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The Meaning of “Contract” and the Basic Attributes of the Contractual Relationship

    §1.2.1 An Oral or Written Agreement Between Two or More Persons

    Probably the most important attribute of contract is that it is a voluntary, consensual relationship. There need only be two parties to a contract, but there is no limit on the number of parties that could be involved in the transaction. A contract is created only because the parties, acting with free will and intent to be bound, reach agreement on the essential terms of their relationship. It is the element of agreement that distinguishes contractual obligation from many other kinds of legal duty (such as the obligation to compensate for negligent injury or to pay taxes) that arise by operation of law from some act or event, without the need for assent.

      Although voluntary agreement between the parties is essential to the creation of contract, “agreement” in the legal sense is subject to an important qualification. The law does not require that the parties reach true agreement, in a subjective sense—that their minds are in accord. It is enough that the words and conduct of a party, evaluated on an objective standard, would lead the other party reasonably to understand that agreement was reached. (The reason for using this objective standard is explained in sections 1.4.3 and 4.1.) Also, volition should not be taken too literally. We assume that a party may not be acting with completely free will in entering into a contract. He may feel some compulsion to make the contract as a result of market forces, the persuasiveness of the other party, necessity, or the lack of a more attractive alternative. However, volition does at least mean that a party cannot be improperly coerced or tricked into making a contract, and the law has principles and standards (covered in Chapter 13) to distinguish when pressure to make a contract is no longer acceptable, and has so undermined the party’s will as to defeat his volition.

      Note that our definition refers to an oral or written agreement. In common terminology, people often use the word “contract” to refer to a written document that records the parties’ agreement. However, it is important to understand that “contract” describes a relationship that may or may not be recorded in a document. As a general rule, a contract does not have to be in writing to be a binding and enforceable legal obligation. (Under a legal rule called the statute of frauds, there are some types of contract that must be recorded in a signed writing to be enforceable. This is discussed in Chapter 11. However, most contracts are not covered by the statute of frauds, and are binding as soon as oral agreement has been reached.) Of course, it may be harder to prove an oral contract than one that has been recorded in writing, but do not confuse problems of proof with the more fundamental question of enforceability.

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