Legal Aspects of Health Information

Systems

Contract Law: Contract Elements

Contract Law

Contract law relates to the rights and duties of two or more parties to an agreement. There are four
essential elements necessary to form a valid contract:

1. Offer
2. Acceptance
3. Mutual assent (also known as meeting of the minds)
4. Consideration

Offer

The offeror promises to do or refrain from doing some specific thing in the future, if the offeree will do
something in exchange. Generally, an offer:

• Cannot take effect until the offeree knows about it

• Must indicate an actual desire to enter into a contract rather than a mere invitation to begin
negotiations
• Must be directed at some person or group
• Creates a power of acceptance in the offeree

Acceptance

The offeree sends a communication to the offeror that he or she agrees to the terms of the offer.
Generally, acceptance:

• Must be a voluntary act, such as the offeree exercises the power of acceptance

Page 1 of 5
 • Must satisfy the mirror image rule, such as it must correspond to the exact terms of the offer
without adding, changing, or suggesting new terms
• May be inferred from the offeree’s acts or conduct, though it should be noted that silence
cannot be construed as acceptance

Lonergan v. Scolnick

Before moving on to the third and fourth elements, let’s examine an assigned case that illustrates offer
and acceptance. Read Lonergan v. Scolnick (found in this week’s readings), which explains the mirror
image rule, and carefully consider the facts and issues presented. The primary issue: Was there a valid
offer, and if so, must the parties clearly demonstrate mutual intent to enter into a contract in order to
create a valid contract between the parties? In this case, the plaintiff/appellant is Lonergan and the
defendant/appellee is Scolnick.

Is it clear to you why the court determined that the invitation to negotiate is not an offer? Lonergan was
not being given a right to act within a reasonable time after receiving the letter and thus had no power
of acceptance because he never received a valid offer. The first rule of law (precedent) established by
this case states that an invitation to negotiate is not an offer. Some further expression of assent by the
offeror (owner) is necessary before there can be a binding contract (of sale). Remember the mirror
image rule when evaluating offer and acceptance, because an alteration in terms may constitute a
counteroffer or even a nonoffer. Nonoffers include opinions, ads, estimates, inquiries, price quotes, and
solicitations.

The second rule of law established by this case states that without mutual assent, there is no
valid/enforceable contract. This is why an injured party may recover for breach of contract if there is a
clear, unequivocal manifestation of contractual intent, because that is the only way he or she can
demonstrate that the parties intended to create a binding agreement and consent to specific terms.

Mutual Assent

Mutual assent is also referred to as meeting of the minds, mutual intent, mutual agreement, or mutual
consent. This contract element focuses on the parties’ understanding of the substance underlying the
agreement. One of the consequences of the Lonergan decision was that if both parties are not clear on
the exact terms of the offer, they aren’t necessarily agreeing to the same terms.

Page 2 of 5
So, what do courts consider when determining the presence or absence of mutual assent? They look to
the reasonable person standard, which requires the court to consider what a reasonably prudent person
would think/assume in that situation. They also look for circumstances or facts that tend to prove the
presence or absence of mutual assent. These factors include whether the communications between the
offeror and offeree were vague or misleading and whether the terms and conditions of the agreement
contained erroneous or awkward descriptions or other information.

Raffles v. Wichelhaus

Another case that illustrates threats to mutual assent is Raffles v. Wichelhaus, wherein the parties
agreed to ship goods on a ship named the Peerless. Unbeknownst to the offeror and offeree, there were
actually two ships by that name, and each party had a different ship in mind. The issue in this case was
whether the defendant was still bound by contract to purchase cotton from a different Peerless.

Even though the parties thought the subject matter of the agreement was clear, the word “Peerless”
turned out to be ambiguous because there was more than one ship with that name. The court’s
reasoning is based on this latent ambiguity, which does not readily appear on the face of a document
and is apparent only in the light of knowledge gained from a collateral matter. (Note: Extrinsic evidence,
which are facts and circumstances outside the four corners of the paper a contract is written on, can be
used to clarify latent ambiguities.) It is clear that the parties did not agree to the same thing, and
therefore, there is no binding contract.

Ultimately, the court established the common law rule that no binding contract exists unless both
parties agree to the same subject matter. So Wichelhaus was ultimately victorious due to a latent
ambiguity in the terms of the agreement, as there was inherent uncertainty in the terms that was not
discovered by either party until performance began.

This case demonstrates that there is no mutual assent where a latent ambiguity arises. And a latent
ambiguity can be used to prove that there was no meeting of the minds and thus no enforceable
contract.

Consideration

Consideration is defined as a bargained-for exchange of value between the parties to the agreement,
which is proven by a reciprocal inducement to enter the agreement. A reciprocal inducement means

Page 3 of 5
that both parties receive something of value in exchange for performing their end of the contract. This
inducement is characterized by either a legal benefit, such as receipt of compensation, goods, or
services, or a legal detriment, such as forbearance (for example, not engaging in an action/enforcing
something that is due to a party, like collecting a debt). When determining whether consideration exists,
courts ask:

• What was the promisor (person making the promise) looking for when he/she made a promise?
• What did the promisee (person to whom the promise was made) actually receive for doing/not
doing something?

The kind of consideration required to create a valid contract varies depending on the kind of contract:
whether it is a bilateral or unilateral contract.

A bilateral contract is a two-way agreement. As a general rule, in a bilateral contract, one promise is
valid consideration for the other. Another way to think about it is consideration for bilateral contracts
involves a mutual exchange of promises, so each party is both promisor and promise. Moreover, both
parties are bound to abide by their promises. For example, I publish the following ad: “I am selling my
1979 Mustang for $25,000 or best offer.” You respond, “I am interested in the car, but I am only willing
to pay $20,000 for it.” I reply, “I accept your offer. I will deliver the 1979 Mustang after you deliver the
$20,000.”

A unilateral contract is a one-way agreement. In a unilateral contract, the bargained-for exchange

consists of a one-way promise from the offeror and a real act by the offeree. In unilateral contracts, the
performance of the agreed activity by the offeree furnishes the necessary consideration and operates as
an acceptance of the offer. It is important to note that the offeree is not obligated to act, but if he or she
does, he or she must comply with the terms of the agreement. For example, I call you and leave a
voicemail saying, “If you come over and mow my lawn this Saturday, I will pay you $30.” If you come
over on Saturday and mow my lawn, this is both acceptance and consideration. There is no requirement
that a person provide a verbal acceptance, as the act/conduct would indicate acceptance to a
reasonable person.

In general, permissible forms of consideration include:

• Act or omission (see unilateral contract example)

Page 4 of 5
 • A promise to do or not do something (see bilateral contract)
• Performance of a specific activity
• Abstention from a specific activity

Impermissible forms of consideration, which are not deemed to meet the court’s consideration test,
include:

• Love and affection

• Goodwill
• Delivery of something other than what has been bargained for

Page 5 of 5