An agreement is the second essential step in creating a contract. An agreement represents the acceptance of an offer made by another party. When an agreement is reached, it means that the two parties to a contract have agreed to terms and have decided to become bound to perform the actions in the contract.
In the past, this agreement was known as a “meeting of the minds,” but this has fallen out of favor in court rulings over the last century. Instead, an agreement in a formal contract is now recognized by the signing of a contract. In an informal contract, which is a contract when signatures are not exchanged, acceptance is demonstrated by the actions of the two parties. In a bilateral contract, agreement occurs when the two parties accept the obligations placed on them. When a unilateral contract is in effect, agreement occurs when the offeree completes the action requested by the offeror.
The “meeting of the minds” as a standard for recognizing agreement has fallen out of favor due to the recognition that a court cannot assume to know what is within the mind of any individual. As a result, the court cannot possibly interpret the intentions of any party to a contract at the time they enter into the contract. The standard that the courts have adopted instead is a reasonable person test. The reasonable person test is designed to guard against any agreement which would be detrimental to the person agreeing to the contract.
In order to accurately understand the concept of agreement, it is crucial to understand when a valid offer has been made. An offer is made when a party, known as the offeror, presents terms of a contract to another party. The party that receives the offer is known as the offeree. If the offeree accepts the offer, the two parties are considered to be in agreement.
In contrast are offers of “invitations to treat.” Invitations to treat are not offers. Invitations to treat can happen in a number of ways. Some of the most common include the display of goods in a store window, an auction without reserve, the solicitation of competitive bids, or advertisements for goods.
Except in specific circumstances, an auction does not constitute a legally binding offer and agreement process. An auction can be held with or without reserve. An auction without reserve is the rarer of the two kinds. An auction without reserve means that the item will automatically be sold to the highest bidder regardless of the price. An auction with reserve, or reserve auction, is an auction in which the person putting the item up for auction has stated a price below which they are unwilling to part with the item, or circumstances under which they “reserve” the right to not complete the exchange of goods.
Auctions present interesting situations when considering offers and agreements. In an auction without reserve, the person placing the goods up for auction is obligated to accept the final bid. Each bid during the auction represents a new offer. Each higher bid that the auctioneer accepts means that the offer represented by the previous bid is invalidated. During a reserve auction this can create some complications.
If the person placing the goods up for auction decides against accepting the highest bid, they are left without an alternative. Even if the person would rather accept the second highest bid represented, they are unable to do so because the higher bid caused the previous bid to become voidable.
Advertisements are not considered to be offers because they may oblige the person creating the advertisement to sell more goods than they possess. As a result, an agreement cannot be reached as the result of an individual responding to an advertisement. Advertisements are technically considered “invitations to treat.” However, there are circumstances in which an advertisement can constitute an offer.
The Nineteenth Century case of Carlill v. Carbolic Smoke Ball Company in England involved a promise by Carbolic Smoke Ball Company to pay £100 to anyone who used their product but still developed influenza, which their product was claimed to prevent. As guarantee of their claim, the advertisement said that the company had deposited £1000 in an account to pay anyone who caught the flu.
The advertisement was considered to be a unilateral contract. The agreement by Louisa Carlill was twofold. The first part of the agreement can be seen in her purchase of the smoke ball, and the second element of agreement was her continued use of the ball.
The English Court of Appeals ruled that the advertisement became a legally binding contract on several grounds. The most relevant part of the ruling was that while an offer existed between the company and the entire world, a contract only existed with those individuals who had taken the actions to accept the terms of the offer. Acceptance in this case is interchangeable with agreement. This case also cemented the idea that conduct was sufficient to convey agreement with the terms of the advertisement’s offer.
Agreements to agree are not considered legally binding. These legal documents only reveal that the concerned parties are considering a future contract. In and of themselves an agreement to agree does not mandate action on the part of either party. Agreements to agree arise when two parties are discussing an event involving future transactions which are still in progress. A statement of future intent is not a legally binding contract. It only indicates an agreement by the two parties involved in the negotiation to attempt to form a future contract. An agreement to agree is not binding if the matter under discussion is still in dispute.
An agreement to agree may be considered a contract, however, if the material terms of agreement are present. Agreements to agree can become legally binding agreements if they contain all the typical elements of a contract. If, however, an agreement to agree merely records the terms that have been discussed in preliminary negotiations, or they can be given the full weight of a contract to which both parties have agreed. Agreements to agree are sometimes known as letters of intent. Whether the document is titled an agreement to agree or a letter of intent, the legal significance of the terms is equal.
In order for agreement to occur, the offeree must have an intention to enter into the contract. Intention can be interpreted by action or by verbal acceptance of the terms provided by the offeror. Intention also extends to the offeror. The offeror’s intentions are rarely subject to question.
Intention to form a contract is one of the requirements to form a contract. Intention to be legally bound by a contract does not exist during the initial negotiation of a contract. Courts generally do not assign intention to either party by their interpretation of the parties’ statements of future intent or by agreements to agree.
There are several circumstances under which an agreement or an offer may be rescinded. The first way to rescind an offer is to attempt to change the offer. Any attempt to change an offer is known as a counter-offer. If a counter-offer is presented and subsequently rejected, the execution of the original offer cannot be compelled by a court of law. Unless the counter-offer contains a provision specifically authorizing it, any previous offer becomes invalidated.
Contract negotiations are often lengthy processes. If during the negotiations one of the parties discovers that the information being discussed in the negotiations is substantively different than has been presented during the negotiation process but fails to disclose this information, it may serve as grounds to invalidate the other party’s agreement. If, however, the information in dispute is an expression of opinion, it may be found to be false without invalidating the contract negotiations. Expressions of opinion are not given equal weight to other elements of preliminary negotiations.
Option contracts are contracts in which the offeror, or promisor, is limited in their ability to withdraw or rescind a contract. An option contract is an important element of a unilateral contract. Traditionally a unilateral contract is only formed when the action under consideration is completed. This is an issue because it provides no protection to an offeree who has completed the partial performance of the contracted action before the offeror withdraws the contract under discussion.
An option contract transforms an unilateral contract into a bilateral one because it provides some guarantee to any party providing agreement to the contract that their actions will receive compensation. The compensation may begin immediately after the action has begun, or may only come into effect once a significant portion of the work is completed.
The party which has engaged an action leading to the partial performance of the contract may be able to claim detrimental reliance upon the belief that the offeror would provide payment. For instance, Mike hired Steve to paint the walls and ceiling of his room for $100. Mike told Steve to leave after Steve had finished painting the four walls, and was in the middle of painting the ceiling.
Under a traditional unilateral contract, Steve would not be entitled to any of the $100 because the money was provided as consideration for the completion of the task. Steve, however, could compel Mike through promissory estoppel to compensate him for the partial performance of the task. Steve undertook the actions under a detrimental reliance that Mike would allow him to complete to task.
Option contracts are related to the ideas of promissory estoppel and detrimental reliance. In contract law, promissory estoppel and detrimental reliance apply if the actions a party has undertaken by the offeree while under contract would be unfairly detrimental to the interests of the offerree and would unjustly enrich the offeror. As a general legal principle, estoppel is meant to halt any action which would be unfair to the interests of one party in comparison to another.
As in the above example, detrimental reliance comes into effect in instances of partial performance of unilateral contracts because the party fulfilling the actions which complete an unilateral contract have a detrimental reliance upon the party offering the contract to adhere to the terms of the contract. Promissory estoppel applies because it seeks to “estop,” or halt, the offeror from withdrawing their promise of consideration.
Option contracts are usually found in real estate. Real estate option contracts exist primarily for the benefit of the buyer. The buyer in a real estate option contract is allowed time to secure financing, to arrange for a contractor to examine the land, and to investigate relevant zoning laws governing the property. Real estate option contracts do not oblige the buyer to grant agreement to the seller’s offer. Agreement in real estate contracts can be withheld by a buyer looking to make money off the land. Real estate option contracts often have a short period of time before the terms laid out in the contract lapse.
There are several ways in which an irrevocable offer can be terminated. The first way to terminate an irrevocable offer is for the offerree to reject the offer, either by denying it or by presenting a counter-offer. The second way is for a period of time laid out in the original offer to expire. If the offer states that it must be accepted by a certain time, but it is not, then the offer to provide agreement to the contract is considered terminated.
An irrevocable offer, or any other offer for that matter, can also become unenforceable in several other circumstances. If the party who offered the contract dies or becomes legally barred from entering into a contract, such as due to any form of disability, then the contract cannot be agreed to or accepted.
If the person who has agreed to the contract also dies or becomes incapable of entering a contract, then the contract may also be declared unenforceable. If the contract subject to agreement is related to an illegal act, then it is considered void. If the item under discussion in contract negotiations is destroyed, then it is obviously impossible for an agreement to be submitted in response to an offer.
Acceptance of the contract can happen in several ways. The most fundamental is that the acceptance must be unequivocal. There can be no hesitation present in the acceptance of the terms laid out in the offer. If there is any objection to the terms laid out in the offer, then full acceptance has not occurred. Any changes proposed to a contract, as mentioned above, represent a counter-offer and an invalidation of the original offer.
Communication of acceptance is not required in an unilateral contract. The acceptance of an unilateral contract occurs through action. Silence can almost never be considered a condition constituting acceptance of a contract. Even if the offeror tells the offeree “by silence you accept”, it is generally not considered legally binding.
The only exceptions under which silence can be considered acceptance are if the offeree watches the performance of an action by an individual who would have a reasonable expectation of compensation for the action and does not stop the action. This is considered an acceptance by silence because they failed to reject the offer. If there is a history of contractual relations between the two parties if the offeree does not comment on a preferred contract, their silent acceptance may be inferred from past history.
The offer may lay out the terms of acceptance, such as requiring that acceptance be faxed or mailed to the offeror. These are acceptable restrictions that can be placed on conditions of acceptance and are not considered to place an unreasonable burden upon the offeree.
