Video of: What is a contract?
Start Transcript: What is a contract?
The first key to avoiding contract pitfalls is to recognize when you have entered into a contract. To do that you need to know what the elements of a contract are. There’s really two key elements to a contract. The first is Mutual Assent and the second is bargained-for-consideration. Mutual assent means there needs to be an offer on one side of the contract and an acceptance on the other side of the contract. Both parties to that contract must mutually assent to it. They are intending to agree to something.
The second element of a contract is consideration. Consideration can be kind of a confusing topic, and I remember when I first started learning about consideration I was kind of puzzled by it. I think the easiest way to define consideration is something that is bargained for by the parties to a contract. Here’s an example. Let’s say I ask my friend Chip to pick me up from the airport. I probably should know better because Chip is not a super reliable guy. That’s on me, but still I go to Chip, “Hey Chip, would you mind picking me up from the airport tomorrow, 9am?” and Chip says, “Sure! Yeah, I’d be happy to,” and I say, “Okay, Chip, can I count on you here because this is important. I really need you to be there.” “Yes. You can count on me. I will be there.” “Do you promise?” “I promise.”
Okay, morning comes, there I am at the airport, it’s 9am Chip is obviously still in bed as per usual. Has Chip breached his contract with me, that’s the question. When I pose that kind of a hypothetical to people the first thing that people go to is, “No, that’s not a contract, so there’s no breach of contract.” “Well, why isn’t it?” “Well because it’s not in writing.” Contracts don’t have to be in writing. In general, contracts are effective even though they’re not reduced to a writing. There’s some good reasons to put a contract into writing, but they’re still enforceable in general, even if they’re just oral agreements.
The reason there’s no breach of contract, even though we had mutual assent, even though we were both in agreement that Chip was going to pick me up from the airport, there’s no bargained for consideration. Chip was not bargaining for anything. He wasn’t getting something valuable out of this, I was. If my agreement with Chip had been, “Chip will you pick me up from the airport and if you do, I promise to pay you twenty dollars.” Chip says, “Yeah, deal. I promise to pick you up from the airport and you promise to pay me twenty dollars.” Now we have a different story. When Chip fails to pick me up at the airport, now I’ve got a lawsuit against him.