Every day, millions of agreements are made between and among businesses, governments, and individuals—everything from multimillion-dollar deals to agreements to go to lunch or play golf. Human beings are constantly making agreements—promises that something will or will not happen in the future. We could not live without agreements that allow us to plan our futures. Every time any person or company buys or sells a product or service, it is preceded by an agreement—a promise to pay a certain price in exchange for a promise to deliver goods or services.

There is an old axiom—"pacta sunt servanda," a Latin phrase meaning "promises must be kept." But not every promise is kept. A promise to go to lunch or play golf may be breached. Is it a breach of contract for which a court will provide a judicial remedy? Hardly. Such a breach may generate social sanctions such as not inviting the breacher to other social events, but a court would not enforce such a promise because reasonable people do not expect such social promises to generate legal liability. Courts will say that the parties to such agreements do not intend legal consequences to attach to them. While they are agreements, they are not contracts. One of the prerequisites of any contract is the intention to be legally bound.

When parties make agreements, they typically do not state whether they intend to be legally bound. While it is clear that a mere social agreement does not import legal consequences, it is equally clear that a commercial agreement such as a deal between businesses to purchase and sell certain products or services is an agreement that the parties intend to be legally binding, that is, it is a contract. Within the world of commercial agreements, however, parties sometimes engage in legal arguments over whether they are legally bound to each other.

Consider Al Jordan, a supply chain manager for the Carr Corp. that manufactures and sells chemicals. Al has lunch with Jim Dolan, a representative of the Davis Corp. that makes secure containers. They discuss a deal for a carload of containers. Jim provides the specifications for Davis containers and the price ranges, depending upon the size ordered. He states that Davis can deliver a carload of any assortment Carr Corp. desires within two weeks. Al is pleased with the presentation and tells Jim that "the containers and the prices are fine." Al does not specify the sizes of containers that Carr requires, though he does say that Carr will need a carload. The luncheon ends and they shake hands. Twenty-four hours later, Al receives an acknowledgment for a carload of containers that "confirms the agreement made" on the day of the luncheon and requests Carr Corp. to respond with its desired assortment of different sizes of containers that will make up the carload shipment. Does this acknowledgment accurately reflect the parties' intention to be legally bound to a contract?

Al claims that Carr has no contract with Davis since the particular assortment of containers was never agreed upon and, therefore, the total price was never agreed upon. Jim claims that the parties intended to be bound to a deal—a "closed deal"—even though Carr, as the buyer, still had the right to specify whatever size assortment of Davis containers it desired. While the total price depended upon the assortment chosen by Carr, the various container prices were disclosed when the parties met and, according to Jim, made a deal. Al was an authorized agent of Carr and Jim was an authorized agent of Davis.

Assume that Al sincerely believes he did not make a contract for Carr with Davis while Jim sincerely believes he did make a contract for Davis with Carr. It may surprise you to learn that the law does not care what either Al or Jim believed. There is a very good reason why the law does not care. We will never know (for sure) what either party believed. Even if our legal system allowed the use of some truth drug to test what they really believed and, under such a drug, they each stated their sincere, conflicting beliefs as to whether they had made a contract, the law still does not care. The legal test has nothing to do with the subjective intention of the parties. It is their objective intention that counts their outward manifestations. If their words and actions appear to evidence a contract, a contract is made in the eyes of the law, regardless of what either or both were thinking at the time.

It is not essential that all of the terms of a deal to be spelled out before a court will find a contract. In our example, the fact that the buyer must still choose the assortment, which, in turn, will determine the final price of the carload shipment, is not fatal. Parties may leave out many terms such as the shipment and delivery terms, the time and place of delivery and even the price. If they otherwise appear to intend their agreement to be legally binding, it will be legally binding. Parties can even agree that they have a deal but they will later decide upon the price. Suppose they cannot agree later? The court will provide a reasonable price. In our example, if Carr refused to notify Davis of the assortment it desired, a court would allow Davis to decide what a reasonable assortment would have been if Carr had not breached. Davis could then claim damages on the basis of a hypothetical assortment to recover the profit it would have made on the deal—again, if it appears that the parties left that luncheon with the intention of binding their respective companies to a deal even though all of the terms were not specified.

Sometimes a complex transaction involves lengthy negotiations and the parties decide to record their negotiations to avoid useless repetition by agreeing to a letter of intent. A letter of intent will often contain a clause stating that the parties are not bound until both sign a final, definitive agreement. There are cases, however, in which such a statement is included in the letter of intent but the letter contains all of the terms of the agreement and the parties otherwise act as if they have a closed deal. Under these circumstances, a court may find that they intended to be bound even without that final document, that is, the definitive contract document was intended to be nothing more than a record or memorial of their complete agreement. If that was their apparent intention, they are bound to a contract even if a definitive document is never created or signed.

To guard against the possibility that a corporation will be bound by a contract, a favorite clause in a seller's printed form will state that no contract will be formed until it is signed by an authorized official at the company's home office. This protects against an overzealous sales representative making a deal that corporate headquarters would find to be unacceptable. Such boilerplate clauses should be carefully considered because they are stating when the parties will be legally bound. When a business signs a telephone company's printed form to advertise in the yellow pages, the signer may not notice a clause stating that no contract comes into effect until the advertisement is actually printed. If the telephone company makes a mistake and fails to print the ad, the business has no claim since no contract has yet been formed even though the business assumed that it had a contract to have the ad appear in the next edition of the yellow pages. There are numerous cases illustrating the same problem in many different contexts.

The moral of the story is clear. There is no contract unless the parties intend to be legally bound. If the parties state that they intend to be legally bound, unless the deal is otherwise against public policy, a court will recognize their stated intention. If they state that they are not legally bound, unless their actions otherwise indicate their intention to be legally bound, a court will, again, recognize their stated intention. If the parties state when they intend to be legally bound, a court will recognize that stated intention. Where the parties do not state if or when they intend to be legally bound, a court will consider all of the objective circumstances to determine if and when reasonable parties would consider themselves to be legally bound. Rather than leave that determination to a court, the safest course is express the intention to be bound or not bound and to be able to produce evidence of that intention.