An Introduction to Contract Law
A contract is a legal agreement between two or more parties that outlines the obligations and responsibilities of involved parties. When two parties agree on the terms of a contract, both of them are expected to perform or refrain from performing certain duties. In the arsenal of legal tools available to an attorney, the contract is one of the most useful . Its ability to define rights and obligations in a clear way makes it indispensable when structuring a business relationship, marriage, joint venture, or any other agreement. The law of contracts defines the way that agreements are put together, how they can be enforced, how they can go wrong, how to fix things when they do and how to avoid making frequent mistakes that would otherwise cause our contracts to fail.
What Makes a Contract Valid?
A valid contract is always based on an offer and acceptance. The terms of the offer must be clear and not vague or uncertain in any way and, to be effective, the acceptance must correspond with the terms of the offer. While this is a fundamental requirement, it is not the only one.
To be enforceable, a contract must typically include certain key elements:
• Offer. This is essentially a promise made by one party to another containing specific terms subject to which the offering party will be bound if the offer is accepted.
• Acceptance. This means that the other party agrees to accept the offer. To be effective, the acceptance must correspond with the offer. In a bilateral contract, both parties must usually make ongoing promises to each other (for example, in a sales contract, the seller promises to deliver goods and the buyer keeps the promise by way of paying the purchase price).
• Consideration. This refers to anything of value that one party to a contract can give to another in exchange for something else. It can be money, property, services or anything else the parties agree to. However, if a promise is merely an illusory promise, it will not be enforced.
• Capacity. The parties to a contract must be of sound mind and of a certain minimum age.
• Legality. The subject of the contract must be legal in nature; in other words, it must not be criminal, tortious or otherwise against public policy. For example, a contract that involves the delivery of heroin is not legal; neither would be a contract to perform an illegal medical procedure or serve an injury-producing product from manufacturing to the retail sector.
• Mutuality of Obligation. Both parties to a contract must have the same obligations. This is generally achieved by the offer and the acceptance being in correspondence with each other. An example of this would be in a contract to deliver goods for $500: the offeror offers to deliver the goods to the offeree (and the offeree accepts), and in return the offeree promises to pay $500 for the goods (and the offeror accepts). If either the offer or the acceptance is conditional, then the obligations of both parties are likely to be different, making the contract illusory. A contract where a party must do something if they feel like it — such as "If I feel like delivering my end of the bargain, or I happen to find the money to compensate you for your loss, then I might." — is much too vague and unenforceable.
• Intent. This is perhaps the least key of the key features of a contract; any offer that is made must be made with the intention to be binding if it is accepted. It is difficult to define because no party to a contract simply comes out and says that they are not interested in being bound by the offer; and to determine whether there was an intention to be bound, the court will typically look at the surrounding facts and circumstances.
Different Types of Contracts and How They’re Used
In the most basic terms, a contract is an agreement between two or more parties. The type of contract that results depends on the number and type of parties involved in the agreement. Generally, the types of contracts include these:
Bilateral Contract: Involves a promise in exchange for a return promise between two parties. Unilateral Contract: Involves a promise by one party in exchange for something. The promise isn’t legally binding until the performance of the condition is completed. Express Contract: Involves an agreement spelled out orally or in writing, where the parties have in mind specific terms of the agreement, including the existence of a contract at all. Implied Contract: Involves an agreement where while the parties may not have intended to enter into a contract, their actions created the terms of the contract. These are just the general types of contracts. Of course, there are other aspects that require adding other descriptive terms, such as "formal" and "simple" contracts.
Common Contract Law Issues
The law of contracts governs virtually every commercial transaction and is one of the most important aspects of the law of business and commercial transactions that deals with obligations between parties that arise out of agreements. Because the law of contracts is so broad in nature, it can at times prove difficult to determine when there has been a breach of contract or when damages are available. In this regard, the contract must be read as a whole to determine what the contractual obligations are of the parties and then whether a breach has occurred, including whether the breach is material.
A breach of contract occurs when a party does not perform as promised. There are two basic types of breaches: material and minor. A material breach is a "substantial failure to perform according to contract terms." A minor breach occurs when there is a failure to perform a nonmaterial term, at which time the non-breaching party’s duty to perform is suspended until the non-breaching party has had an opportunity to remedy the defect. If the breach is not material, performance is merely delayed, and damages are available for any delay in performance, including direct, indirect and consequential damages.
A party injured by a material breach may seek a variety of remedies, including recovery of direct damages, indirect damages, consequential damages, punitive damages, nominal damages , specific performance and rescission. Compensatory or direct damages are designed to compensate the non-breaching party for the losses it actually suffered as a result of the breach. Consequential damages are special damages that either:
(1) flow from circumstances that the breaching party knew when it entered into the contract were likely to cause additional loss; or
(2) arise out of special circumstances beyond the ordinary course of events if the breaching party had reason to know that such circumstances exist at the time of making the contract.
A party may not recover consequential damages unless they were reasonably foreseeable at the time the parties entered into the contract.
Generally speaking, the terms of a contract are enforceable as written. Thus, it is important to ensure that any contract entered into clearly and concisely sets forth the parties’ obligations, the scope of any limitations, and the consequences of any breach.
Parties to a contract do not need to litigate in court if they do not want to. Generally speaking, both state and federal courts require litigants to litigate their claims if their claims are based upon a license issued by the state or federal government or involve at least $75,000.00 in controversy. However, a majority of contracts entered into contain a clause requiring that any dispute arising out of the contract be submitted to some type of alternative dispute resolution (ADR), including an arbitration, mediation or mini-trial. Although traditionally binding arbitration was required, ADR clauses are becoming more flexible and it is not uncommon for the parties to be permitted to arbitrate claims that exceed a certain threshold, with litigation thereafter controlled by a judicial officer.
Contract FAQs and Additional Contract Law Resources
The following FAQs may be helpful to you, but keep in mind that they are not a substitute for speaking to a lawyer.
Some resources available on the Internet include:
Contracts and State Law
Contracts FAQs
Contracts in Plain English: Avoiding Problems With Verbal Contracts
Legal Resources
American Bar Association
State and Local Bar Associations
U.S. Supreme Court
U.S. Court of Appeals
U.S. District Courts
Case Law
CALI – Center for Computer-Assisted Legal Instruction: Contracts
AVO: Contracts
Nolo Press Online: Contracts FAQs
UH Wolfgram Memorial Library – Contracts
Free and Low Cost Legal Research
For additional resources, check out this list of legal research centers.
Contracts in Plain English
Sample Contracts
Consumer Contracts
Contracts FAQ
Contract and Real Estate FAQ
Construction Contracts FAQ
Enforcing Oral Contracts
How to Pay for Legal Services
More Contract FAQs
UNB: Contracts
Legal Centre: Contracts
Publications & Legal Information
Law Society of British Columbia: Consumer Contracts
Japanese Legal Research: Contracts
Contract Law PDF Downloads
The following are the downloadable PDFs for "A Professional’s Guide to Understanding Contract Law" and "A Business Owner’s Guide to Understanding Basic Contract Law: 42 Common Errors and Omissions in Written Contracts."