5 Minute FAQ: When Is An Agreement a Contract?

A contract is an agreement that is legally binding, and can be enforced in court.

Q: So what are the magic ingredients that make an agreement a legally binding contract?

First, there must be a concrete, bona fide offer, for example, “I will sell you those shoes for $25”.  But if the seller had said instead, “I am not selling those shoes, but if I did I would probably sell them for $25,” then no contract can result.  (This is similar to the language used in a letter of intent, which is also not legally enforceable.)

Second, there must be an acceptance that matches the offer on at least the main terms, such that there is a “meeting of the minds”—“I will buy those shoes for $25.”  If there isn’t a match, then the reply to the offer might be considered a counteroffer (“I will buy those shoes for $20”) which requires its own acceptance.  Note that an offer can be accepted not only with words (oral or written), but also with actions, for example handing over the $25.

Another necessary ingredient is “consideration,” not in the sense of the parties being nice to each other, but in the sense of each party bargaining for a benefit, including the ever popular “money.”  Which sounds like it would always apply, because who makes an offer for which he does not seek a benefit in return?  But for example, an offer of a gift (“I will give you $1 million because you are a lovely person”), even if promptly accepted with a hearty “yeah baby!” would not “normally” be legally binding, because there is no bargained-for benefit to the gift-giver.  “Normally,” because there are exceptions where offers that lack consideration can still become legally binding.

Finally, some kinds of agreements must be in a signed writing to qualify as a contract.

Q: In some cases? You mean oral agreements can be legally binding?

Yes, if there is a valid offer, acceptance, and consideration, then most oral agreements qualify as contracts.  Certain kinds of important agreements are required to be in a signed writing.  In fact, the laws of every state except Louisiana require five kinds of agreements to be in a signed writing: 1) agreements to pay the debt of another; 2) agreements to sell or transfer real property; 3) agreements to get married; 4) agreements that cannot be completely performed within one year; and 5) agreements for the sale of goods (not services) worth more than $500.  These laws are descended from the English Statute of Frauds enacted in 1677.

In addition, assignments (transfers of ownership) of patents, copyrights, and federal trademarks are all required by law to be in a signed writing.  This often applies to exclusive licenses of patents, copyrights and trademarks, because they are often deemed equivalent to transfers of ownership. Also, a work made for hire contract with a non-employee must be in a signed writing.

Q: So oral agreements are okay?! Doesn’t that contradict what you are always saying?

I said oral agreements could be legally binding, but they are definitely not okay.  Trust me when I say— in case of problems, there will always be a conflict over just what was agreed to.  Any agreement concerning anything of value should always be in writing.  I wholeheartedly agree with the quote variously attributed to Yogi Berra and Samuel Goldwyn: “A verbal contract isn’t worth the paper it’s written on.”

Q: Can a series of e-mails discussing deal terms be considered a contract?

Absolutely.  And under the federal Electronic Signatures in Global and National Commerce (E-SIGN) Act and the largely complementary Uniform Electronic Transactions Act enacted in 47 states and the District of Columbia, an electronic signature in a business or commercial record will be given the same legal effect as a handwritten signature if it is: 1) a sound, symbol, or process; 2) attached to or logically associated with an electronic record; and 3) made with the intent to sign the electronic record.  So an e-mail agreement could be legally binding even if it concerned one of the five “Statute of Frauds” categories of agreements.  Typically, the problem will be figuring out whether in the back and forth of e-mails there was ever truly a meeting of the minds—an offer of terms that was substantially accepted by the other side.

Q: Putting this in the context of license agreements—are so-called “clickwrap” and “shrinkwrap” software license agreements legally binding?

Yes, they can be.  If the licensor made the terms of the license clear and visible to the licensee, and gave the licensee an opportunity to manifest its acceptance, either by removing the shrinkwrap on the install disc or clicking a “Yes, I Accept These Terms” button on a website before downloading the software, then the licensee will be bound by the license terms.  On the other hand, courts have ruled that where the license terms were on a submerged screen not visible from the download screen, then the downloader is not legally bound.  Similarly, if the license terms were not clearly and completely visible to the buyer/licensee before he removed the shrinkwrap, then he would not be bound.  I will examine some of these cases in greater detail in future posts.

© 2010, Richard R. Bergovoy. All rights reserved.

Tags: ,

Leave a Reply