Mutual Assent

Our topic today is how to form a contract. In future lessons, we'll talk about how to interpret a contract, how to wiggle your way out of a contract, how to enforce a contract, how to break a contract, and so on. Before we get to all that, we need to know how to make a contract. That's where we'll start. To make a contract, you need two things, mutual assent and consideration. We'll start today with mutual assent, which is the idea that the parties have both agreed to be bound to this deal. Then we'll turn to consideration in our next lesson.

You'll want to pay extra-close attention to these first issues because the bar examiners love contract formation issues. In fact, 50% of the MBE questions are about either contract formation or performance, and for good reason. So much flows from the initial question, do we have a contract and what are its terms? And that depends on what the parties actually agreed to— that depends on mutual assent. Today, I want to do four things. I'm going to talk about what mutual assent means in a Gestalt sense. Then we'll talk about the doctrinal requirements of offer and acceptance. Third, we'll talk about bilateral and unilateral contracts. Fourth, we'll talk about implied versus express agreements.

What is Mutual Assent?

What is mutual assent all about? Mutual assent means that the parties have reached agreement. In particular, it means they've agreed to be bound to this contract. It used to mean "meeting of the minds", and it still kind of does, but with a caveat that I'll explain in a moment. Basically, mutual assent is just fancy words for two parties agreeing to be bound to each other, to do the things they've agreed they'll do.

Courts generally want to be in the business of enforcing agreements, and the flip side of that is that courts do not want to be in the business of enforcing contracts on people who did not agree to them. The core of mutual assent is, did these two parties agree and to what?

What Does Mutual Assent Require?

That's what mutual assent is, but what does it require, as a matter of doctrine? The basic doctrinal requirements of mutual assent, which you can find in Restatement, section 22, are Offer and Acceptance— acceptance of that particular offer. Offers are the manifestation of a willingness to enter into a bargain, so as to justify another person in understanding that their assent to that bargain is invited, and will conclude it.

Offer

In practice, this means that offers must: be serious, they must contain the basic terms of the deal, they must convey an intention to be bound to the deal, an offerer must give the offeree the power to accept the deal. Let me say a word about each of these.

Serious

First, offers must be serious. That means they're not a joke. If I tell you I've been planning a practical joke on my brother, and then you come over to my house, and I wink at you and say loudly in front of my brother, "Hey, want to buy my brother's cherished stamp collection, which is worth over $1,000? I'll give it to you for five bucks." That's not a serious offer, courts would see through, even though it looks like an offer with some basic terms. Courts would see through the facts that that offer is being made in jest and it's not a serious offer.

Contains Basic Terms

Second, basic terms. Offers must contain the basic terms of the deal, or a formula for figuring those out. When I say basic, I mean basic— price, the thing being contracted for, the due date, and so on. Courts are okay with the parties leaving terms open, as long as the parties are both fine with some of the terms being left open, and there's some objective way to figure out what the open term is supposed to be.

You can't say, "I'll sell you my car, and we'll figure out the price later." "We'll figure out the price later," leaves the determination of that term to the parties, and courts will never be okay with that. But you can say, "I'll give you my car and you'll pay me whatever the Kelley Blue Book value is," or the CarMax value, or whatever, some objective criteria that's not up to the parties. That kind of fixed objective, but open price term, is okay.

Conveys Intention to be Bound

The offer has to be serious, has to contain the basic terms, and it has to convey an intent to be bound. The offerer has to communicate to the offeree that they intend to be bound by the commitments they're making.

Gives Offeree the Power to Accept

Then finally, it must communicate to the offeree that the offeree has the power to accept. The offerer is the master of the offer. They decide its terms, they bundle it up, and they pass it over to the offeree, who is given a chance to accept or reject. This is important, in the common law, if the offeree says, "Yes, but," or "Yes, and," 99% of the time, they're actually rejecting the offer and making a counteroffer. If I say to you, "Do you want to buy my car for $1,000?" and you say, "Yes, as long as you include a full tank of gas," in the common law, you are not accepting my offer, but are instead rejecting it and making a new counteroffer.

Objective Standard

By the way, all of this is objective. Remember how I said mutual assent is meeting of the minds? We don't really mean meeting of the minds in the subjective sense that the offerer and the offeree actually have a mind-meld. The law determines mutual assent, not by asking, "In their heart of hearts, what did these two people mean when they got together?" But instead asks, "What would an objective observer, a classic, reasonable person, what would they say if they watched the negotiations between these two parties?" Would they conclude that the offerer made an offer, and that the offeree accepted that offer? If that's the case, if they would conclude that they did, then in fact, they did. It doesn't matter what was privately going on in either party's head.

Preliminary Negotiations

Another thing to note about offers, and this sometimes helps you figure out where you've got an offer, is that they're more than preliminary negotiations. One thing that I do when I'm trying to figure out, do I have an offer that has been accepted, therefore, do I have mutual assent? I look at all the negotiations between the parties, and I draw a line. Above that line is what I would call preliminary negotiations— talk about price, talk about delivery date, any details that are being hashed out. That's all preliminary negotiations, and I'm trying to draw a line between negotiations and that point where I see finality from the offerer, who says, "I'm ready to commit to the following thing for the following price. Are you willing to commit too?"

Things That Are Not Offers

That's the moment that an offer is being made, and transfers power to the offeree to accept. Because of all this required in an offer, price quotes are generally not offers. Advertisements are generally not offers; they're often framed as an offer, "Come on down. We've got amazing offers for you." Those are generally treated as mere invitations to make an offer, not an offer themselves, because they're not specific enough to convey the essential terms and to invite someone to conclude negotiations by merely saying, "I accept."

Acceptance

What is acceptance? Acceptance is agreement of the offer. Note, it's not acceptance of any old offer, it's acceptance of the offer that was made to the party who has the power to accept.

Common Law

The common law makes a big deal of this. The common law deploys what's called the mirror image rule, which asks, "Does the acceptance perfectly match the offer?" so if I offer you my car for a certain price, and you say, "Yes, I accept I will buy your car, as long as you lower the price by $5." That's not an acceptance, it doesn't perfectly match the offer, but it is instead a counteroffer. I could reply to that counteroffer by saying, "Sure, I'll lower the price by $5," and now I'm accepting your counteroffer— we've switched roles. That's the common law.

UCC

The UCC treats things somewhat differently. In 2-207, the famous battle of the forms, the UCC essentially says, "We don't care so much about the moment of offer and acceptance, and we don't care so much if offer and acceptance differ a little bit. As long as there's rough consensus between the parties that they intend to do a deal." And the UCC applies because we're talking about a deal for the sale of goods, then we've got a contract, that's 2-207(1). What the terms of that contract are will be determined by the Battle of Forms Analysis in 2-207(2).

Merchants v Non-Merchants

I won't go into the details of that analysis here, but generally speaking, between merchants additional terms are automatically included in the contract; and between non-merchants, additional terms are mere proposals, to be included in the contract. Imagine that a buyer agrees to buy 100 widgets from a widget manufacturer, because you can do a lot with the widget, and the seller sends a box of widgets to the buyer with a statement that says, "Payment is due in 14 days."

If the buyer and the seller hadn't ever discussed when payment would be due, we've got a new term. What do we do with this additional term? The UCC Battle of Forms Analysis says, first, we've got a contract. The fact that they thought they had one thing and now they've got a different thing doesn't matter, we've got a contract. The additional term is a proposal to be included, or will be automatically included, if they're merchants. That's offer and acceptance.

Bilateral vs. Unilateral Contracts

Now, let's talk about the difference between bilateral and unilateral contracts. Contracts come roughly in two forms, bilateral and unilateral. Bilateral contracts are contracts where two parties exchange promises. A classic example is a sale of goods: "I promise to sell you my car if, and only if, you promise to pay me $1,000." I'm making a promise I will deliver my car, and you are making an exchanged promise that you'll pay me.

Unilateral deals are different, where one promise is exchanged for an action. Acceptance in a unilateral deal is the action. A classic example of this is a reward. If I put up posters all over town saying, "I've lost my dog. Find my dog. Bring my dog to me and I will pay you $100," I'm making a promise and I'm not asking for you to make a commitment back to me.

My promise is heading out to the world, but I'm not asking for anyone to make a return promise. It's not a bilateral contract. Instead, I'm saying, "Just go do the thing I want, and if you do it, you will be accepting my promise and we will have a contract. Find my dog, and I will be bound to pay you $100."

That's the difference between bilateral and unilateral. Finally, courts draw a distinction between terms that are implied in the contract and terms that are expressly stated. This comes up in the context of mutual assent because the parties can't specify, or often don't specify, expressly, everything that they intend to go into the deal. Sometimes they don't even expressly say, "I accept your offer," but they do things that tell us that they have implicitly accepted the offer. It's easy, for example, if I walk up to you and say, "I hereby offer you X in exchange for Y. Do you accept?" You say, "Yes, I accept." That's all express, but other times deals progress in a more implied fashion.

What if I see a gardener doing landscaping across the street, and I say to her, "Hey, that's really good work. My garden is a mess. I'll give you $100 if you spruce up my garden, do a little cleaning and some landscaping." She says, "Well, it depends on my schedule. We'll see." The next day, I wake up and see her working on my front lawn. We have a deal, it's just that her acceptance was implied rather than stated explicitly. Courts will see that exchange, and they'll say the parties had mutual assent, even though it wasn't the acceptance; wasn't communicated expressly. That's mutual assent.

Contracts require mutual assent and consideration. Mutual assent can be broken down into an offer that is accepted. Offers can be for a contract that is bilateral, in which case the thing that's being asked for in exchange for a promise is another promise, or contracts can be unilateral, in which case the thing that's being asked for in exchange for a promise is an action. In unilateral contracts, acceptance of the offer happens by doing the action that's required.

The last thing to note is that contract terms and mutual assents can be expressly stated out loud or written down, or it can be implied from the way the parties conduct themselves. With that behind us, our next task is to look at consideration. That's what we'll do in the next lesson.