Contract Law and Consent: How Contracts Form and When They Bind

What a contract is

This page is for education, information and intellectual discussion. It explains what each authority says and what each court decided. It does not tell anyone to use these arguments, and it is not legal advice.

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

Restatement (Second) of Contracts § 1 (1981)

Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

Restatement (Second) of Contracts § 17(1) (1981)

The Restatement is written by the American Law Institute. It is not binding law, but courts in every state rely on it. Sales of goods are governed by Article 2 of the Uniform Commercial Code, adopted in every state except Louisiana.

Offer, acceptance and consideration

An offer invites acceptance on stated terms. Acceptance must match the offer. Each side must give consideration, which the Restatement defines as a bargained-for exchange:

(1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

Restatement (Second) of Contracts § 71 (1981)

For example, Reading R.R. Co. v. Johnson (Pa. 1844) held that “A mere promise to pay the debt of another without consideration is not obligatory.”

Silence is usually not acceptance

Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only …

Restatement (Second) of Contracts § 69(1) (1981)

The listed exceptions are narrow: taking the benefit of services knowing they were offered for pay, an offeror who said silence would count as assent when the offeree silently intends to accept, and prior dealings that make it reasonable to expect the offeree to speak up if rejecting. The rule cuts both ways. A business cannot bind a consumer by silence, and an individual cannot bind a company or a government agency by mailing a notice that says “failure to respond is acceptance.”

Adhesion contracts and unconscionability

The term signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.

Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807 (1981)

Adhesion contracts — insurance policies, software terms, bank account agreements — are generally enforceable. Courts will refuse to enforce a term that falls outside the weaker party’s reasonable expectations or is unconscionable. Under U.C.C. § 2-302, a court that finds a contract or clause unconscionable may refuse to enforce it, enforce the rest, or limit the clause.

The classic definition of an unconscionable contract is one “such as no sensible man not under delusion, duress or in distress would make and such as no honest and fair man would accept” (Franklin Fire Ins. Co. v. Noll, Ind. Ct. App. 1945). In that case the court enforced the clause.

Defenses that undo consent

• Duress and undue influence — consent obtained by improper threats or by abuse of a relationship of trust.
• Fraud and misrepresentation — consent induced by a false statement of fact.
• Mistake — both parties wrong about a basic fact, or one party wrong in a way the other knew about.
• Incapacity — minors and people without mental capacity can usually avoid contracts. Adults are presumed to have capacity; the term sui juris describes that status.
• Illegality and public policy — courts do not enforce agreements to break the law.

Freedom of contract and its limits

In Lochner v. New York (1905), the Supreme Court said “The general right to make a contract in relation to his business is part of the liberty of the individual protected by the Fourteenth Amendment.” In 1906, Hale v. Henkel described an individual’s “power to contract” as “unlimited” (see Hale v. Henkel).

The Court abandoned that approach in West Coast Hotel Co. v. Parrish, 300 U.S. 379, 391 (1937): “The Constitution does not speak of freedom of contract. It speaks of liberty and prohibits the deprivation of liberty without due process of law. In prohibiting that deprivation the Constitution does not recognize an absolute and uncontrollable liberty.” Since then, freedom of contract has been treated as “a qualified and not an absolute right.”

How to check the contract law claim yourself

The best test of contract law is simple: look for a court that accepted it. We have not found one in the reported decisions. Next, read the actual law the claim points to. For example, check the statute, the UCC section or the constitutional text it cites. Then compare that text with what the claim says it means. For a real problem with a debt, a court case or a tax bill, a licensed attorney can explain your actual options. Our directory is a good place to start.

Sources and further reading

Official sources used on this page:

• law.cornell.edu
• static.case.law
• static.case.law
• law.cornell.edu

Related reading on Lawtopolis:

• "Everything in Public Is by Contract": Consent, Licenses and Contract Theory
• Public Law and Private Law: The Two Branches of the Legal System
• Hale v. Henkel (1906): "The Individual May Stand Upon His Constitutional Rights"