FAQ: Contract Law

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 What Is A Contract?

A contract is a legally binding agreement between two or more parties, which provides details of what the parties agree to perform or exchange. Contracts are considered to be the foundation of the business world, and as such they may be simple or considerably complex. Examples of contracts include:

  • Employment contracts;
  • Real estate purchase contracts; and
  • Insurance contracts.

Contracts can be used any time the parties involved wish to document an agreement, in order to ensure that all parties’ rights are protected.

Drafting a contract refers to the act of writing the terms and details of a contract, in order to determine and outline the legal obligations of all parties to the contract. This allows them to have a clear understanding of their duties and legal obligations to one another. While a contract can be drafted by anyone, it is in the best interest of all parties involved to have an attorney draft a contract, especially if it is detailed and/or complex.

A contract will also provide sections outlining whether it may be canceled, as well as how to cancel it. The contract will clarify the consequences if a party breaches the terms of the contract; as such, a well-written contract will contain clear definitions of what constitutes a breach, so that all parties can uphold their duties.

What Are The Elements Of A Valid Contract?

In order for an agreement to be binding in a court of law, the contract must contain the following elements:

  • Mutual Assent: Each party must have a shared understanding regarding what the subject matter of the contract is;
  • Offer and Acceptance: One party, referred to as the offeror, must make an offer to a second party, referred to as the offeree; the offeree must accept that offer. The parties will then exchange consideration, or something of value. A common form of an offer would be a sale sign at a local shop where any person may walk in and pay money to own an item which is for sale. However, offers may also include promises to perform particular services in exchange for money, or other items of value. In order to accept the offer, the offeree is required to show the intent to be bound to the terms of the offer. This may include signing an agreement, or making a payment;
  • Consideration: Both parties mutually exchange something of value in order to make the agreement binding. The consideration may be a formality, such as giving $1. There are some circumstances in which contracts can be enforced in a one-sided promise, where only one party renders consideration;
  • Capacity: All parties must have the ability to knowingly enter into the contract. Capacity is further discussed below; and
  • Legal Purpose: The contract must be created for legal purposes only. What this means is that contracts to sell illegal drugs, or commit fraud or other crimes will not be recognized or enforced.

How Old Do You Need To Be To Form A Contract?

In general, a person needs to be of legal age in order to enter into a contract. In most states this is at least 18 years of age, and is referred to as the legal capacity to enter into a contract.

In addition to having legal capacity, a person also needs to have “competency” to form a contract, which is often referred to as either “competency” or “capacity.” When entering into a legally binding contract, certain people may lack the capacity or competency to contract. Both parties to a contract must have contractual capacity or competency in order for the agreement to be legally binding. Contractual capacity means that the parties are able to understand that a contract is being formed. The parties must also be able to understand the basic nature of the contract.

It is important to note that contractual competency and capacity have nothing to do with a person’s skill in bargaining or negotiating a contract. Just because a person does not understand every detail and provision in a contract does not mean that they lack the competence or capacity to form the contract. In short, it is enough if the person understands that they are entering into a contract, and that they understand the general nature of the contract.

Essentially, even if a person has the legal capacity (age) to enter into a contract, a court might not enforce the contract if the person lacked the legal or mental capacity to do so.

What Is Breach Of Contract?

A breach of contract means that one party to the contract fails to fulfill their contractual obligations. A breach can occur if a party:

  • Fails to perform within the time frame specified in the contract;
  • Does not perform in accordance with the terms of the agreement; and/or
  • Fails to perform whatsoever.

If one party fails to perform while the other party fulfills their duties under the contract, the performing party is entitled to legal remedies for breach of contract. This is further discussed later on.

Some common examples of breach include:

  • Non-performance of duties promised in the contract;
  • Impossibility;
  • Breach of an implied duty; and
  • Anticipatory breach.

What Does Consideration Mean?

In a contracts claim, the term “consideration” refers to something of value that is given in exchange for the performance of the contract duties. Consideration may also be called the “bargained-for-exchange,” which is generally the price paid for the promise. This indicates that the party receiving the goods or services has given something in exchange for those benefits.

Every contract agreement must be supported by consideration. What this means is that you cannot make a contract for one person to give something to the other person, without receiving something in return. However, the consideration does not have to be of the same exact value as the goods or services that are being provided. The focus is more on the legal obligation that the consideration “triggers” for the receiving party.

When Is A Contract Unenforceable?

Even when the above elements are satisfied, there may be other reasons as to why the contract cannot be enforced. Such reasons may include, but are not limited to:

  • Duress: One party was forced into the agreement against their will;
  • Violation of Public Policy: Contracts cannot violate federal and state laws, nor can they be used to enforce immoral actions. Examples include prostitution, prohibition of unions, and child labor;
  • Nondisclosure: If one party misrepresents the agreement to the other parties, it may not be recognized;
  • Impossibility: Events outside of all parties control may result in the agreement becoming void, or too expensive. An example of this would be natural disasters, such as hurricanes;
  • Illegal Purpose: The contract is for an illegal purpose, as was previously mentioned; and/or
  • Lack of Capacity: The party in the contract is not of legal age to enter into a contract, or did not possess the legal or mental capacity to do so.

Are Contracts Valid If They Are Not In Writing?

Oral contracts are generally considered to be valid, even when they are not supported by a written document. However, contract laws require specific contracts to be in writing in order for them to be enforceable in court. These laws are known as “statutes of fraud,” or “the statute of frauds.”

Under the “statute of frauds”, these contracts need to be written in order to deter parties from taking advantage of each other. Contracts that are required to be in writing in order to be considered valid include:

  • Surety and Guaranty Contracts: Contracts in which one party agrees to be responsible for another party’s debts. A student loan that is co-signed by a parent is a common example;
  • A Contract, for Consideration, to Marry: Modernly, this rule has been eliminated in many states for policy reasons;
  • Long Term Contracts: This generally means a contract that cannot be fulfilled within one year of the start of the contract;
  • Significant Amounts: This would include a contract for the sale of goods over $500, or a lease of goods over $1000;
  • Exchange or Interest In Real Property: The most common examples of this would be a contract involving the exchange of land or real property, or an interest in real property, such as a lease); and/or
  • Others: Examples include a contract to give property on or after death, or a contract to sell stocks and bonds.

What Are Some Legal Remedies For Breach Of Contract?

The two basic types of remedies for a breach of contract are monetary damages and equitable remedies. If a contract is breached and the non-breaching party is successful in a breach of contract lawsuit, the plaintiff can recover monetary damages and equitable relief.

Monetary damages include:

Equitable remedies are generally awarded when monetary damages will not properly remedy the situation. They involve the court ordering the parties to act, or to refrain from acting.

Examples include:

Do I Need A Lawyer For Help With Contract Law?

It is essential to work with local contract lawyers every step of the way. Your contract attorney can help you draft a suitable agreement, and prepare your arguments should a breach occur. Because contracts create binding legal obligations, a lawyer can help you understand what your legal rights and options are under contract laws.

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