54 Contract Formation

Context

Given the formality (and high cost) of most eResource licenses, it should typically be clear through the parties’ signatures on multi-page contracts whether or not the parties reached an agreement. But it’s important to understand the elements of contract formation for a few reasons.

First, you might have a lot of back and forth with vendors (in meetings, e-mails, redline comments) about what the terms of your agreement actually are, and this can later affect interpretation of the agreement (discussed in a later section). This correspondence and any representations, misrepresentations, or mistakes evidenced in the process, can also mean a court may determine that there was no agreement at all. And that might be an important “out” if you have a major disagreement in the course of performing the contract.

So, we’ll look here at the essential elements of contract formation and some key defenses to formation about which you should be informed.

When is there a “contract”?

Very simply, a contract is a promise for performance that, in response to the breach of which the law is able to provide a remedy. ^[1].The performance or promise to perform can be doing (or agreeing to do) something, or refraining from doing (or agreeing to refrain from doing) something. ^[2].

The resulting agreement will be enforceable as a contract provided that the terms are sufficiently definite or certain so that a court can determine the extent of the parties’ obligations and provide an appropriate remedy in the event of a breach of an obligation. ^[3]The essential terms and the requisite degree of certainty required as to them will vary from transaction to transaction; in some cases, courts can even fill in essential terms in a “reasonable” way. ^[4]Generally speaking though, the more complex the agreement, the less inclined a court will be to fill in essential terms. Further, while contract interpretation is discussed more fully in the next section, courts can look to the parties’ performance of the agreement to find the parties’ intentions as to terms—even if the agreement’s written terms may have otherwise been too vague or indefinite to enforce without performance showing evidence of their meaning.^[5]

All parties to the contract also must have intended to be bound or, at a minimum, have had no knowledge or reason to know that another party did not intend to be bound. ^[6]. If parties have reached some agreement but there are significant terms to be settled, a court might properly find that the parties have not yet manifested their intent to be currently bound but have expressed only an intention to continue to negotiate and will not consider the deal done until they have reached agreement on the remaining terms.

There also needs to have been some “consideration” for the promise—that is, there needs to be a “bargained exchange” or “something in return” for the promise or performance. ^[7] The consideration needs to be adequate and sufficient. Although some states define adequacy and sufficiency by statute ^[8], generally speaking “adequacy” refers to whether or not the parties are getting promises of relative (though subjective) equal value, or a “fair bargain.” ^[9].“Sufficiency” refers to whether the consideration meets legal minimums such that there is at least some detriment incurred by each party in exchange for the other party’s promise. ^[10].Consideration will not be “sufficient” if one promises to do that which they were already legally obligated to do (because there is no legal detriment in that scenario), or if one refrains from doing something outside of their having been a bargain.^[11].

What are relevant defenses to contract formation or enforcement?

There are a number of possible defenses affecting assent to an agreement, or enforcement of an agreement if assent is found. We won’t get into the nuanced differences between defenses that prevent contract formation vs. enforcement, as the overlap can be confusing. Suffice it to say that the most relevant defenses that can render a purported agreement void or nullified are as follows:

1. Mistakes

With its roots in laws of equity and fairness rather than contract interpretation, mistake is now recognized as a defense that voids an agreement, or that can be used as a basis for contract amended or modification.

Before a mutual mistake can “undo” contract formation, there are several prerequisites that an aggrieved party must show. Demonstrating these does not ensure a court will find lack of assent or agree to modify the agreement, as a court will also look to overall fairness and justice. But these elements must be established before a court can proceed:

• The error in belief must have existed relative to a factual matter at the time the contract was made
• The mistake must be as to a “basic assumption” upon which the agreement was made
• The mistake must have had a material effect upon the agreed-upon exchange
• The risk born by the mistake must not have been separately allocated for (i.e. the contract must not have otherwise addressed that potential for mistake is part of the bargained-for exchange)

^[12].

If the mistake was made only by one party, that party must not only demonstrate the four principles identified above, but also that either (a) the other party knew or had reason to know of the mistake, or (b) the resulting contract is “unconscionable” (discussed below). ^[13].

2. Misrepresentations

When one party makes a misstatement or assertion that is factually incorrect, this constitutes a misrepresentation. The misstatement could be intentional or could be based on the party’s failure to adequately investigate the facts. (The difference between misrepresentations and fraud is that with fraud, the party has made both a material misrepresentation and did so with “scienter” (knowledge of its falsity).) Nondisclosure of a fact might also constitute a misrepresentation if there is some other legal duty requiring disclosure. ^[14]

To use misrepresentation as a basis for nullifying contract formation, the aggrieved party must show that the misrepresentation either was (a) material or (b) fraudulent.

• • Material misrepresentations: A misrepresentation is material if it would be likely to induce a reasonable person to agree to the bargain. Misrepresentations can also be material if the person who made it knew or should have known that it was likely to induce the other party to agree. Material misrepresentations can nullify a contract even if they were negligent or unintentional (e.g. the misrepresenting party failed to sufficiently investigate the facts).
  • Fraudulent misrepresentations: A misrepresentation is fraudulent if it was intended to induce the other party to rely on it and was either made with knowledge of its falsity, or with knowledge that the party had no factual basis upon which to make the assertion (i.e. knowledge that the party did not know whether it was actually true).

^[15]

Further, the aggrieved party must also show that they relied on the misrepresentation, and that their reliance on the misrepresentation was “reasonable” (i.e. a representation that is obviously outlandish or unbelievable may not be the proper basis for reliance).

3. Unconscionability

A court might refuse to enforce all or part of a contract if the terms are sufficiently egregious under a theory of “unconscionability.” Courts recognize two forms of unconscionability: procedural and substantive. Typically, for a court to rescind all or part of an agreement on the basis of unconscionability, both substantive and procedural unconscionability must be present.

• Substantive unconscionability: Substantive unconscionability arises if the contract or particular terms thereof either: (a) substantially deprive one party of benefits or leave them without a remedy for the other’s non-performance; (b) bear no reasonable relation to the business risk involved; (c) substantially disadvantage one party without a comparable benefit to the other; or (d) reflect an excessive disparity in buying and selling price without justification.
• Procedural unconscionability: Procedural unconscionability relates to the manner in which terms become part of the agreement, such as if their manner of presentation (e.g. presented in small print, unintelligible “legalese”) or in a mandatory / non-negotiable way as against a party with weaker bargaining power (e.g. a contract of “adhesion” that prohibits negotiation with oppressive results for the party to whom the agreement is presented)

^[16]. While both prongs of unconscionability must exist for the contract to be unenforceable, their existence can be measured on a sliding scale: “the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” ^[17]

4. Public Policy

The last key impediment to contract formation or enforcement is the existence of contrary “public policy.” As explained in American Jurisprudence, Contracts, “a contract or contractual provision that violates public policy is invalid, unenforceable, void, and without legal effect, to the extent of the conflict.” ^[18] Contracts contrary to public policy may be voided, but public policy cannot be invoked merely to alter or amend an agreement. ^[19].

So, what is “public policy”? It’s hard to say, though it generally can be thought of as established interests of society, or “need to protect some aspect of the public welfare.” ^[20] Generally, a court look to the following types of laws and legal precedents to assess what public policy is, in order to determine whether that public policy has been violated:

• Constitutions;
• Statutes;
• Regulations;
• Case law
• “[P]revailing concepts of the federal and state governments relating to and affecting the safety, health, morals, and general welfare”;
• Governmental practice;
• “[O]bvious ethical or moral standards”; and
• Treaties

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