Terms of a Contract Case Case Study

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CONTRACT FORMATION ISSUE -- HUNT V. MCLLORY

Case Background and Decision

Hunt owned and operated a farm. He borrowed $175,000 from Mcllory Bank and the two parties also discussed long-term financing for the farm. The discussions about long-term financing were oral and there were no specific terms ever agreed upon about the dollar amount, repayment terms, or interest rates. Hunt signed a promissory note for the loan and eventually defaulted on it. The bank foreclosed on the farm and other collateral for the loan. Hunt countersued arguing that the bank had breached the oral agreement to provide long-term financing to the farm. The court ruled that no contract for long-term financing had ever been created because the oral discussion did not create a contract since it left open all of the terms about the specific dollar amount of the loan and the other related terms such as for repayment and interest rates.

Issue Analysis

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In order for a valid contract to be formed, all of the essential terms must be specified. Otherwise, there is no "meeting of the minds" and no enforceable contract is formed. Where an agreement is too vague to form an enforceable contract, courts will not revisit the negotiations to determine what the terms should have been. Generally, the necessary elements for a valid contract are a specific agreement whereby one each party knows exactly what is required of him by the contract and what is required by the other party. In this case, a valid contract would have required a precise amount of the future financing, repayment terms and conditions, interest rates that applied to the loan, the collateral accepted for the loan, the conditions under which that collateral would be forfeited, and the exact dates of a payment schedule for repayment.

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