Podcast Episode 21—What is a Contract?

Podcast Episode Timestamps

00:00 — Do you really know what a contract is?
00:08 — Intro
00:31 — Check out the show notes for an outline of the episode.
00:48 — This episode is not a law school contracts course—it’s only a basic overview and explanation of what constitutes an contract.
01:45 — Reminder of what a cause of action is.
02:23 — The breach of contract cause of action.
03:01 — This episode is focused on element 1—the enforceable contract.
03:42 — What does the term “enforceable contract” mean?
04:30 — The three most essential components of an enforceable contract—offer, acceptance, and consideration.
04:56 — Offer and its three elements.
06:09 — Acceptance and three of its elements.
07:05 — Consideration—”mutuality of obligation,” “exchange of value,” or “the bargained for exchange of promises.”
08:57 — Does a contract have to be in writing? Not unless the statute of frauds says so.
10:10 — Defenses to a breach of contract cause of action.
11:24 — Takeaways from this episode.
11:57 — Subscribe, check the show notes, and email or schedule a call with your questions.
12:33 — Outro

Knowing What a Contract Is

Even non-lawyers talk about “contracts,” but do you really know what a contract is?  This week, I thought about delving into a specific type of contract.  But then, I figured it might make more sense to first go over the basics of what a contract actually is.  Take a look at the show notes for an outline of this episode to see the highlights.

This post is not a law school course.  In law school, you will probably have to study contracts over two school terms.  I only mention that to suggest that there are many rabbit trails you can go down when talking about the law governing contractual relationships, defenses, various specialized contracts, exceptions, exceptions-to-exceptions, and exceptions the exceptions-to-exceptions, etc. 

All I’m attempting to do with the post is provide the basic explanation of what constitutes a contract.  If you have a specific legal situation, you should always consult your trusted attorney in your jurisdiction to get a professional analysis of your specific situation.

Breach of Contract Cause of Action

In several posts, I’ve mentioned the breach of contract cause of action.  And, by way of reminder, (or for the first time if you haven’t tuned in before), a cause of action is a legal theory that a  plaintiff (the person suing) must establish for legal relief (such as an injunction or a money judgment) to become available.  The analogy I use is a cake recipe.  Without every ingredient in the recipe, the cake won’t turn out right.  Similarly, without proving every essential element of a cause of action, the plaintiff cannot access a remedy from the court.

The breach of contract cause of action has five essential elements (which I usually distill down to three).

1. There is a valid, enforceable contract;
2. The plaintiff is a proper party to bring the lawsuit for breach of the contract;
3. The plaintiff performed, tendered performance of, or was excused from performing its contractual obligations;
4. The defendant breached the contract; and
5. The defendant’s breach caused the plaintiff’s injury.

This post is focused on element one—the enforceable contract.

What is an Enforceable Contract?

As a practicing attorney, when I use the word “contract,” I am usually referring to an enforceable contract.  When it comes to the situations I deal with, if a contract is not enforceable it doesn’t make much sense to call it a contract (though the enforceability might be in dispute).  But for purposes of this post, I will be focusing on what an enforceable contract actually is, because there may be arrangements that folks refer to as contracts that are not actually enforceable contracts.

An enforceable contract is simply a contract that can be enforced in a court of law.  These are civil courts at law because breach of contract is a civil cause of action—criminal courts have nothing to do with this. 

When a court enforces a contract, it almost always results in a money judgment as the form of enforcement.  Only in special circumstances would the court’s enforcement look like specific performance.  Specific performance is the court-ordered physical performance of a contractual duty in certain situations where a money judgment would not be an adequate remedy.      

Although a detailed analysis of what constitutes an enforceable contract can be broken into five elements, for this post, I am narrowing it down to the three most essential components of an enforceable contract—(1) an offer; (2) an acceptance; and (3) consideration supporting the contract.  This third element, “consideration,” basically means an exchange of value, but I’ll dig into it later in this post.

Offer

A valid offer is required for the existence of an enforceable contract.  A valid offer requires the following three elements.

1. that the offeror intentionally made an offer (conduct and language must show with reasonable certainty an intent to enter into a binding agreement with the offeree—as opposed to thinking out loud, talking in their sleep, or mentioning something that would be nice to have);
2. that the terms of the offer were clear and definite (not vague); and
3. that the offeror communicated the essential terms of the offer to the offeree.  The offeror must be someone authorized to make the offer.  The offer can be made orally or in writing and becomes effective when communicated to the offeree, but an offer cannot be inferred from the offeror’s silence.

Acceptance

After a valid offer has been made, the offeree can either accept or reject it.  (By the way, a counteroffer serves as a rejection and new offer.)  Although acceptance can be broken down into four elements, for purposes of this post I am breaking it down into the following  three elements.

1. The acceptance was timely—meaning it wasn’t too late to be effective;
2. The acceptance was communicated to the offeror or the offeror’s authorized agent; and
3. The acceptance was clear and definite (not vague).  If the acceptance does not mirror the important terms of the offer, then it is not really an acceptance but, instead, it is a rejection and counteroffer.

Consideration

An enforceable contract must be based on consideration.  Consideration is sometimes formally referred to as “mutuality of obligation,” but I usually refer to consideration as “an exchange of value.”  A contract without consideration is not enforceable and I would say that it’s not a contract at all.  For example, if someone offers to perform a service gratuitously, there is no consideration because there is no corresponding promise to pay for the service.  That’s not a contract and it is not enforceable.  Instead, if performed, I would call it a gift.  Before it is performed, I would call it a promised gift that, if not performed, may be unfortunate but not enforceable in a court of law.

A more formal definition of consideration is “the bargained-for exchange of promises” and consists of either a benefit to the promisor (the person making the promise) or a loss or detriment to the promisee (the person who receives a promise).  The loss or detriment to the promissee can include promising to forego a right of the promissee, even if doing so is in the promissee’s best interest (such as promising to stop smoking in exchange for payment).

Like many legal concepts, consideration is a topic that can lead to a deep-dive and could easily be the focus of one or even a series of blog posts.  But, as I said at the outset, this is not intended to be a law school course.  What you need to know is that enforceable contracts require consideration which is an exchange of value.

Does it Have to be in Writing?  Statute of Frauds

An enforceable contract does not have to be in writing unless required to be in writing by the statute of frauds.  In Texas, the statute of frauds can be found in the Texas Business & Commerce Code at section 26.01.  In the Texas statute of frauds, eight situations require a promise or agreement to be in writing to constitute an enforceable contract.  A few that might be worth mentioning here include:

1. A promise by one person to take responsibility of another person’s debt, default, or other liability;
2. A contract for the sale of real estate;
3. A contract for a real estate lease if it’s for longer than one year;
4. Any agreement that is not to be performed within one year from the date of making the agreement;
5. A loan agreement where the amount loaned exceeds $50,000.

Other Categories of Defenses

In addition to statute of frauds, a defendant in a breach of contract lawsuit may have any number of possible defenses—as always, depending on the circumstances.  This post is not focused on explaining these defenses, but it might be useful to get non-exclusive list of possible defenses to provide an overview of the breadth of possibilities.  Defendants may defend a breach of contract lawsuit based on the following, and possibly other, defensive categories:

1. Formation problems,
2. lack of capacity,
3. illegality of the subject matter,
4. impossibility,
5. duress,
6. unconscionability,
7. undue influence,
8. violation of the statute of frauds,
9. mistake,
10. misrepresentation,
11. fraud,
12. commercial impracticability, and
13. frustration of purpose.

Whether any of these defenses actually exists requires an analysis and, if asserted, will ultimately be decided by the judge or jury.

Takeaways

The most important takeaways from this episode are (1) that an enforceable contract requires an offer, acceptance, and consideration; (2) that consideration means an exchange of value; (3) that contracts do not have to be in writing unless required by the statute of frauds; (4) that there are many possible defenses to a breach of contract lawsuit; and (5) that every step of the analysis can go very deep.

Disclaimer: This audio and blog post are for informational purposes only and should not be misinterpreted as legal or other professional advice. If you have a legal question, you should consult with an attorney in your jurisdiction. Thank you for tuning in to Keith Law, PLLC.

(Photo by energepic.com from Pexels)