7.2 Formation and Essential Clauses

The Five Elements of a Valid Contract

General contract law requires five things before a court will enforce a bargain:

1. Offer — a definite promise with specific terms ("I will replace your roof with architectural shingles for $18,500"). An advertisement or estimate is usually an invitation to deal, not an offer.
2. Acceptance — an unconditional agreement to the offer's exact terms, the mirror-image rule. A reply that changes terms ("I'll do it for $17,000 if you include the gutters") is a counteroffer, which legally rejects the original offer and puts a new one on the table.
3. Consideration — the exchange of value: the owner's money for the contractor's work. A promise with nothing coming back is a gift, not a contract.
4. Capacity — the parties must be adults of sound mind, acting for an entity with authority to bind it.
5. Legality — the contract's purpose must be lawful. In Maryland, this element has teeth: only a licensed MHIC contractor may contract with a homeowner for home improvement work, and an unlicensed contractor who sues to collect on a home improvement contract faces the legality problem head-on.

When all five align, the parties have mutual assent — a meeting of the minds.

Statute-of-Frauds Logic

The statute of frauds is the doctrine that certain contracts are unenforceable unless in writing: contracts that by their terms cannot be performed within one year, promises to answer for another's debt, contracts transferring an interest in real property, and (under the Uniform Commercial Code) sales of goods of $500 or more. The logic is evidentiary — some deals are too important to rest on memory.

For an MHIC candidate, though, the common-law question "must this be in writing?" is academic. Section 8-501 of the Business Regulation Article independently requires every home improvement contract to be written and signed — so the exam's real question is never whether a writing is needed but what the writing must contain and when it must be signed.

What §8-501 Requires in Every Home Improvement Contract

Maryland's Home Improvement Law specifies the form and content of the contract itself. Every contract must be:

• In writing and legible, and signed by each party before work begins or any money is paid. The homeowner must receive a signed copy before work starts.
• Bearing the contractor's name, address, telephone number, and MHIC license number — plus the name and license number of each salesperson who solicited or sold the job.
• Containing a description of the work to be performed and the materials to be used.
• Stating the approximate dates when work will begin and when it will be substantially completed.
• Describing each document the contract incorporates — drawings, specifications, permits. A set of plans only becomes part of the bargain if the contract identifies it.

The contract must also carry consumer notices: the MHIC telephone number and website with a statement that each contractor must hold a current MHIC license and that anyone can ask MHIC about a contractor; a notice that MHIC administers the Guaranty Fund, which may compensate homeowners for actual losses caused by licensed contractors; and a notice that the homeowner may purchase a performance bond for added protection.

Payment rules: the contractor cannot accept a deposit exceeding one-third of the contract price and cannot accept any payment until the contract is signed. Beyond the deposit, the payment schedule is negotiable.

Deposit math on the exam: on a $30,000 contract the maximum lawful deposit is $10,000; collecting $12,000 up front violates the one-third cap even if the homeowner volunteers it. And no payment of any amount may be accepted before the contract is signed.

Two special situations add requirements. If payment is secured by an interest in residential real estate, the first page must carry a bold warning that the contract creates a mortgage or lien and that failure to pay can cause loss of the property, plus a three-business-day right to rescind in writing. If the sale falls under Maryland's Door-to-Door Sales Act, the buyer may cancel until midnight of the fifth business day — or the seventh day if the buyer is 65 or older — the contract must be written in the same language principally used in the oral sales presentation, and a completed Notice of Cancellation form must be attached. MHIC regulations treat contract-content failures as citable violations, with fines for a missing or unsigned contract, missing license numbers, and missing dates.

Scope Drafting and Warranties

Scope of work should read like a build order, not a slogan: "furnish and install 32 linear feet of maple base cabinets, Brand X, finish Y" beats "remodel kitchen." Specificity is the contractor's protection as much as the owner's — it defines what is in the price and therefore what qualifies as a paid extra. When the contract incorporates drawings, specifications, and permits, add an order-of-precedence clause stating which document controls when they conflict — without one, the parties end up fighting over whether the spec or the drawing governs. Warranties come in two kinds: express warranties are the written promises in the contract ("workmanship warranted for two years"), while Maryland law also implies that work be performed in a workmanlike manner — the same "unworkmanlike, inadequate, or incomplete" standard the Guaranty Fund applies.