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Contract Law 101: When is a Deal actually an Enforceable Deal?

Douglas Dowell
4 min read
Contract Law 101: When is a Deal actually an Enforceable Deal?

An important theory on whether a party has truly a contractual right and obligation is based on the concept of a “meeting of the minds.” The purpose of this article is to give you a brief flavor of how to use that to increase your odds of getting what you bargained for.

Since BiggerPockets is a real estate investing site we would be missing the boat if we failed to mention the “statute of frauds,” which – while very sinister sounding – – just means that contracts for real estate must be in writing to be enforceable (Note: other certain contracts fall into this rule as well).

Like real estate, there are a lot of nuances that are involved in whether you do or do not have a deal that can be legally enforced.  The scope of this article is to talk about the theory behind the rest of the details.  If you have a specific situation, your state law will be very important and the facts are very important.  This is not intended as legal advice.

First the Definition:

Meeting of the Minds n. when two parties to an agreement (contract) both have the same understanding of the terms of the agreement. Such mutual comprehension is essential to a valid contract. It is provable by the express provisions of a written contract, without reference to any statements or hidden thoughts outside the writing. There would not be a meeting of the minds if Bill Buyer said, “I’ll buy all your stock,” and he meant shares in a corporation, and Sam Seller said, “I’ll sell all my stock to you,” and meant his cattle (For more information, see http://legal-dictionary.thefreedictionary.com/meeting+of+the+minds)

The trick to this concept is the difference between what we think and what we express.   We may be thinking of an apple but we may express something that sounds like “orange.”   In fact one of the brightest American legal scholars, “Oliver Wendell Holmes,  wrote in 1897 that a meeting of minds was really a fiction, stating:

‘In the law of contract, the use of moral phraseology led to equal confusion, as I have shown in part already, but only in part. Morals deal with the actual internal state of the individual’s mind, what he actually intends.

From the time of the Romans down to now, this mode of dealing has affected the language of the law as to contract, and the language used has reacted upon the thought. We talk about a contract as a meeting of the minds of the parties, and thence it is inferred in various cases that there is no contract because their minds have not met; that is, because they have intended different things or because one party has not known of the assent of the other.

Yet nothing is more certain than that parties may be bound by a contract to things which neither of them intended, and when one does not know of the other’s assent. Suppose a contract is executed in due form and in writing to deliver a lecture, mentioning no time. One of the parties thinks that the promise will be construed to mean at once, within a week. The other thinks that it means when he is ready. The court says that it means within a reasonable time. The parties are bound by the contract as it is interpreted by the court, yet neither of them meant what the court declares that they have said.

In my opinion no one will understand the true theory of contract or be able even to discuss some fundamental questions intelligently until he has understood that all contracts are formal, that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs — not on the parties’ having meant the same thing but on their having said the same thing.’”

See: http://en.wikipedia.org/wiki/Meeting_of_the_minds 

Key Takeaways:

  1.  The trouble is about communication.  Did we say what we meant?  How was our message received?
  2. When it comes to dispute resolution will the judge or jury agree with you?   This is why, unless you have a fair amount of information about the trustworthiness of your counter party, even an email to recap the agreement is good policy. My word is my bond is not widely held it seems.

So now we turn to the specifics of real estate agreements that flow from the basic problems identified above.  The statute of frauds which is defined as:

“A legal concept that requires certain types of contracts to be executed in writing. The precise form of the Statute of Frauds varies between jurisdictions, but generally requires a writing for the following types of contracts:

(1) Contracts for the sale of land;

(2) Contracts for the sale of goods above a certain dollar amount;

(3) Contracts that cannot be completed in less than one year; and

(4) Contracts where one party is to pay the debt of another party.

In a breach of contract case where the statute of frauds applies, the defendant may raise it as a defense. In this case, the burden of proof is on the plaintiff to establish that a valid contract was in existence. “

(For more information, see Investopedia http://www.investopedia.com/terms/s/statute-of-frauds.asp)

So what do you think?  Is my word is my bond still relevant?  Are you like me cynical on that point therefore rely on at least a email recap when dealing outside of real estate?
Photo Credit: Groupon

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.