All questions

Contract formation

i Basic elements

A contract is nothing more than an agreement to exchange things of value. In California, an enforceable contract requires reasonably certain terms, mutual assent to those terms, and something of value for both parties. To be 'reasonably certain', a contract's terms must be sufficiently definite that they provide a basis for later determining whether the parties have complied with their obligations and what remedy they would expect for a breach. An enforceable agreement must also have a lawful purpose and both parties must have the legal capacity to enter into a contractual relationship – children generally cannot enter into binding agreements, for example.

If an offer meets these requirements, it becomes a contract the moment it is accepted, provided the offeree accepts the terms without changes or preconditions. Acceptance does not have to be explicit. It can be communicated by beginning performance or by taking the consideration offered. Silence in the face of an offer is not acceptance unless there is a relationship between the parties that would indicate to a reasonable person that silence means acceptance. An offer may be revoked any time prior to acceptance, provided there was no binding agreement to leave the offer open for longer. An offeror can assign an expiration date to its offer, at which time the offer will automatically expire if not accepted. If no time period is specified, an offer will lapse after a 'reasonable time' an amount which varies based on the circumstances.

Consideration is an essential element of any contract, but offering most any benefit, or agreeing to suffer most any prejudice, is generally enough. Although little is required, a recommitment to perform a pre-existing obligation has no value and, therefore, cannot constitute consideration. Parties should be aware, however, that consideration can be so inadequate in comparison to the benefit received that it raises questions about whether the contract was obtained by fraud or duress and is, therefore, unenforceable. These issues are addressed elsewhere in this chapter.

ii Oral contracts

California does not require that parties set down their agreement in writing except under specific circumstance identified in a rule known as the statute of frauds. While there are others, the primary circumstances in which the statute of frauds requires that an agreement be in writing is when an obligation is not intended to be performed within a year or within the promisor's lifetime, or when an agreement involves the sale of real property or an interest therein. Even when the statute of frauds requires that an agreement be in writing, emails and electronic signatures are sufficient.

iii Modifications

Any contract may be subsequently modified by agreement of the parties, provided the same elements required for validity of the original contract are present. Except in those circumstances where the statute of frauds applies, parties to a written contract in California do not need a new written agreement to modify an existing one. It is enough that both parties fully perform in a manner that is consistent with the new understanding or that the modification is supported by additional consideration. However, if parties to an oral agreement in California modify the original contract in writing, there is no need for new consideration.

If a contract has a term requiring that all modifications be made in writing, California will generally enforce it. But a court may also find that the parties' consistent divergence from the agreements' terms, without objection from either side, effectively modifies the agreement, notwithstanding a contractual provision forbidding oral modifications. For example, one California court addressed a provision in a written shareholder agreement requiring that shareholders approve all billing contracts in writing. According to the court, by repeatedly approving billing contracts orally, the shareholders 'orally amended' the agreement to allow 'oral approval'.