The following anecdote is loosely based on allegations in a court complaint. These facts were not proven in court; the case settled before trial. This article is for informational and entertainment purposes and not for the purpose of providing legal advice.
While there are certain requirements to forming a contract, it is possible to make a legally binding agreement without intending to. Before you offer to take your friends to the super bowl or to give your niece a loan for an investment she calls a “sure thing,” consider whether your informal conversation can leave you on the hook.
In April of 2001, the manager of a Hooters in Florida announced to the wait staff that several Hooters restaurants were holding a contest to increase beer sales. Each restaurant would hold a drawing among the ten waitresses who sold the most beer at their location. The winners of these lotteries would be entered into another drawing, in which the selected waitress would win the grand prize. Those present heard him say, “A brand new Toyota!”
A waitress at one of the locations decided to go for the goal. She worked hard to sell as much beer as possible to give herself a chance to win a car. Throughout the month of April, she and other waitresses put in long hours and worked strenuously.
Finally, the waitress was elated to find that she was indeed among the ten highest earning waitresses. She went on to win the drawing at her Hooters restaurant. When she was once again selected in the combined lottery, the manager put a blindfold over her eyes and led her out to the parking lot. When the blindfold was lifted, she was shocked to find, not a brand new Toyota, but its homophonous counterpart… a toy Yoda!
Two months later, she filed a lawsuit against Hooters in Florida state court for breach of contract and fraudulent misrepresentation. You might be thinking, “Wait a minute, fraudulent misrepresentation makes a lot of sense, but how is this a breach of contract? The manager and the waitress didn’t sign anything. They didn’t even shake hands!”
In fact, one of the most common questions from non-lawyers is, “What makes a contract?” This is a good question because you don’t want your offhand remark to be construed as a legally binding contract.
The law of every state is different, but no, you do not necessarily need to put pen to paper to form a contract. You do not need to shake hands to form a contract. Hypothetically, a contract might be formed without any words spoken at all. Contract law usually relies on three essential elements to establish the formation of a contract: (1) an offer; (2) acceptance; and (3) consideration.
In general, an offer is exactly what it sounds like. To come to a legally enforceable agreement (in other words, a contract) the one who suggests an agreement must make some kind of expression of that offer. This offer can be in writing, it can be verbal, or it can be implied based on actions that would reasonably be interpreted to be construed as an offer.
An interesting twist in the toy Yoda case is that the one who made the offer was the manager. On the other hand, Hooters restaurant, the company, was the party being sued. Assuming that the manager did not announce the contest at the direction of the company, how could Hooters breach a contract that it did not even offer?
In some cases, an employee or representative of an organization can bind the organization if they have authority to do so. This does not have to be explicit. An employee who was not given permission to make decisions on behalf of the company can still bind the company to a contract if the other person is given the impression that they do have authority, provided that the company does not dispel this impression. In our hypothetical, the waitress was at least under the impression that the manager had the authority to bind Hooters to a contract.
After an offer has been made, for a binding agreement, the other party must accept the offer. Just as with an offer, an acceptance can be made verbally, in writing, or by actions that would imply the acceptance of an offer. The waitress never approached the manager and said, “I accept your offer to take part in this contest”; however, she responded by increasing her beer sales and taking part in the drawing. Her actions theoretically served as an acceptance to the offer.
If we dig deeper, did she really accept the offer, though? As far as she knew, she was entering a contest for a Toyota. As we now know, his offer was actually for a toy Yoda. Their so-called agreement was not to the same terms. In legalese, maybe there was no “meeting of the minds.” Perhaps the offer that she “accepted” was different from the offer than he made.
Finally, for a contract to exist, both sides must be giving something up. This exchange is called consideration. If you tell me that you will give me $100 and then refuse to give it to me, I cannot sue you for the money because I have not given you anything in exchange for it. Hooters would probably make a similar argument in response to the claim. Her only obligation to enter the contest was to sell beer, which was her job. The waitress would argue that she worked harder and longer than she would have otherwise done, and so she did give something up.
Do not take this to mean that you can go around making promises that you do not intend to keep, simply because the other side has not offered you anything in return. Just because a contract has not been formed, it does not mean that there are no legal remedies available! Even if the waitress and Hooters did not have a contract, she still had a chance to sue them for fraudulent misrepresentation.
The toy Yoda case that formed the basis for our hypothetical ultimately settled prior to going to court, so there is no way of knowing whether the judge and jury would have found that the manager’s contest gave rise to a remedy under contract law, but this misunderstanding provided an opportunity to examine the fact and fiction of contract law.
WARNING: Most states require a signed written document to form a contract in many situations, including the sale of goods that is above a certain amount of money. Had the toy Yoda case gone to trial, the court might well have insisted on such a signed document. The focus of this article is to alert you that you might be inadvertently forming contracts that could be used against you. But if the ability to legally enforce any promise is important to you, speak to your lawyer about getting that promise in writing.
Lew Tesser gratefully acknowledges the assistance of Randall Tesser, Esq., associate at Tesser, Ryan & Rochman, LLP, in the preparation of this article.