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Contracts • Defenses to Enforcement and Formation
K#074
Legal Definition
No contract is formed where: (1) the parties use a material term that has at least 2 reasonable interpretations; (2) each party interprets the term differently; and (3) neither party knows or has reason to know that the term is open to different interpretations.
Plain English Explanation
Contracts require a "meeting of the minds," which means that each party has a shared understanding of the terms of the agreement, especially the important, material terms. In the real world, it is common for misunderstandings to occur. When parties have a misunderstanding about important parts of the agreement due to a term or words being confusingly similar to another meaning, then no contract is formed.
Hypothetical
Hypo 1: Bob owns two cars: A red Mustang and a blue PT Cruiser. Both cars are parked in Bob's driveway. One day, Bob and Sam are talking outside Bob's house. Bob mentions that he is looking to sell his car, and points to his driveway. Sam looks over at the driveway and assumes Bob is talking about the Mustang, which is parked in front of the PT Cruiser. In reality, Bob meant the PT Cruiser, not the Mustang. Bob says, "I'll sell you my car over there for $5,000." Sam says, "I accept!" They write out a contract. Result: No contract is formed. The term "car" is a material term in the contract, yet it is ambiguous as to which car it is referencing. Here, Bob believes it refers to the PT Cruiser, but Sam believes it refers to the Mustang. Thus, no court would enforce the contract because there was never any actual agreement made between Bob and Sam, despite an apparent contract being signed.
Visual Aids
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