Without being aware of it, most people enter into and fulfill any number of contracts on a daily basis. This will become more apparent as we continue through the chapter, but examples of contracts you encounter often include: grocery purchases, fuel purchases, buying a home, renting an apartment, using the toll road, buying a car, purchasing a textbook and (yes) taking this course.

I should note that there are actually two separate laws governing contracts in Indiana (and in most states). For sales of goods, a law called the Uniform Commercial Code (or “UCC”) controls. That is located at Indiana Code § 26-1-1-0.2, et. seq. For service contracts (including rental agreements), the common law of contract controls. For contracts under either UCC or common law, however, the specific terms and conditions of the contract control. Therefore, contracts are often called “private law,” as the parties choose to be bound to the terms and conditions upon which they agree. For purposes of this chapter, we will be using the common law, as that will give you the general vocabulary you need for contracts. If you do happen to go into a field dealing with sales of goods, you should be able to use your knowledge of common law contracts to deal with the UCC.

Being ancient, contracts are subject to many definitions and qualifications, but to look at some Indiana definitions:

A contract is an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.^[1]

An offer, acceptance, plus consideration make up the basis for a contract.^[2]

Three rudimentary elements must be present before an agreement may be considered a contract: offer, acceptance of the offer and consideration. If these components are present, a legal obligation results from the bargaining of the parties as found in their language or by implication from other circumstances, as affected by the rules of law.^[3]

Also essential to the formation of a contract is a “meeting of minds” of the contracting parties: the parties must have the same intent. Thus, a “meeting of minds” must occur, and an offer must be made; once it is accepted, a contract is formed.^[4]

[1] W. Am. Ins. Co. v. Cates, 865 N.E.2d 1016, 1021 (Ind. App. 2007).

[2] Zimmerman v. McColley, 826 N.E.2d 71, 76 (Ind. App. 2005).

[3] Straub v. B.M.T. by Todd, 645 N.E.2d 597, 598 (Ind. 1994).

[4] Bain v. Bd. of Trustees of Starke Meml. Hosp., 550 N.E.2d 106, 110 (Ind. App. 3d Dist. 1990).

Most texts dealing with contracts first discuss the offer, then the acceptance, then deal with the question of consideration. However, consideration is the thing that often distinguishes a contract from other forms of transfer, such as gifts. Therefore, we are going to deal with the question of consideration first, and then jump into offer and acceptance.

Consideration is the thing the contract is about - the property or service being exchanged. It need not be monetary, though money is often involved in a contract. Consideration is often defined as “bargained for exchange in which there must be a benefit accruing to the promisor or a detriment to the promisee.”^[1]

There have been many, many, cases dealing with the question of when consideration is “valid” or “enough.” Generally, however, almost any consideration will be sufficient. At least one Indiana case has extensively discussed this concept – for example:

It is well settled that it is not proper for courts to inquire into the adequacy of consideration. Moreover, consideration need not be of benefit to the party making the promise. Although the Auburn companies are correct in noting that a mortgage must be supported by consideration to be enforceable, any consideration which will sustain a promise to pay will suffice, and it is not necessary that the obligee actually give anything of value to the obligor. Sufficient consideration will be found if it is shown that the mortgagee suffered any damage, inconvenience, detriment or loss, or that he extended any forbearance in reliance upon the mortgage. Consideration exists if it is shown that any right, profit, benefit accrued to the mortgagor, or that responsibility was suffered or undertaken by another.^[2]

So, in other words, selling a car for a penny, or selling it to the person who waxes it first, or for a mustard seed – will all form the basis of a contract. Even a promise for a promise will create a contract. As another Indiana case noted:

It is the general rule that, where there is no fraud, and a party gets all the consideration he contracts for, the contract will be upheld. And mutual promises, whereby there is mutuality of engagement, are not without a sufficient consideration.^[3]

Or again:

Anything is a valuable consideration for a contract which is of advantage to the one or of disadvantage to the other. Where parties agree to a consideration of indeterminate value, the courts will not substitute their judgment for that of the parties, but will uphold the contract.^[4]

At times, however, consideration will fail or will be insufficient or not binding to form a contract. For instance, consideration will not exist when the person purporting to have the consideration either does not own it, or does not have the power to transfer it.^[5] If a the consideration is illegal, against public policy, or otherwise unenforceable, this will be considered invalid consideration.^[6] Moreover, “past consideration,” that is, consideration that already occurred as part of some other transaction or contract will not support a new contract. For instance:

It appearing from the facts alleged that the advancement of the money in controversy was completed at the time appellee received it in 1890, therefore his execution of the note in 1892, as shown, would not serve to change the advancement into a debt, in the absence of a new agreement between appellee and his mother, supported by some new consideration.^[7]

Similarly, “preexisting duties” will not support a new contract. So, for instance, is a reward is offered for information about a criminal, a police officer will not be able to collect the reward, as the officer has a duty to obtained information about, and apprehend, the criminal.^[8] As we go through offer and acceptance, more instances of “things that looks like contracts but good luck enforcing them because they’re not contracts” will become apparent. For now, however, this concludes our discussion of consideration.

[1] Wavetek Indiana, Inc. v. K.H. Gatewood Steel Co., Inc., 458 N.E.2d 265, 269 (Ind. App. 3d Dist. 1984).

[2] Auburn Cordage, Inc. v. Revocable Trust Agreement of Treadwell, 848 N.E.2d 738, 748 (Ind. App. 2006).

[3] Brown v. Marion Com. Club, 97 N.E. 958, 960 (Ind. App. 1912)

[4] Gregory v. Arms, 96 N.E. 196, 202 (Ind. App. 1st Div. 1911)

[5] “It is fundamental that a party must have it in his power to do the thing he undertakes to do to make his promise sufficient as a consideration.” Gregory v. Arms at 202.

[6] “An express promise…can give no original right of action, if the obligation on which it is founded never could have been enforced at law, though not barred by any legal maxim or statute provision.” Wiggins v. Keizer, 6 Ind. 252, 257 (1855).

[7] Baum v. Palmer, 76 N.E. 108, 110 (Ind. 1905)

[8] “Accordingly, it is a general principle of law, that a promise to one to pay him, if he will do what he is already bound to do by law or by contract, is without consideration, and cannot be enforced.” Ritenour v. Mathews, 42 Ind. 7, 14 (1873)

An offer is as it sounds: the original asking price for the contract. Seems simple – and in most contracts, it is. However, problems start to arise when the offers are met with counter offers and new counter offers, etc. This can be confusing, both for the contracting parties, and for others trying to figure out who offered what, and when, for how much, and so forth.

The second question to answer, therefore is “How is an offer defined in legal terms?” As with many things in law, this turns out to have several, related, answers. However, an offer, legally speaking, is best described as the following:

An offer is 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.^[1]

There are really two types of offers – unilateral and bilateral. A unilateral offer means that it can be accepted without a promise of return performance, but rather may only be accepted by the actual performance. Remember the “award for information about the criminal” scenario from before? That, and many other “award” posters (“Lost Cat – Fluffy, $200 Reward” … that’s an expensive cat) constitute unilateral offers. To accept, you bring information or Fluffy to the individual putting up the poster to fulfill the contract.^[2] A bilateral contract is one which invites acceptance by something other than performance – by payment, or a return promise.^[3] Bilateral contracts are usually what people think of when they think “contract.^[4]”

While you have some understanding of an offer now, it is equally important to understand what are not offers, as there are many statements which may resemble an offer, but which are actually not offers at all, and therefore, cannot form the basis of a contract. We will deal with each in turn below.

[1] . Zimmerman v. McColley, 826 N.E.2d 71, 77 (Ind. App. 2005).

[2]  “A unilateral contract arises without a “bargaining process or exchanges of promises by the parties. Only one party makes an offer (or promise) which invites performance by another, and the performance constitutes both the acceptance of that offer and the consideration.” Kelly v. Levandoski, 825 N.E.2d 850, 861 (Ind. App. 2005)

“[3] It is most commonly a bilateral contract whereby the debtor promises to render the substituted performance and the creditors promise to receive it in full satisfaction.” Henry B. Gilpin Co. v. Moxley, 434 N.E.2d 914, 918 (Ind. App. 4th Dist. 1982).

[4] “A promise is a sufficient consideration for a return promise. This has been true for at least four centuries, ever since bilateral contracts were recognized.” Leatherman v. Mgt. Advisors, Inc., 448 N.E.2d 1048, 1050 (Ind. 1983)

With certain exceptions, offers to make gifts are not offers that can form the basis of a contract. A gift is something which requires no “thing” to be given in exchange – in other words, it is given and accepted, but the other party need not do anything significant in exchange. Therefore, if someone says to you, “I will give you a car” and the only thing you need do is take the keys, and you do, that is a gift. As noted in one Indiana case, a gift:

[A] voluntary transfer of property by one person to another without consideration. It is an act which has taken place and is complete in itself. For a gift to be incomplete is a negation of terms. There is either a gift or there is not a gift. There is no halfway point between the two. The issue here confronting us is whether or not there was a valid gift. Under our law, if there was incompleteness or something left to be done, there was no gift, but only an attempted gift.^[1]

Therefore, an offer to make a gift, and an acceptance of that gift, is not a contract. If someone offers you that car, and you refuse, but later go and ask for it, and they refuse, you do not have an enforceable contract in court. One Indiana case put it this way: “An agreement, intention, or promise to make a gift effective in the future is void as being without consideration.” Id. at 419. Believe it or not, there is a test for whether something is a gift, which is:

(1) The donor must be competent to contract; (2) there must be freedom of will; (3) the gift must be completed with nothing left undone; (4) the property must be delivered by the donor and accepted by the donee; and (5) the gift must go into immediate and absolute effect.^[2]

There IS one situation where a promise to make a gift may constitute a binding contract, and that is where the promise is a pledge to charity. While courts of different states are divided on this question, generally, courts will look for a way to enforce a charitable pledge against a donor.

[1] Norman v. Norman, 169 N.E.2d 414, 419 (Ind. App. 1st Div. 1960).

[2] Norman, supra.

An illusory promise in an offer destroys the possibility of contract. If I say to you “Give me $500 and I’ll sell you my car,” that is a valid offer. If I say, “Give me $500 and I’ll sell you my car if I feel like it,” that is entirely within my control, and I am manifesting no intent to be bound. Another example: “I’ll sell you my car if I mow the lawn tomorrow.” Probably illusory, as whether or not the contract forms depends on what I feel like doing. However, “I will sell you my car if it rains tomorrow” is entirely valid, as the condition forming the contract is out of my control. Similarly, where two parties contract and one agrees to sell quantities of some good to the other, if certain terms are missing, the promise is illusory and unenforceable. As stated by the Indiana Court of Appeals:

Thus, an indefinite quantities contract, without at least the requirement that the buyer purchase a guaranteed minimum quantity from the seller, is illusory and unenforceable. As expressed under Indiana law: it is fundamental that a contract is unenforceable if it fails to obligate the parties to do anything.[1]

When drafting and editing contracts, always ensure that the contract requires both parties to be bound to do (or not do) something in some way.

[1] Ind.-American Water Co. v. Town of Seelyville, 698 N.E.2d 1255, 1260 (Ind. Ct. App. 1998)

As noted in the “consideration” section, an offer to do something illegal or against public policy will not be enforced and cannot be “accepted” to form a contract. In fact, if you will recall the case we looked at previously, dealing with clauses in restrictive covenants preventing minorities from living in a neighborhood, this is an example of a contract which will not be enforced due to illegality.

Acceptance, like “offer” is as it seems – the agreement to the terms of the offer. Generally, all terms must be accepted. This is called a “meeting of the minds.” As one Indiana case put it:

To bring a contract into existence, an offer must be extended and the offeree must accept it, the communication of acceptance being crucial. Thus, a meeting of the minds between the contracting parties is essential to the formation of a contract. Id. This meeting of the minds must extend to all essential elements or terms for a contract to be binding.^[1]

Note that it says that “communication…is crucial.” Keeping the acceptance secret means that no contract will be formed. In addition, generally, the method of acceptance is open, and requires only that it be “expressed by acts which manifest acceptance.”^[2] With that said, if otherwise specified, the acceptance must be in the method indicated in the offer. So, for instance, if an offer says, “Must be accepted in writing, faxed or emailed, by March 23, 2015 at 5:00 PM,” a telephone call at 4:45 PM on March 23 indicating acceptance is insufficient. Otherwise, the offer lapses.

Generally, an acceptance must agree to all important terms. For instance, if an offer says, “Cadillac: $25,000” and the acceptance says, “Okay, but I will give you $23,000,” this is known as a counteroffer. It essentially consists of a rejection of the old offer and a new offer in the other direction. Once that happens, the old offer of $25,000 is off the table, and it cannot be accepted without another offer for $25,000. If you said, “Fine, if you won’t take $23,000, I’ll give you $25,000,” and there is no response, there is no contract. This is a specific rule, to wit:

It is well settled that in order for an offer and an acceptance to constitute a contract, the acceptance must meet and correspond with the offer in every respect. This rule is called the “mirror image rule.” An acceptance which varies the terms of the offer is considered a rejection and operates as a counteroffer, which may be then accepted by the original offeror.^[3]

[1] Troutwine Estates Dev. Co., LLC v. Comsub Design and Engr., Inc., 854 N.E.2d 890, 897 (Ind. App. 2006).

[2] Pinnacle Computer Services, Inc. v. Ameritech Pub., Inc., 642 N.E.2d 1011, 1013 (Ind. App. 1st Dist. 1994).

[3] Martinez v. Belmonte, 765 N.E.2d 180, 183 (Ind. App. 2002)

Unless you have spent no time around people, you are probably aware that people get into disputes in relationships, and contractual relationships are no exception to that rule. Usually, disputes arise over questions of performance – that is, did one or the other party to the contract fail to adhere to the terms of the contract in some way. Occasionally, this is because one party is incapable of performing (has gone out of business, for instance) or the parties disagree as to the meaning of a term in the contract.

What a court will first attempt to do is determine the intent of the parties to the contract at the time they formed the contract. As explained further:

The court must accept an interpretation of the contract that harmonizes its provisions as opposed to one that causes the provisions to be conflicting. Id. In interpreting a written contract the court will attempt to determine the intent of the parties at the time the contract was made as disclosed by the language used to express their rights and duties. Id. The unambiguous language of a contract is conclusive upon the parties to the contract and upon the courts.^[1]

In other words, the court will not permit either party to unilaterally change the terms or meanings of terms in the contract. In addition, in determining the parties’ intent, it is as expressed in the contract – the parties’ subjective desires, thoughts, or feelings are irrelevant. As noted by the court:

[T]he intent relevant in contract matters is not the parties' subjective intents but their outward manifestation of it….[t]he cardinal rule of contract interpretation is to ascertain the intention of the parties from their expression of it. The court does not examine the hidden intentions secreted in the heart of a person but, rather, examines the final expression found in conduct.^[2]

[1] Bank of Am., N.A. v. Ping, 879 N.E.2d 665, 669-70 (Ind. App. 2008)

[2] Real Est. Support Services, Inc. v. Nauman, 644 N.E.2d 907, 910-11 (Ind. App. 1st Dist. 1994).

When one party breaches a contract, the other party may sue, and if so, has several remedies available to it. First, the party may seek monetary damages. If so:

In a breach of contract case, the measure of damages is the loss actually suffered by the breach. However, the non-breaching party is not entitled to be placed in a better position than he would have been if the contract had not been broken. Indeed, the non-breaching party, as a general rule, must mitigate his damages, and the breaching party has the burden to prove that the non-breaching party has not used reasonable diligence to mitigate its damages. Where a party does mitigate its damages, the breaching party is entitled to set-off the amount of damages mitigated.^[1]

Or, to put it another way:

The essential elements of any breach of contract claim are the existence of a contract, the defendant's breach thereof, and damages. The measure of damages for breach of contract is the loss actually suffered by the breach. Indeed, the plaintiff must show that its damages flowed directly and naturally from the breach. Damages may not be awarded based upon guess or speculation but must be ascertainable with reasonable certainty.^[2]

There is one concept here you should be familiar with, and that is mitigation of damages. This means, in essence, that a party who has been hurt by a breach of contract must attempt to lessen or eliminate damages by taking some other action. So, for instance, in a case where someone breaches an apartment lease:

The doctrine of mitigation of damages creates an obligation on the part of the landlord to use such diligence as would be exercised by a reasonably prudent man under similar circumstances to re-let the premises, if possible, in order to mitigate damages resulting from the tenant's breach of lease. The obligation exists even if there is no mandatory re-letting clause in the lease. Further, courts have recognized and enforced the doctrine of mitigation of damages while at the same time sustaining savings clauses.^[3]

The same holds true for other contracts. For instance, in a manufacturing contract, if the purchaser does not get needed parts, the purchaser must attempt to purchase those parts elsewhere. Conversely, if a purchaser refuses an order, the manufacturer must attempt to sell those parts elsewhere.

On the other hand, in certain situations, the injured party may seek specific performance; that it, the party may seek to force the other party to go through with the contract. Specific performance is known as an equitable remedy – that it, rather than awarding money damages, the court orders some other action to “make one party whole.” In other words, “specific performance is an equitable remedy, directing “the performance of a contract according to the precise terms agreed upon, or substantially in accordance therewith.”^[4] Specific performance will often be found as part of real estate suits, where one party seeks to force the other to consummate the sale. Therefore, Indiana courts have held that:

To be enforced by specific performance, a contract for the sale of real estate need only be reasonably definite and binding as to its material terms. Id. A party seeking specific performance of a real estate contract must prove that the contract obligations of that party have been substantially performed or that an offer to do so has been made.^[5]

A court may also order compensatory damages when ordering specific performance, if the party seeking performance has expended time and money in order to obtain it.

[1] Sheppard v. Stanich, 749 N.E.2d 609, 611-12 (Ind. App. 2001).

[2] Knitcraft Corp. v. Raleigh Ltd., Inc., 943 N.E.2d 446 (Ind. App. 2011

[3] Geller v. Kinney, 980 N.E.2d 390, 399 (Ind. App. 2012).

[4] Schuler v. Graf, 862 N.E.2d 708, 712 (Ind. App. 2007)

[5] Humphries v. Ables, 789 N.E.2d 1025, 1034 (Ind. App. 2003).