Contract formation is an essential part of establishing virtually any business relationship and documenting most business transactions. Business owners, executives and professionals enter contracts on a regular basis. While frequently a straightforward and uneventful process, in a contract dispute, the issue of whether a contract is legally enforceable is paramount. Contract formation is a technical process and more complex than it may seem.
This post will discuss the legal criteria for a valid and enforceable contract, including mutual assent, offer and acceptance. In my next post I will address consideration, other legal requirements essential to contract formation, and whether a contract must be in writing to be enforceable under the statute of frauds.
Legal Requirements for a Valid Contract in California
The California Civil Code defines a contract as follows:
§1549. A contract is an agreement to do or not to do a certain
§1550. It is essential to the existence of a contract that there
1. Parties capable of contracting;
2. Their consent;
3. A lawful object; and,
4. A sufficient cause or consideration.
While it is important to know the statutory definition and legal requirements for a contract in California, let's take a look at the legal principles underlying contract formation to gain a better understanding of how an agreement becomes legally binding and enforceable.
Fundamental to contract formation is the legal requirement of mutual assent. Mutual assent requires that the parties entering a contract, are, in fact, consenting to the same terms. At common law this principle is referred to as "a meeting of the minds".
Courts examine whether mutual assent exists between the parties by a review of the objective facts and evidence under the reasonable person standard. The reasonable person standard requires that the facts and circumstances be interpreted by the judge or jury objectively as a reasonable person in a similar situation would reasonably believe. This is necessary, as subjective intent cannot be measured; one cannot read another person's mind. See Meyer v. Benko, (1976) 55 Cal. App. 3d 937, 942-43.
Offer and Acceptance
Offer and acceptance analysis is a traditional approach in contract law used to determine whether or not a valid agreement exists.
An offer is a statement of the terms on which the offeror is willing to be bound. It is the present intent to be bound by a contract with definite and certain terms communicated to the offeree. The offer remains open until it is accepted, rejected, revoked or has expired. A counter-offer terminates the original offer.
Acceptance is the manifestation of a clear and absolute assent to the terms of the original offer communicated to the person who made the offer.
Like the offer, acceptance is measured by the objective reasonable person standard, not the subjective intent of the party receiving the offer.
In summary, mutual assent, offer and acceptance are all vitally important concepts to contract formation. Without a valid offer and an unqualified acceptance where the parties have mutually assented to the same terms, there is no enforceable contract.
Next, in a post entitled What Makes A Contract Valid in California Anyway? Part 2: Consideration and Other Formation Requirements we will examine other essential principles of contract formation, including consideration, legal capacity to contract and whether a contract must be in writing to be enforceable under the California statute of frauds.
Meyer v. Benko, (1976) 55 Cal. App. 3d 937, 942-43