A contract is an agreement creating obligations enforceable in a court of law. A contract can be used to exchange products or services. Depending on the terms and the context, a contract can be simple or complex.
If you are interring a contract involving substantial sums of money, it may be in your best interest to retain the services of a business attorney to protect your rights and prevent any disputes regarding the contract.
Contract Formation: Elements of a Contract
Where a dispute exists between parties over an alleged contract, the court must first establish that a contract exists. Four essential elements make up a valid contract. The complaining party must prove that these elements are present.
- Offer. One or both of the parties made a promise to do or refrain from doing some specified action in the future.
- Consideration. Consideration is a word representing that something of value was exchanged in exchange for something else of value. An example of this would be money for services. Consideration is considered to be the value that induces the party to enter into the contract.
- Acceptance. Unambiguous acceptance of the terms of the contract shown through words, deeds, or performance. If the contract specifies the exact manner of acceptance, acceptance must typically mirror the terms of the offer.
- Intent. Perhaps the most important element of a contract is that the parties contracting had the intent to contract. The parties must intent to create legal relations and must understand at the time of contracting that the agreement is enforceable in a court of law.
Note: If the contract is for the sale of goods, between one or two merchants, the UCC is the governing law. The UCC provides that acceptance does not have to mirror the terms of the offer for a valid contract to be found unless:
- The terms of acceptance significantly alter material terms of the original contract; or
- The offeror objects within a reasonable time.
What Laws Govern Contracts?
In contracts, there are two different governing laws that determine how the court will govern the interpretation of the contract and enforcement of the terms of the contract.
The Uniform Commercial Code or UCC controls contracts that are primarily for the sale of goods. The UCC is a standardized collection of guidelines that govern the law of commercial transactions. Most states have adopted the UCC in whole or in part.
Common law governs the majority of contracts. The state’s common law is an evolving set of laws, mostly judge-made, that come from court decisions through the years.
Types of Contracts
There are a variety of different types of contracts, including:
- Bilateral Contract. A bilateral contract is one where there is a mutual exchange of promises. This is commonly regarded as the most typical of contracts. An example of a bilateral contract would be performing the act of mowing a person’s lawn in exchange for money for performing the act.
- Unilateral Contracts. A unilateral contract is one where the offer requests performance instead of an exchange of promises. A unilateral contract is typically only complete and formed when performance is complete. An example of a unilateral contract would be a "reward" poster. The contract is only formed when the item requested on the reward poster is returned. Once returned, the money will then be provided for performance.
- Express Contracts. An express contract is a contract formed by explicit language. An express contract will recite the agreement and its terms in entirety and specificity.
- Implied Contract. An implied contract is a contract formed by behavior of the parties. Where they may not be a clear contract, one will be found where the behavior shows a clear intent by the parties. An example of an implied contract would be where a veterinarian examines and treats an animal in their office. It is implied that the veterinarian will do his or her best and that the client will pay the fee charged for the treatment.
What Is the Statute of Frauds?
In general, there is no requirement that a contract be in writing. However, the Statute of Frauds requires that certain types of contracts be in writing in order to be enforceable in a court of law. In addition to the writing requirement, the contract must provide sufficient content to evidence that a contract exists. There are several types of contracts that must be in writing as they fall within the Statute of Frauds requirements:
- Contracts in consideration of marriage and covers prenuptial agreements.
- Contracts that cannot be performed within one year. However, contracts of indefinite duration do not fall under the Statute of Frauds and therefore need not be in writing to be found enforceable.
- Contracts involving the transfer of interest in land or real property. This applies to contracts to sell property and land as well as any other contract where land or an interest in real property is provided, such as a mortgage or an easement to property.
- Contracts by an Executor of a will to pay a debt of the testator with his own money.
- Contracts for the sale of goods totaling $500 or more in value.
- Contracts for which one party becomes a surety for another party’s debt or other obligation.
The Statute of Frauds is not only a requirement for the above mentioned contracts, but can also be used as an affirmative defense in a lawsuit for breach of contract. If a party is being sued for breach of contract, and the contract falls within the Statute of Frauds but is not in writing, the Respondent in that lawsuit may argue that there was no contract to breach.
Exceptions to the Statute of Frauds
There are certain exceptions to the Statute of Frauds. These include the following situations:
- Merchant confirmation rule. In contracts for the sale of goods, where merchants are involved, the UCC governs. If a contract between the parties is not in writing, the contract will still be enforceable if one merchant sends a memo sufficient to satisfy the Statute of Frauds. A sufficient writing would be one that includes some terms of the contract. If the receiving merchant knows the contents of the confirmation and does not object within 10 days, the confirmation is satisfactory as a contract.
- Admission of the contract under oath.
- Part performance of a contract. If a contract is not in writing, however, it is partly performed, the contract is enforceable to the amount already paid or delivered.
- Goods that were specially manufactured for the buyer and seller. This is satisfied if the buyer and seller either (1) began manufacturing them or (2) entered into a third party contract for their manufacturer, and the manufacturer cannot without undue burden sell the goods to another person in the ordinary course of business.
- Promisorry estoppel. Promisorry estoppel is applied in some jurisdictions when the charging party detrimentally relies on the otherwise unenforceable contract.
Breach of Contract
Breach of contract is a cause of action brought in a court of law. A breach of contract occurs where one or more of the parties to a contract does not honor an agreement between the parties to a contract. A breach can occur through non-performance, interference with the other party’s performance, or failure to perform according to the terms of the contract.
Under common law, there are two types of breaches to a contract - material breach and a minor breach.
Minor Breach. A minor breach occurs where there has been substantial performance of the contract. The non-breaching party cannot sue for specific performance, but can only sue for actual damages. An example of a minor breach would be where a contractor is hired to install a certain brand of plumbing pipe, but installs another brand of plumbing pipe of equal value. The court will not require the contractor to remove the existing pipe, even if incorrect, as the value is equal. This would amount to economic waste. Economic waste is tearing down or destroying something of value. However, the homeowner can recover actual damages, if any.
Material Breach. A material breach occurs where a party fails to perform. The non-breaching party can then either sue for specific performance or for damages resulting from the breach. For example, if the contractor above had installed plastic pipes instead of heavy-duty iron pipes, the homeowner could sue to recover the cost for correcting the breach. This would amount to the cost of removing the plastic pipes and installation of the iron pipes.
Under the UCC, a contract for the sale of goods may be breached if a seller provides the buyer with the wrong items. Under Article 2 of the UCC, there are a myriad of situations of how merchants may deal with a possible breach of contract situation. These include:
- Nonconforming Goods. If non-conforming goods are sent with a note of accommodation, the shipment is considered a counteroffer. If accepted, a new contract is formed between the two parties. If the seller refuses to conform to the contract and the buyer does not accept the nonconforming goods, the buyer can sell the goods and sue the seller for the difference from the contract price.
- Perfect Tender. Under the UCC, a buyer has the right of perfect tender requiring that the seller provide the goods according to the terms of the contract. If the goods are not perfect tender, the buyer may accept all, reject all, or accept the conforming goods and reject the nonconforming goods within a reasonable time but before acceptance. Buyer must also notify the seller of the rejection.
Anticipatory Repudiation. Under both common law and the UCC, anticipatory repudiation occurs where there is a clear and unequivocal indication that one party will not perform under the terms of the contract. The non-breaching party has the option to either treat the contract as breached, terminate the contract and sue for any damages, or continue performance under the terms of the contract.
Remedies for Breach of Contract
When seeking a remedy for a breach of contract, the non-breaching party may sue for damages or equitable relief by the court.
Damages. Damages are monetary relief for the breach of contract. There are different types of damages that a party make seek. These include:
- Expectation Damages. These damages are those which put you in a position had the contract been performed.
- Consequential Damages. Consequential damages are those losses stemming directly from the breach.
- Incidental Damages. Incidental damages are those which are reasonable foreseeable as a result of the breach.
- Liquidated Damages. Some contracts provide for a liquidated damages clause. In the event of a breach, it may be difficult to determine expectation damages, therefore liquidation damages represent the amount a non-breaching party can recover from a breach. It is important that the damages clause be reasonable. If it is egregious, it may be deemed a penalty and the courts will not honor the liquidation cause.
Equitable Remedies. Equitable remedies are preferred in situations where monetary relief is not sufficient to adequately compensate the non-breaching party for their loss.
- Specific Performance. Specific performance is an order by the court requiring a party to perform under the terms of the contract.
- Rescission. In rescission, the court will cancel the contract and both sides are excused from performance under the contract.
- Reformation. Reformation is a court act where the terms of the contract are changed to represent the true intent of the parties involved.
It is important to note that a party may not seek both damages and equitable relief.
Affirmative Defenses to Breach of Contracts
If a party is sued for breach of contract, they may defend against the claim using one or more of the following affirmative defenses. Affirmative defenses are claims that protect against the breach of contract claim by rendering it moot. The following are possible affirmative defenses that may be raised in a breach of contract claim:
- Statute of Frauds. As stated above, there are several types of contracts that must be in writing to be enforceable. If one of those contracts is not in writing, the party may raise the defense of the Statute of Frauds, specifically, that the contract is not enforceable as it was not in writing.
- Indefinite Terms. A contract may be deemed unenforceable if the contract does not have definite terms that were agreed upon by the parties. If it is unclear what the terms of the contract were, the court will have a difficult time enforcing the contract.
- Mistake. If mutual mistake exists as between the intent or terms of the contract, the contract may be deemed unenforceable.
- Capacity. If a party to a contract lacked capacity to contract, the contract will be void. This exists in cases of minors to a contract or those with mental incapacity.
- Fraud. If a party is induced to enter a contract based on intentional misrepresentations or lies, the contract will be void.
- Unconscionable. If the terms of a contract are unconscionable, it will not be enforced. There are certain elements that must be present for unconscionability to be found. These include unequal bargaining power between the parties and unfair conditions, clauses or waivers.
- Illegal. When a contract is illegal, the court will not enforce the contract. An example of an illegal contract would be a contract for a murder for hire.
- Estoppel. Estoppel occurs where one party makes a statement excusing performance of the agreement and the other party relies on that statement. The first party may be prevented from denying making that statement and claiming a breach if the relying party relied to their detriment.
Do I Need an Attorney?
If you have been sued for a breach of contract, or are suing one for a breach, an experienced business attorney can help defend your rights. As there is likely much at stake, the legal counsel of an experienced attorney can help you to recover your losses.