either or both of the arteries; the proposed terms would alter the original offer; within an appropriate time, the offeror provides his rejection in the form of a notice just after receiving the acceptance.

Thus, acceptance does not happen when the agreement is accepted in part, that is, on certain conditions, or when the offer has not been made clear, as under Section 2-207(1). Additionally, if it becomes a concern for the offeror to accept all the terms and conditions but faces an express rejection or conditional acceptance from the offeree, then in that case, some modifications can be made in order to accommodate the offeree’s needs and ensure that they accept the offer.

Communication of acceptance

In order to ensure that both parties have full and complete knowledge that they are accepting of the terms and conditions of the offer, they have to communicate it to one another. In order to do so, the offeror, that is, the one who has proposed such an offer, has to ensure the place, time, and manner in which the offeree must communicate his acceptance to him before sending in the offer to the offeree.

For example, the offeror named Rachael communicates the offer to the offeree, Diana and states that the acceptance must be communicated to her by December 20th, 2023 in the form of an email. Now that Diana is interested in the offer, she communicates the same to Rachael by December 20th, 2023 but not in the form of an email but in the form of a handwritten letter, which she posts in the postbox. Even though she met the time and date of the communication of acceptance, she failed to comply with the manner of communication of acceptance.

Communication at an instant

There are certain instances where the communication of the acceptance is instantaneous, that is, as soon as the offer is received or in the same transaction that the offer has been made. Such instantaneous communication of acceptance happens when the offer has been made while the parties are negotiating face to face, on a video call, or in any other medium of communication that, in the virtual mode, is quick and instant. So what happens is that as the offer still stands, the offeror presents the offer to the offeree, the offeree instantly conveys their acceptance to the offeror, and the contract becomes binding on both the offeror and the offeree.

Communication that is non-instantaneous

There are certain instances where there can be no instant communication of acceptance, or the offeree needs some time to rethink it. Then, the offeror, seeing to it, provides the offeree with some reasonable amount of time to think about it and decide if they want to enter into a contract or not. Such an offer is also communicated through a non-instantaneous medium of communication, like a voicemail, a fax, or a letter.

Because the communication is non-instantaneous, several problems are bound to arise. For example, the acceptance has been communicated in the form of a letter by the offeree to the offeror, but the offeror, thinking his offer will be rejected, presents it to another person. Would this new proposal be valid while the old acceptance is still in transit? This is one of the questions that might persist. Therefore, it becomes important to mark the acceptance and timeline of the process. This can be done through the mailbox rule, which is present in the common law of contracts and also in the Uniform Commercial Code in a modernized form.

Mailbox rule under the Common Law under contract

Under the common law under contract, the mailbox rule states that, once the acceptance of the offer has been communicated to the offeror through mail, that is, the mail has been dispatched and is on the way to reach the offeror, then it would be the right way of confirming the acceptance. In the case of communication to the offeror of acceptance, for a business, the trade practice followed by them would be an appropriate means of communication of acceptance.

Now if we talk about the opposite, like if the acceptance has been communicated in the proper manner, or if that acceptance has been dispatched in a manner that is not authorized, then the offeree is put in a disadvantageous position as they could be at risk of losing the offer or the acceptance could be lost. The mailbox rule under modern law aims to resolve these issues.

Mailbox rule under the Uniform Commercial Code

Under the Uniform Commercial Code, the general assumption for offers that lack a specific medium and mode of communication of acceptance would have to be accepted in any reasonable manner of communication. It also explicitly states that if the offeree has dispatched the acceptance to the offeror in a manner and time that is reasonable, then it would be deemed to be effective from the date it was dispatched.

Now the question arises about the vagueness of the term “reasonable”. Reasonable means something within reason, something that is fair and appropriate. Therefore, the definition of what would be reasonable depends on the circumstances of the offer that was made. Some of the factors which determine reasonableness are the speed, manner, and reliability of the means of communication, the nature and extent of transactions, and the previous dealings of the parties with one another.

In the case where the offer has been made through a telegraph and the acceptance conveyed through a letter, it would be deemed to be a valid form of communication, and thus, as soon as it is dispatched, it would be effective for both parties. However, there are other factors that are considered to be flaws.

Flaws like insufficient postage stamps and incorrect addresses are bound to make it impossible to effectively communicate whether or not it would be a valid form of acceptance. While the common law remains silent on this, the Uniform Commercial Code states that if it is received after dispatched, within a reasonable period and manner, it would amount to an effective means of communication.

Role of acceptance in contract formation

Acceptance plays an important role in determining whether the contract formed is valid or not. It becomes necessary for the parties to communicate their acceptance to one another to become bound by their offers and signify their intent to contract with one another. Therefore, it is necessary for the offeror to convey acceptance to the offeree, and the offeree must also convey their acceptance to the offeror. In the case of a unilateral contract, the offeree performing the act is sufficient to be considered acceptance, but not in the case of bilateral contracts, where the acceptance of both parties is required.

Additionally, it is important for the offeror to stipulate to the offeree in the offer made, what the appropriate means of communicating acceptance are. And if the offeree is interested in the offer, they must communicate only through the stipulated means of communication. Because the stipulation of the means of communication of acceptance in itself is a condition, failure to do so does not result in the formation of the contract.

As far as silence is concerned, silence is not generally a valid means of communication of acceptance. If the offeror states, “If you do not respond in two days, I take it that you accept the offer”, it imposes an unnecessary duty and obligation on the offeree to respond to the offer. Thus, this does not amount to acceptance if the offeree does not respond. However, if the parties have been in contract with one another previously, then even their silence would amount to acceptance.

Formalities in contract formation

While the mutual assent of the parties, certainty, intention to create legal intention, capacity of the parties to contract, offer, acceptance, and consideration form the basic formalities of the party to contract. However, there are other formalities related to it. Some of the other formalities are as follows:

Details of the parties and who they represent

It is important for the contract to mention the details of the party like their name, if at all they represent any company, and in what capacity they are associated with the company (that is, like director or CEO, etc.). The contract must also mention that correspondence address for further communications between the parties that are to take place. The contract must also contain the phone numbers and/or email addresses of the parties for any instantaneous communication that might be required.

Review by the lawyer

After the parties agree to enter into a contract with one another, it is essential for a lawyer to review the contract. The lawyer basically reviews the contents of the contract, whether the purpose of the contract is lawful, whether the parties have the capacity to enter into the contract, whether the parties require any modification to the contract, and any other follow up advice to make the contract close to perfect for the parties. The lawyer is also responsible for checking if the contract complies with all the laws present in the place.

Signature

Once the contract is ready for both parties to bind themselves, it becomes important for the parties to sign it. Their signature acts as a personal seal and signifies the parties’ intent to enter into the contract. Generally, two original contracts are retained with each of the parties, with their signatures on each of them. These original documents can be used later on when required, like for the production of evidence in case of any dispute between the parties. The signature must be that of the party to the contract, not anyone else.

Notarization

A contract can be notarized. Such notarization is done to ensure that the document has the legal weight to be produced before the Court, and it also ascertains the identity of the parties to the contract and provides safety and security to the document. A notarization basically authenticates the document, and once it has been notarized, it is free from expiry; that is, it does not require to be notarized again.

Date

The date is one of the most essential parts of the contract. This date becomes the timeline for the calculation of installment payments and other contractual obligations that are to be done either in part or in whole by the parties. It also stipulates when the contract becomes binding on the parties and is basically the effective date of the contract. Thus, it prevents confusion among parties and helps to ascertain the cancellation date and expiration date, if required, in the event of a failure to comply with the obligations of the contract.

Contents of the contract

Since the contract is to contain all the details of the parties, it is divided into different components, which are also known as clauses. These clauses address different parts of the contract. But before that, the contract must contain a title, a date, the names of the parties, and other details. After that, the contract must directly dive into recitals, which mention the background of the party and the reason for which they are entering into a contract.

Since the contract is specific to the parties, it must contain in detail the explanation of any technical terms necessary for understanding it better. The contract must also contain a representation and warranty clause that highlights their duties and obligations towards one another with respect to the contract they have formed.

The contract must also contain a payment clause elaborating on the manner and mode of payment to be made and whether it is to be made at once or in installments. The payment clause contains all the details related to the payments. It addresses the payment amounts to be made and also the manner, mode and time in which it is to be made. The contract is also to contain a tenure clause to ascertain the time period within which the objective of the contract is to be achieved, and the parties are to abide by this time period. Parties may further set milestones and assign time periods for the same to better understand it.

The parties may also include a termination clause so that they can terminate the contract upon the failure of the party to comply with the contractual obligations; this must include the manner and mode of issuance of notice to the party that has failed to comply. The parties can also include a dispute resolution clause and mention their preferred mode of dispute resolution. The parties may also include covenant, consideration, indemnification, penalties, amendments, and remedy clauses as a part of their contract.

Terms of the contract

As discussed, the terms of the contract include offer, acceptance, consideration, obligations, capacity of the parties to the contract, lawful objective and purpose of the contract, mutual agreement, and meeting of minds, among other things. All these terms help to better define and understand the rights and obligations that the parties owe to one another.

Unfair contract terms

A contract term would be deemed to be unfair if it in any way puts one party in an advantageous position over the other or goes against the provisions of the law. Some examples of unfair contract terms are:

Levying a penalty for terminating the contract early
Changing the terms of the contract without informing the other party
Putting one party in an advantageous position over the other
Giving one party bargaining and negotiating power over the other
Giving the other party no say in the contractual matters

Important case laws

Thus it becomes important for us to discuss some case laws related to contract formation to better understand it. One such case is the case of Lucy v. Zehmer (1954). In this case, Lucy, the plaintiff, and Zehmer, the defendant entered into a contract. But the catch here is that the contract was written by the defendant who said that the contract was just a joke written on a tissue paper/napkin. The plaintiff took the contract in all seriousness and decided to enforce it and the defendant shut this idea of hers down by stating that he was just joking around. The Court held that if there is reasonable belief of the plaintiff that a contract has been made even when the other party has made no such intent then in that case, the contract can be made enforceable. In addition to this the acts of the plaintiff, who is proposing a small amount of money to bind the contract and getting her brother to pay half of the decided amount, all contribute to showcasing the seriousness of the plaintiff in entering into a contract which the defendant just cannot fail to acknowledge on the ground that it was a joke written on a tissue paper/napkin. It is a valid contract as the parties were in a sane state of mind.

In the case of Cummings v. Premier Rehab Keller, P.L.L.C. (2022), the Supreme Court refused to provide the plaintiff with damages resulting from the emotional distress caused by private action of the two acts, namely the Rehabilitation Act of 1973 and the Affordable Care Act of 2010. These acts are likely to be the reason for the discrimination which ultimately resulted in emotional distress to the plaintiff and hence no recovery of damages could be claimed in this suit.

Conclusion

A contract is a very important part of our lives. We engage in contracts in different capacities, sometimes as individuals for the purchase of basic necessities, sometimes as employees working under our employers, and sometimes as customers to the banks and other services and facilities that we avail of. Contracts are an intrinsic part of our lives. A contract can be of various types, and thus we do not have to limit ourselves to the standard contract that requires parties to sit down, negotiate, and sign on paper, the modern types of contracts have evolved beyond this.

But before a contract is formed, there are several things to look into to make it close to perfect. These include, but are not limited to: the capacity of the party to enter into a contract; the intent of the party to enter into a contract; there must an offer that must be communicated from the offeror to the offeree, there must be an acceptance which must be communicated from the offeree to the offeror, there must be some consideration; the parties must create fair terms and conditions for one another and bind themselves to performing the contract.

Thus, a contract is the most important part of human life, without which humans cannot exist. A contract helps to form new relationships, grow forward in life, engage in business, and meet new people at the same time. A contract does not just limit our own personal benefit; it benefits all those around us.

FAQs

What is a contract?

A contract is a mutual agreement between parties to fulfill a common purpose that is enforceable under law. In a person’s lifetime, we enter into a variety of contracts. Most of the contracts we are exposed to in our day-to-day lives are simple or express contracts. From purchasing groceries to agreeing to the terms and conditions before installing an app, we are exposed to contracts of various types.

What are the important factors to consider for the formation of a contract?

There are several factors to consider while a contract is formed. A contract must have a lawful purpose, the parties must provide their free consent, the parties must have the legal capacity to enter into a contract, there must be an offer and acceptance, the offer and acceptance must be communicated, there must be some consideration etc. More importantly, the parties must keep in mind that they are not trying to dominate the other; they should negotiate in a free and fair manner about the terms and conditions of the contract. They must also ensure that they understand the business power they have and are respectful towards each other.

What provisions govern formation of contracts in the United States?

The common law majorly governs the contracts across the United States and it is contained in the Restatement (Second) of Contract. Other special types of contract are governed by the Uniform Commercial Code (UCC). In regard to this, parties may mutually decide what would be their choice of law for governing the contract and choice of forum to decide the place where the dispute would have to be brought to.