When Do You Have a Contract?

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2-16-1When it comes to contract law, nothing seems to be easy. Everything from wording, interpretation and consideration winds up in court. In fact, one big litigation area deals with whether or not a contract existed in the first place.

That may seem strange on the face of it, but remember, a contract doesn’t have to be in writing. Think about various jobs you’ve had – did your employer make you sign a formal agreement, or just tell you “you’re hired?”

Before a legal contract is said to exist, there needs to be something called a ‘meeting of the minds.’

That may sound kind of strange, but think about it for a minute. Let’s say you’re sitting in a lounge with some friends, talking about business and whatever else comes to mind. Someone brings up a business idea. You contribute to the discussion, figuring it’s just idle talk. You use lots of words like “if,” “maybe,” “in theory,” and so on. A couple of days later, one of your friends send you an email with a draft contract drawn up, and then calls you to talk about what your new responsibilities are, and how much money you need to put into the new venture. In his mind, you made a deal. In your mind, it was just idle chit-chat over drinks.

Given those circumstances, is there a contract? From your perspective, the answer is definitely not. You had no intent to make a deal, and your friend has jumped the gun by making that assumption. You don’t see any meeting of the minds. Your friend, though, sees things differently, and thought that things went far beyond just chatting over a drink. From his viewpoint, you did agree to be part of this new venture, and should uphold your end of the deal.

So who’s right? Well, if the matter wound up in a court, the first thing a judge would do would be to apply the Objective Standard doctrine to the contract. This is another legal concept, which has been developed through years and years of litigation, and basically says “What would a reasonably educated bystander think, after looking at all of the facts relevant to the agreement?” If an unconnected third party was to take a look at all of the facts, starting with your conversation in the lounge, what would he or she think? Did you mean to make a deal, and are having second thoughts, or did your friend overreach and make an inaccurate assumption? Depending on the answer to the Objective Standard question, you may or may not find yourself in a legally-binding contract situation.

The lesson to take away here is clarity. Any time you’re talking to someone about a possible deal, be up front about your motivation. Are you engaging in idle conversation, or do you have something more in mind?

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