contract is a legally enforceable promise that allows commerce to flow smoothly throughout society. Without contracts, businesses and consumers would be embroiled in constant disputes with potential for fraud and frequent misunderstandings but the fact that contracts are available does not eliminate disputes and resulting litigation. The courts are full of cases involving transactions between parties that have been formalized by the existence of a contract but the existence of a contract, or what the parties believed was a contract, does not ensure that matters will progress without problems.
Although contracts are in their simplest form promises there are elements that must be contained in contracts that distinguish them from simple promises. All contracts must contain: 1) an offer; 2) an acceptance; and 3) consideration. In a perfect world, every contract would have clearly identifiable offer, acceptance and consideration but in reality this is not always possible and the terms are subject to interpretation.
The requirement that all contracts must contain an offer and an acceptance implies that both parties to a potential contract have the intent to enter into an agreement and that both parties are doing so voluntarily. Unfortunately, the intent of the parties and the voluntary nature of their entering into a contractual relationship is not always clear and it remains incumbent upon the courts to provide the forum for interpreting not only the intent of the parties but also the parameters of the contract.
Ambiguity in the creation, interpretation, and enforcement of a contract is common. There are some general rules that are applied to such situations. On occasion, courts resolve such difficulties through the admission of what is known as parol evidence. The case law establishing the use of parol evidence is extensive and can often be confusing but, in general, parol evidence is the admission of evidence that is capable of explaining the terms and existence of a contract (Posner, 1998). The philosophy behind its admission is to provide stability to contractual relations. It is allowed when:
the contract writing is incomplete the contract is ambiguous contract fails to state true agreement of the parties due to fraud there has been an accident or mistake the existence, a subsequent modification, or the legality of the contract is in question.
Through the admission of parol evidence the court is placed in a position of determining what the true relationship between the parties actually was. Despite the value that parol evidence often provides, courts are reluctant to permit its admission. The courts would prefer to rely upon the four corners of the document and in this regard the courts afford the benefit of the doubt to the party that did not draft the document. This approach is most often applied in situations where one party enjoys a superior contracting position such as an insurance company doing business with an insured or a bank with a customer.
The use of parol evidence or the application of the position favoring the non-drafting party may in some situations clarify any problems that may exist in regard to the interpretation of a contract but neither is necessarily helpful in determining how to handle the contract situation in which there is an issue as to the intent of either party to be bound to a contract. As earlier indicated, the traditionally established elements necessary for the formation of a contract do not include intent. Although intent may be implied through the process of offer and acceptance, there is some question as to whether or not the common law has ever required that intent to be contractually bound is required. In the confusion regarding the issue of intent, there is also apparently some additional question as to how the common law that developed under the American system may treat this issue differently than the English system.
Tearing away all the legal requirements for a contract, a contract remains a promise. Promises are made between individuals every day. Some rise to the level of a legal contract and some do not. In the end, the effect is the same. Something is done for another. Yet, what distinguishes a contract from an ordinary promise is in the enforceability of the promise. If one promises to go to the store and buy some milk for someone, there is a promise but how is such promise enforced? There may be a moral obligation present but there is no enforcement mechanism because there is no consideration. Add in the fact, however, that one is to compensated for going to the store and now there is a potential contract but the question remains: did the parties have any intent to be contractually bound?
In the scenario presented, there is little reason for either party to expect outside intervention in regard to any possible breach by either party and, therefore, the intent of the parties is of little concern but in other contracts involving far greater financial concerns the intent of the parties to be contracted takes on greater importance. Before addressing how the English and American common law treat the matter of intent, it should be pointed out the legal systems utilizing the civil code system vs. The common law require that parties to a contract must have an intention to be legally bound (European Union, 2002).
The American position regarding intent and its role in the formation and enforceability of contracts can be found in Section 21 of the Restatement of Contracts. Section 21 states: "Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract (American Law Institute, 1981, §21)." Although there is minimal case law to the contrary, the language of the Restatement establishes that parties under American law can enforce their agreement when there is a stated intent to be bound but cannot be bound when there is a stated intent to the contrary.
The Restatement view is based on the American legal systems' attempt to objectify the law as much as possible in the area of contracts. The preparation of the Restatement and the subsequent development of the Uniform Commercial Code (UCC) attempted to address problems that had occurred over the years in regard to the formation and operation of contracts. Both the Restatements and the UCC were attempts by the American legal community to limit subjectivity and, therefore, the fact that the intention of the parties is afforded little consideration should not come as a major surprise.
Under the English system, the intent of the parties is viewed much differently. Under the English system, for a contract to be considered valid there must be a clear intention manifested by the parties to create a legal relationship. Although intent is, by its nature, subjective the measurement of intent by the English system is done objectively. Simply stated, the determination as to whether intent was present between two bargaining parties is based on whether or not the surrounding circumstances would lead a reasonable man to believe that intent was manifested.
Despite the fact that the English and American approach to the matter of the parties' intent differs as a matter of black letter law the result of how the courts in both systems treat the matter in actuality differs very little (Kraus, 2009). In both systems, the parties are effectively never placed in a position to provide evidence as to their intent or their willingness to enter into a contract. The courts in both the English and American systems have largely ignored the issue of intent. Historically, they have adopted the approach of examining contract cases from the viewpoint of whether or not the elements of a contract are present and affording no consideration to the issue of intent. Both systems have treated promises that conform to the elements of offer, acceptance, and consideration as valid contracts and ruled on the enforcement of same based on the presence of these elements.
There are occasions, however, when the parties move forward with the execution of the terms of an agreement when all the traditional contractual elements are not present. In such situations, the court may find that a valid contract does not exist but because of the passage of time or the possible damage to one of the parties the intent of the parties relative to the anticipated formation of the contract is highly relevant (Balfour v. Balfour, 1919). Under such circumstances, both the English and American courts have examined the intent of the parties extensively.
Obviously when the full details of a contract are not available the court is placed in a difficult position. Without clearly defined contract terms and the corresponding question as to whether a contract evens exists, the court is placed in a delicate position. Obviously, if the parties come forward and admit that a contract exists and also agree as to the terms the court's role is made much easier…