What Is A Contract?
Contracts are agreements between two or more parties enforced by the legal system. Such contracts may be written or oral, although most contracts which expect to have legal power are made in writing. Contracts must be made voluntarily and free from duress. If a party fails to fulfill his or her terms in the contract, then that party is committing a breach of contract.
What Are the Elements of a Binding Contract?
Not every agreement between parties is binding in a court of law. In order to be enforceable, contracts require the following elements:
- Mutual Assent: this means that the parties involved have a shared understanding as to what the contract covers. For example, in a contract involving a "model", if one party thinks the contract is for a model car and the other thinks it's for a supermodel, there is no mutual consent and the contract probably will not be enforceable.
- Offer and Acceptance: One party must make an offer, or a communication of the intent to be bound by a contract. The other party must accept, or assent to the terms offered. See also alternatives to acceptance.
- Consideration: the mutual exchange of something of value. Note that even though there may be no mutual consideration, there are rare cases where a mere one-sided promise can be enforced. See detrimental reliance.
- Capacity: All parties must have the ability to knowingly enter into the contract. A party cannot enter into a contract if the party does not have the mental capacity, is underage or does not have the authority to contract. The last one can be especially important if the person making and signing the contract is merely an agent of the party, such as an employee for a business.
- Legal Purpose: The contract must be created for legal purposes only. Contracts to sell illegal drugs, commit fraud or other crimes will not be recognized or enforced.
What Constitutes Adequate Consideration?
In general, a contract is only binding if each party promises something to the other. For example, one party promises a house in exchange for a certain amount of money. Laws concerning adequate consideration may vary by state, but in general:
- Consideration can be a promise to do something, like making a payment or performing a service, but it can also be a promise to not do something. For example, a promise to refrain from using bad language is valid consideration.
- Consideration should be of some value. If a party promises to give her friend a house, the friend cannot hand over a wooden nickel and claim to have a binding contract.
- Past consideration is not adequate. If a party promises to pay another party for a service that has already been rendered, there is no adequate consideration and no binding contract.
- Consideration decided upon by the parties is binding, even if it seems unfair or inadequate. In other words, if a party contracts to sell his car for $5,000 when the car is actually worth $30,000, the contract is still binding.
When is a Contract Unenforceable?
Even when the above key elements are satisfied, there may be other reasons why the contract cannot be enforced. For more information, see defenses to breach of contract. Such reasons may include, but are not limited to:
- Duress – a party was forced into the agreement against their will.
- Violation of public policy – Contracts cannot violate federal/state laws nor can be do they used to enforce immoral actions. Examples include prostitution, prohibition of unions or child labor.
- Nondisclosure – If a party misrepresents the agreement to the other parties, it may not be recognized as bidding.
- Impossibility- Events outside of all parties control may result in the agreement becoming void or too expensive. Such events may include natural disasters such as hurricanes.
Should I Consult an Attorney for my Contract Issues?
Contract law is complicated, and the applicable rules and standards may vary from state to state. If you desire to enter into a contract, an attorney can help with proper drafting to provide you with protection later on.
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Last Modified: 05-10-2012 12:09 PM PDT