Whether you are an individual or a business owner, you have certain expectations when you enter into an agreement. Namely, you expect the person or business you’re dealing with to uphold their end of the bargain. When they don’t, it can be difficult to collect on what they owe you without the help of a seasoned collections attorney. To determine whether your situation has reached that point, it may help to first know what does and does not constitute a legally binding contract in California.

Understanding Contracts

By definition, a contract is an agreement between two or more parties that a court will enforce. There are many kinds of unenforceable agreements, but that is usually not what people or businesses want, as those types of agreements can put them at risk. Creating a legitimate, legally binding contract is a much safer decision in the long run.

Contract Elements

The essential elements for making a contract are an offer, acceptance of the offer, and consideration. What this really means is that the parties involved in the agreement came to an understanding as to what they were agreeing to do. The formula of offer and acceptance is used in order to determine if and when a contract is formed, as well as its terms. Generally, an offer has to be accepted as is and without changes in order to form a contract. Offers may also sometimes be accepted by taking action, such as performing what was asked. If you add or change the terms when responding to an offer, however, you are making a counter offer. The law views this as a rejection of the offer and considers it to be a new offer to the other party for them to accept, reject, or counter.

Strictly speaking, once an offer is rejected or countered, it is gone and cannot be accepted unless it is extended again. In the context of a sale of goods, a contract may still be formed even though there are additional terms. This is a good example of why lawyers often answer seemingly simple questions with the words “it depends.”

In addition to an offer and an acceptance, the agreement must have consideration. This is what the parties agree to exchange. It is also referred to as the “legal detriment,” which means each side has to give something up. For example, let’s say a buyer promises to pay money in exchange for a car. Each side has a detriment: the buyer parts with money and the seller transfers the car. Generally, the amount of consideration does not matter so much as the fact that it exists.



Reasons Contracts Fail

Some contracts fail because they are “illusory” — meaning there is no consideration. For example, suppose a person agrees to give me their car for free. If the other person does not give me the car, I will have a very difficult time getting the court to rule in my favor since a court will likely view the promise of a free car as a gift. If we change the facts to where a person will give me their car if I tow it away from their home, it is more likely that a court will view this as a contract.

A common example of illusory consideration arises when a buyer, for example, agrees to purchase something but has the complete right to reject it and cancel the agreement if the item does not meet with their subjective approval. Under these circumstances, can we really say that the buyer has agreed to do something? Not really, and there may therefore not be a contract under these circumstances.

Contract Limitations in California

There are limits on what the parties may contract to do. For example, a contract must have a lawful purpose. A gambling debt in California is not generally enforceable. Similarly, a party defaulting on an agreement to sell illicit drugs would not be enforceable — at least in court.

In addition, there are limits on what people can agree to or what a court will enforce. If an agreement is unconscionable, a court may not enforce it. In addition, courts may do equity between the parties to prevent one side from taking unfair advantage of the other side. Take for example the situation above where the buyer can reject and cancel the agreement at their subjective whim. Suppose the seller delivered the item and the buyer used it for some time before rejecting it. A court may enforce the contract of sale because the buyer used the property. Or the buyer may have to pay for the value of the use of the product for the time it was used.

Courts may also look beyond the form of a transaction at the economic realities underlying it. In leasing cases, for instance, the lease of equipment may really just be the sale of goods structured in the form of a lease. Depending on the circumstances, it may be treated as a sale even though it is set up as a lease.

Verbal Agreements

The law recognizes and courts will enforce oral agreements, but oral agreements will not work in all situations. For example, sales of real property, sales of goods for more than $500.00, or contracts not to be performed within one year must be in writing. It is also a better practice to use written agreements because it will reduce (but not eliminate) disputes about the existence of a contract or its terms.

If you need assistance reviewing, understanding, or enforcing a contract, do not hesitate to call for representation in these matters.


If you have entered into a contract and the other side isn’t holding up their end of the deal, please give me a call. For more than two decades, I have represented both individuals and business owners in the San Francisco Bay Area going through the exact same thing. Put that experience on your side.