Contracts can sometimes be quite complex and confusing to understand. To better shed light on the ins and outs of contract law, here are some frequently asked questions.
- What is a Contract?
- What are the Elements of a Valid Contract?
- How Old Do You Need to Be to Form a Contract?
- How can a Contract be Breached?
- What Does “Consideration” Mean in Relation to a Contract?
- When is a Contract Unenforceable?
- Are Contracts Valid Even If They Aren’t Written Down?
- What are Some Remedies for Breach of Contract?
- Do I Need a Lawyer for a Contract Issue?
A contract is an agreement between two parties creating a legal obligation for both of them to perform specific acts. Each party is legally bound to perform the specified duties such as rendering a payment or delivering goods.
In order for the contract to be enforceable, each party must exchange something of value (called “consideration”).
A contract may be used for various transactions, including the sale of land or goods, or the provision of services. They may be either oral or written, though courts prefer that agreements be put in writing.
In order for an agreement to be binding in a court of law, a contract must contain the following elements:
- Mutual Assent: Each party must have a shared understanding regarding what the subject matter of the contract is. For example, for a delivery contract, both parties must understand that the word “ship” does not refer to a sea vessel, but rather means “to deliver”.
- Offer and Acceptance: One party must make an offer by clearly communicating their intent to be bound in a contract. Likewise, the other party must render their acceptance in unambiguous terms.
- Consideration: This where both parties mutually exchange something of value in order to make the agreement binding. The consideration may simply be a formality, such as giving $1. Sometimes 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. 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.
- 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.
Usually, 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. This 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. This is defined as: the ability to understand that a contract is being formed, and the ability to understand the general nature of the contract.
So, even if a person has the legal capacity (age) to enter into a contract, a court might not enforce it if the person lacked the legal or mental capacity to do so.
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A breach of contract means one party to the contract fails to fulfill her 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, or fails to perform whatsoever.
If one party fails to perform while the other party fulfills her duties under the contract, the performing party is entitled to legal remedies for breach of contract. This means that there are several points in time when the contract may be breached. A breach of contract means that one or both parties have failed to perform their duty. Some common types of breach include:
- Non-performance of duties promised in the contract;
- Breach of an implied duty; and
- Anticipatory breach.
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 is also called the “bargained-for-exchange”, usually 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. In other words, you can’t make a contract for one person to give something to the other without receiving something in return.
The consideration doesn’t have to be of the same exact value as the goods or services being provided. The focus is more on the legal obligation that the consideration “triggers” for the receiving party.
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.
- Illegal Purpose: The contract is for a illegal purpose
- Lack of Capacity: The party in the contract is not of legal age to enter into a contract
Oral contracts are generally valid even if not supported by a written document. On the other hand, contract laws require certain contracts to be in writing in order 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 writing because courts do not want parties taking advantage of each other. The following is a list of contracts that are required to be in writing to be valid:
- Surety and Guaranty Contracts: These are contracts where one party agrees to be responsible for another party’s debts. A student loan co-signed by a parent is a good example.
- A Contract, for Consideration, to Marry: Modernly, this rule has been eliminated in many states for policy reasons
- A Contract that Cannot be Fulfilled Within One Year of the Start of the Contract: This generally means long terms contracts
- A contract for the sale of goods over $500 or a lease of goods over $1000
- Contract involving the exchange of land or real property, or an interest in real property (such as a lease)
- A contract to give property on or after death
- A contract to sell stocks and bonds
There are two basic types of remedies for a breach of contract. These are damages are: Monetary Damages and Equitable Remedies.
If a contract is breached and the non-breaching party or plaintiff is successful in a breach of contract lawsuit, the plaintiff can recover monetary damages and equitable relief.
Monetary damages can include:
Equitable remedies are typically awarded when monetary damages will not properly remedy the situation. They involve the court ordering the parties to act or to refrain from acting. Types of equitable remedies include:
- Specific Performance
- Contract Rescission
- Contract Reformation
Whether you making plans to enter into a contract or are already dealing with a breach, it is essential to work with a local business lawyer every step of the way. A competent contracts attorney can help you draft a suitable agreement; as well as prepare your arguments in the event that a breach occurs. Contracts are powerful tools that create binding legal obligations, and a lawyer can help you understand what your rights are under contract laws.