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Knowing When You Have A Contract

Oddly enough, one of the mysteries of everyday law is figuring out when you've entered into a contract. Of course, you should get all important contracts in writing and have legal advice before you commit yourself - but how can you do that if you're not sure when bargaining has ended and a deal has been struck? Here's a quick guide to how a contract is formed.

OFFER: The bargaining process may take many forms. Since most contracts begin with an offer, we'll look at that first.
An offer is a communication by the person making the offer (the offeror) of a present intention to enter a contract. It is not simply an invitation to bargain or negotiate. For the communication to be effective, the person who is receiving the offer (the offeree) must receive it. In a contract to buy and sell, for an offer to be valid, all of the following must be clear:

• Who is making the offer?
• What is the subject matter of the offer?
• How many of the subject matter does the offer involve (quantity)?
• How much is offered (price)?

Let's say you told a friend, "I'll sell you my mauve-coloured car for one thousand dollars". Your are making the offer, your friend is receiving it, and the car is the subject matter. Describing the car as a mauve car makes your friend reasonably sure that both of you are talking about the same car (and only one of them). Finally, the price is $1,000.00. It's a perfectly good offer.

An offer does not stay open indefinitely unless the person receiving it has an option, an irrevocable offer for which that person bargains (see box on option contracts). Otherwise, an offer ends when:

• the time to accept is up - a "reasonable" amount of time, or the deadline stated in the offer
• the offeror cancels the offer;
• the offeree rejects the offer; or
• the offeree dies or is incapacitated.

An offer is also terminated, even if the offeree has an option, if:

• a change in the law makes the contract illegal; or
• something destroys the subject matter of the contract.

ACCEPTANCE: A contract is not complete unless an offer is accepted. But what, exactly, constitutes the acceptance of an offer?
An offer is accepted when the offeree voluntarily communicates assent to the terms and conditions of the offer. Assent is some act or promise of engagement. An easy example of an assent might be your friend's saying: "I agree to buy your mauve car for one thousand dollars".

Generally, a valid acceptance requires that every material term agreed to be the same as in the offer. Thus, if the offer requires acceptance by mail, you must accept by mail. If there's no such requirement, you just have to communicate your acceptance by some reasonable means (not by carrier pigeon or smoke signals but by telephone, mail, or maybe facsimile). On the other hand, an assent that is not quite so specific but is crystal-clear would also suffice - such as, in the car example, saying, "It's a deal. I'll pick it up tomorrow". The standard is whether a reasonable observer would think there was an assent.

Can silence make up an acceptance? In most cases, the answer is no. Yet there are circumstances where failure to respond may have a contractual effect. Past dealings between the parties, for example, can create a situation in which silence constitutes acceptance.

Suppose a fire insurance company, according to past practice to which you have assented, sends you a renewal policy (which is in effect a new contract for insurance) and bills you for the premium. If you kept the policy but later refused to pay the premium, you could be liable for the premium. This works to everyone's benefit: if your house burned down after the original insurance policy had expired but before you had paid the renewal premium, you obviously would want the policy still to be effective. And the insurer is protected from your deciding not to pay the premium only after you know what claims you might have.

Can acts make up an acceptance? Yes. Not only words, but generally any conduct that would lead a reasonable observer to believe that the offeree had accepted the offer qualifies as an acceptance. Suppose you say, "John, I will pay you fifty dollars to clean my house on Sunday at nine o'clock a.m."

If John shows up at nine o'clock a.m. on Sunday and begins cleaning, he adequately shows acceptance (assuming you're home or would otherwise know he showed up).

To take another example, you don't normally have to pay for goods shipped to you that you didn't order. But if you were a retailer and you put them on display in your store and sold them, you would have accepted the offer to buy them from the wholesaler and you would be obligated to pay the invoice price. You otherwise would only have to allow them to be taken back at no cost to you. Sometimes this is called an implied (as opposed to an express) contract. Either one is a genuine contract.

An acceptance is effective, and the contract is usually in effect, as soon as the offeree transmits or communicates the acceptance - unless the offeror has specified that the acceptance must be received before it is effective, or before an option expires. In these situations, there's no contract until the offeror received the answer, and in the way specified, if any.

What is an Option Contract?
An option is an agreement to keep an offer open for a certain period. It's usually made in return for money. For example, in return for a $50 payment today, you might agree to give your friend until next Friday to accept your offer to sell her your car for $1,000. Now you have an option contract, and you may not sell the car to someone else - even for $1,200 - without breaching that contract. Selling and option puts a limit on your ability to revoke an offer, a limit that the option-holder bargains for with you.

The foregoing comments are of a general nature, and are not intended nor should they be used as a substitute for legal advice or opinions which can be rendered only when related to specific fact situations.

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