Contracts play an important role in day-to-day business operations and drive economic activity across the globe.  And when one party to a contract fails to live up to its obligations, the other party or parties may be damaged.  Texas law provides a cause of action for a breach of contract.  Aggrieved parties may be entitled to recover not only damages, but attorneys’ fees and costs as well.

Breach of Contract

Texas law requires the following elements to establish a breach of contract: (1) a valid contract exists; (2) the plaintiff performed or tendered performance as contractually required; (3) the defendant breached the contract by failing to perform or tender performance as required; and (4) the plaintiff sustained damages due to the breach.

Under Texas law, a breach of contract occurs when a party to a contract fails to perform an act that it has expressly or impliedly promised to perform.  When one party to a contract commits a “material breach” of that contract, the other party is discharged or excused from further performance.

Texas law allows a party to recover reasonable attorneys’ fees for the breach of an oral or written breach of contract.  In addition, Texas law allows a party to recover general damages and, in certain cases, special damages and equitable relief.

The statute of limitations to bring a lawsuit for breach of contract is four years.

Formation of a Contract

In Texas, the following elements are necessary to create a contract:

• An offer
• Acceptance of the terms of the offer
• Consideration
• A meeting of the minds regarding the material terms and
• Execution and delivery of the contract

Offer

In order to prove that an offer was made, a party to the contract must show that:

(1) the offeror intended to make an offer;

(2) the terms of the offer were clear and definite; and

(3) the offeror communicated the essential terms of the offer to the offeree.

The offer must be reasonably definite in its terms and must sufficiently cover the essentials of the proposed transaction. Indeed, generally, a contract is legally binding only if its terms are sufficiently definite to enable a court to understand the parties’ obligations.  This is so because the law presumes that a party cannot accept an offer and thereby form a contract unless the terms of that contract are reasonably certain.

Acceptance

The offeree must assent with respect to the material, essential terms before a binding contract arises.  The acceptance must be identical to the terms of the offer.

An acceptance is not binding until it is delivered or conveyed to the offeror.  An acceptance that is not communicated to the offeror is ordinarily not a binding acceptance.[1] An offeree’s ability to accept an offer is terminated at the time specified in the offer, or if no time is specified, it is terminated at the end of a reasonable time.

Consideration

To be enforceable, a contract must be based on consideration—a concept also known as mutuality of obligation. Consideration is a fundamental element of every valid contract.

Consideration is a bargained-for exchange of promises. Consideration consists of benefits and detriments to the contracting parties. The detriments must induce the parties to make the promises and the promises must induce the parties to incur the detriments.

In other words, consideration is a present exchange bargained for in return for a promise and consists of benefits and detriments to the contracting parties.

Lack of consideration occurs when the contract, at its inception, does not impose obligations on both parties.  A contract lacking consideration lacks “mutuality of obligation” and is unenforceable.  This occurs, for example, where a promise is illusory.  A promise is illusory if it does not bind the promisor, such as when the promisor retains the option to discontinue performance.  When illusory promises are all that support a purported bilateral contract, there is no mutuality of obligation, and therefore, no contract.

Lack of consideration is an affirmative defense.  The existence of a written contract, however, presumes consideration for its execution.  Therefore, the party alleging lack of consideration bears the burden of proof to rebut this presumption.

A “Meeting of the Minds”

To create an enforceable contract, the minds of the parties must meet with respect to the subject matter of the agreement and all its essential terms.  That is, the parties must agree to the same thing, in the same sense, at the same time.

Thus, a “meeting of the minds” describes the mutual understanding and assent to the agreement regarding the subject matter and the essential terms of the contract.  This mutual assent with respect to the material, essential terms is a prerequisite to the formation of a binding contract.  Courts employ an objective standard, rather than an objective standard, to determine whether there was a “meeting of the minds.”

Execution and Delivery of the Contract

Texas law recognizes that a contract need not be signed to be “executed” unless the parties explicitly require signatures as a condition of mutual assent.

The issue of whether the parties required that the agreement be signed to be considered binding is one of intent, and, therefore, the issue is normally a fact question for the jury.

If a written draft of an agreement is prepared, submitted to both parties, and each of them expresses his unconditional assent to it, there is a written contract.  If there is a writing, there need be no signatures unless the parties have made them necessary at the time that they express their assent and as a condition modifying that assent.  Even an unsigned agreement is a written contract if all of the terms are embodied in a writing that is unconditionally assented to by both parties.

The ultimate issue is the intent of the parties.  Some factors that have been considered in determining whether contracting parties intended to be bound by an informal agreement prior to the execution of a formal writing include (1) whether the contract is of that class usually found to be in writing, (2) whether the contract is of such a nature to need a formal writing for its full expression, (3) whether the contract has few or many details, (4) whether the amount involved is large or small, (5) whether it is a common or unusual contract, and (6) whether negotiations themselves indicate that a written draft is contemplated as a final conclusion of negotiations.

[1] State v. Triax Oil & Gas, Inc., 966 S.W.2d 123, 128 (Tex.App.-Austin 1998, no pet.) (recognizing “silence does not normally indicate acceptance of an offer”); RESTATEMENT (SECOND) OF CONTRACTS § 69(1), cmt. a (1981) (stating “[a]cceptance by silence is exceptional”).

Have a question? Contact Jason Freeman, Freeman Law, Texas.