6.2 Formation of Contracts

• Library: Virginia Law and Practice: A Handbook for Attorneys (Virginia CLE) (2020 Ed.)

6.2 FORMATION OF CONTRACTS

Forming a valid contract in Virginia has evolved from a simple handshake into a series of specific factors that govern the contractual relationship between the parties. The fundamental elements of a contract include mutual assent between competent parties, that is, an offer and an unconditional acceptance, legal subject matter, and consideration evidencing that a bargained-for exchange has occurred. ¹²⁸ However, in some cases, a contract

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may be inferred when no consideration exists. The doctrines of equitable estoppel and promissory estoppel address this situation, and this chapter includes Virginia's approach to these doctrines as well as the concepts of contract termination and modification. For instance, a contract may be terminated by revocation of the offer, rejection by the offeree, or operation of law. Additionally, the Virginia Code contains many sections that are pertinent to the formation of contracts, such as the use of a seal. ¹²⁹

6.201 Mechanics of Assent: Offer and Acceptance.

A. Offer. Every contract negotiation begins with an offer of some kind, whether communicated orally or in writing. An "offer" has been defined as

the act or an instance of presenting something for acceptance; a promise to do or refrain from doing some specified thing in the future, conditioned on an act, forbearance, or return promise being given in exchange for the promise or its performance; a display of willingness to enter into a contract on specified terms, made in a way that would lead a reasonable person to understand that an acceptance, having been sought, will result in a binding contract. ¹³⁰

"Offer" has also been defined as "the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it." ¹³¹

An offer sets the tone for further negotiation between the parties and is an important part of the contracting process.

Many practitioners today use letters of intent as tools to propose offers and negotiate without legally binding their clients to the transaction terms. A letter of intent is a preliminary yet often intensely negotiated document which expressly states that it is nonbinding in nature unless and until a detailed, formal contract is executed by the parties. This feature allows each party to negotiate and exchange several drafts of the document,

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fleshing out the basics and addressing complicated business concepts of a potential deal without binding either party.

1. Conditions of the Offer. The offer may be the initial communication between parties, and accordingly, the offeror may stipulate any conditions to the offeree, such as the term of the agreement, the purchase price, the quantity, the deadline, the manner of acceptance of the offer, and a myriad of other items related to the potential agreement. ¹³² Although there is no specific formula for creating an offer, the language conveying the terms of the offer must be certain and definite to avoid vagueness and ambiguity, and the conditions and requirements should be spelled out clearly. ¹³³ The offer should be stated in a way that can be easily accepted.

The offer should also identify a bargained-for exchange, creating a power of acceptance in the offeree. ¹³⁴ To be complete, an initial offer should contain, at a minimum, the following items: (i) the identity of the offeror and offeree; (ii) the subject matter of the contract, including the type of work to be performed or the goods to be provided; (iii) the price to be paid and the quantity involved; and (iv) the time, manner, and place of payment or performance.

2. Specific Types of Contracts. For certain types of contracts, specific information should be contained in the initial offer. In real estate transactions, an offer should be in writing and should include a detailed legal description of the real property to be conveyed as well as the sale price. For an offer involving the sale of goods, the quantity and type of goods should be specified or easily ascertainable in order to be definite enough to form a valid contract. An employment contract must usually state clearly the duration of employment, or it will be construed as creating a contract terminable at will by either party. In settlement negotiations, a mere agreement to settle, without specifying the particulars of the settlement, does nothing more than establish an agreement to negotiate further at a later date. ¹³⁵

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B. Acceptance.

1. In General. An offer alone does not constitute a contract unless there has been an unconditional acceptance of the offer. ¹³⁶ In Gibney & Co. v. Arlington Brewery Co., ¹³⁷ the court held that in order for an agreement to exist, the acceptance "must in every respect meet and correspond with the offer, neither falling within or going beyond the terms proposed, but exactly meeting them at all points." ¹³⁸ If the acceptance is not identical to the offer, then there has been no meeting of the minds and a contract has not been formed.

In Green's Executors v. Smith, ¹³⁹ the court examined the acceptance of a written document purporting to be an offer. The court stated that "a contract may be formed by accepting a paper containing terms. If an offer is made by delivering to another a paper containing the terms of a proposed contract and the paper is accepted, the acceptor is bound by its terms; and this is true whether he reads the paper or not." ¹⁴⁰ This premise becomes debatable, however, in the circumstances of accepting ticket stubs, receipts, or bills of lading. Although the party may be bound if the terms are conflicting or ambiguous, the provisions of the contract may be subject to judicial interpretation.

In determining the existence of a valid acceptance, it is important to distinguish between a condition to performance of a contract and a conditional acceptance. An offer and an acceptance that contains a condition to performance creates a valid contract, while a conditional acceptance is deemed a counteroffer that may never be accepted. Consider the sale and purchase of a house. Seller Sue offers to sell her house to Buyer Bill, and they sign a valid real estate contract. However, the contract provides that (i) before Bill is obligated to close, Sue must have marketable title to the property and must bring a deed to closing, and (ii) before Sue is obligated to sell, Bill must have tendered sufficient money to purchase the property and

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pay for his closing expenses. These items are considered conditions precedent to each party's performance of the obligations set forth in the contract. However, if Bill signed the contract proposed by Sue, but amended it to require several repairs to be completed by Sue before Bill would agree to purchase the house, Bill would not have validly accepted Sue's contract. Bill's signed and altered contract would be a rejection of Sue's initial offer and would constitute a separate counteroffer to Sue. In the first case, there is a contract between parties that requires certain acts of performance before the transaction is complete. In the latter, there is no contract, as Bill conditioned his acceptance of Sue's original offer on additional items to be added to the contract. Bill rejected Sue's offer and made a counteroffer.

2. Acceptance of Varying Terms. Virginia common law maintains that an acceptance must mirror the terms of the original offer to be a valid acceptance. In Crews v. Sullivan, ¹⁴¹ the court held that a "proposal to accept, upon terms varying from those offered is a rejection of the offer and puts an end to the negotiation, unless the party who made the original offer renews it, or assents to the modification suggested." ¹⁴² An acceptance that varies from the original offer, however, may be deemed a counteroffer in some instances, capable of being accepted to form a contract.

3. Uniform Commercial Code Interpretation. The Uniform Commercial Code (UCC), which governs the sale of goods, differs from Virginia common law with respect to modified acceptances. Under the UCC, an acceptance that alters the initial terms of an offer may be considered sufficient to form a valid contract, depending on certain circumstances. ¹⁴³ Virginia's UCC provides that "[u]nless otherwise unambiguously indicated by the language or circumstances . . . an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances." ¹⁴⁴ Virginia's UCC further states:

A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance

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even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

The additional terms are to be construed as proposals for addition to the contract. ¹⁴⁵

As a result, an acceptance that changes the original offer may be acceptable under the UCC but not under Virginia common law.

4. Form of Acceptance. An acceptance may be made in almost any form as long as the rendering of an acceptance, whether written or oral, clearly creates a meeting of the minds between the parties. In many cases, the acceptance is conferred in the same manner as the offer was initially given. If there is an oral offer made in person, then the acceptance is likely to be in person. Similarly, if an offer is made by mail, overnight delivery service, facsimile, or electronic mail, then the acceptance is usually generated by the same means. If the acceptance is not required to be in writing, and the contract does not give a specific form of acceptance, acceptance can be made by any means as long as it is clear and unconditional. ¹⁴⁶ "[T]he modern test for determining whether there was acceptance . . . is whether it would be clear to a reasonable person...