Every business needs to have a good understanding of contract law. This type of law covers the basic elements of a valid contract, how contracts can be terminated, and what happens when one party fails to live up to their end of the bargain.
In this blog post, we’ll provide a definition of contract law, discuss the basics, and explore some key points that business owners should know. If you’re looking for more in-depth information, don’t hesitate to reach out to an attorney.
People Also Ask
What is a contract?
A contract is a legally binding agreement between two or more parties that creates an obligation to do or refrain from doing certain things. The term “party” can refer to an individual, a company, or another legal entity. Contracts almost always include the following essential elements, regardless of who the parties are:
- Parties who are legally capable of entering into a contract. A mentally disabled person, for example, could not enter into a contract. Minors can enter into contracts, but they can usually void them before reaching the age of majority.
- All parties have reached an agreement. In other words, all alliance members have reached an agreement on a specific topic. Each party promises to either perform an act that the party is not legally required to perform or to refrain from performing an act that the party is legally entitled to perform.
What is the purpose of Contract Law?
- Maintain incentives for individuals to efficiently exchange goods and services.
- Reduces the costs of economic transactions because its very existence means that the parties do not have to go to the trouble of negotiating a variety of already spelled out rules and terms.
- Notifies the parties of previous problems, making it easier to plan transactions more intelligently and avoid potential pitfalls.
When Does a Contract Exist?
When a party files a suit alleging breach of contract, the judge must first determine whether a contract existed between the parties. To establish the existence of a contract, the complaining party must demonstrate four elements:
1. Offer – One of the factions made a promise to do or refrain from doing some specified action in the future.
2. Consideration – In exchange for the specified action or inaction, something of value was promised. This can take the form of a significant financial or time investment, a promise to perform a service, an agreement not to do something, or reliance on the promise. Consideration is the monetary value that persuades the parties to enter into the contract.
A contract is distinguished from a gift by the presence of consideration. A gift is the voluntary and gratuitous transfer of property from one person to another without the promise of something of value in return. Because there is no consideration for the promise, failure to follow through on a promise to make a gift is not enforceable as a breach of contract.
3. Acceptance – The offer was unambiguously accepted. Acceptance can be expressed in words, deeds, or performance as specified in the contract. In general, the acceptance must correspond to the terms of the offer. Otherwise, the acceptance is interpreted as a rejection and counteroffer.
If the contract involves the sale of goods (i.e. movable items) between merchants, the acceptance does not have to match the terms of the offer in order for a valid contract to exist, unless:
(a) the terms of the acceptance significantly alter the original contract; or
(b) the offeror objects within a reasonable time.
4. Mutuality – Concerning the agreement, the contracting groups had “a meeting of the minds.” This means that the parties understood and agreed on the contract’s basic substance and terms.
When the complaining party provides proof that all of these elements occurred, that party has met its burden of proving the existence of a contract. To challenge the existence of the contract, a defending party must present evidence undermining one or more elements.
What are the Different Types of Contracts?
Express Contract: The promises are communicated verbally or in writing. For instance, John promises to paint Dan’s car in exchange for Dan’s promise to pay him $100.
Implied Contract: The parties’ actions indicate that they agreed to be bound. Toni, for example, fills up her car with gas at Tina’s gas station. A contract exists for the purchase and sale of gas.
Unilateral Contract: A person accepts an offer by performing a requested act under a unilateral contract. The terms of the offer must clearly state that acceptance requires an act. For example, John tells Dan that he will pay him $100 if Dan paints his car, and that Dan must accept the offer by painting the car. Dan agrees by painting his car.
Bilateral Contract: A person accepts an offer by promising to perform the requested act. For instance, Red Company offers to purchase 100 widgets from Green Company for $100. Green Company guarantees that it will deliver the 100 widgets to Red Company.
Why should I use a written contract?
Some agreements must be in writing to be enforceable. The situations in which an agreement must be in writing vary by state, but typically include real estate transfers, sales of goods valued at more than $500, and contracts that require more than a year to complete.
A written agreement, whether required or not, serves as proof of what was agreed upon and prevents someone from forgetting or changing the story later. Scripting the contract also helps the sets focus on the important points and reach a firm agreement.
Can and should I write my own business contracts?
You can, in fact, write your own business contracts. If there is a lot at stake or the situation is complicated, you should consult with a lawyer. Rather than fighting it out in court later, your best money may be spent up front to prevent any potential legal problems. If the amount at stake in your business contract is modest and the terms are straightforward, you can use a legal form that both parties understand.
What laws govern contracts?
Contracts are typically governed and enforced by the laws of the state in which they were made. A contract may be governed by one of two types of state law, depending on the subject matter of the agreement (for example, the sale of goods or the lease of property). The majority of contracts (e.g., employment agreements, leases, and general business agreements) are governed by the state’s common law — a tradition-based but constantly evolving set of laws derived primarily from court decisions over time.
However, common law does not apply to contracts primarily for the sale of goods. Instead, such contracts are governed by the Uniform Commercial Code (UCC), a standardized set of guidelines governing commercial law. The UCC has been adopted in whole or in part by the majority of states, making the UCC’s provisions part of the state’s codified laws governing the sale of goods.
What is “breaching” a contract?
Contract disputes can arise in the business world, and one party (or both) may accuse the other of breaching the agreement’s terms. A party’s failure to fulfill an obligation under a contract is referred to as “breaching” the contract. When a breach of contract occurs (or is alleged to occur), one or both parties may wish to have the contract “enforced” on its terms, or may seek compensation for any financial harm caused by the alleged breach.
Contract law is a branch of US law that deals with agreements between individuals, businesses, and groups. When someone violates an agreement, it is referred to as a “breach of contract,” and contract laws allow you to take the issue to court. The case will be discussed by contract law attorneys and a judge to determine a fair solution.
Contract Law Basics
A contract is a legally binding agreement between two or more coalitions that creates an obligation to do or refrain from doing certain things. A “party” can be either an individual or a corporation. Contracts typically involve parties who are “competent” to enter into a contract, i.e. not minors or mentally disabled, and a mutual agreement between the parties. Certain types of agreements must be in writing. Although state laws vary, most contracts involve real estate, goods worth more than $500, and contracts that take a year or more to complete.
Even if writing is not required, a written contract is a good idea because it provides a clear record of the terms and the parties’ explicit acceptance of them. You can draft your own contract, but in more complicated transactions, hiring an attorney is a wise investment to protect your agreement and get help identifying potential issues before they become problems.
A “breach” occurs when one of the members of the association violates the terms of an agreement. If the non-breaching party sues, the court can order the contract to be “enforced.” This may result in a court order requiring the breaching party to keep their end of the bargain, or it may require payment for the breach if damages are determinable, putting the non-breaching party in a better position to receive the benefit sought in the contract.
“Breach of Contract” and Lawsuits
When a contract is breached and one or both parties want the contract to be enforced on its terms, and informal resolution attempts have failed, the aggrieved party can file a lawsuit in the appropriate civil court. In some cases, parties will attempt mediation before filing a lawsuit. A successful party in mediation or court may be awarded specific performance (an order commanding the breaching party to keep their end of the bargain) or one of several types of damages, including:
- Compensatory Damages
- Punitive Damages
- Nominal Damages
- Liquidated Damages
- Cancellation and Restitution
Will your contract be enforced under the law?
A contract will be enforced if it complies with certain basic rules for the formation of a legally binding contract. There are several common defenses to contract enforcement, which include:
- Lack of Capacity – A person must be able to understand the agreement they are entering into at the time the contract is formed. Someone with a mental disability, a minor, or someone who has been drugged without their knowledge may be released from their obligations under an otherwise valid contract due to a lack of capacity.
- Undue Influence, Duress, Misrepresentation – Where a contracting party would not have entered into an agreement but for the undue influence of another, duress, or knowledge of the other party’s misrepresentations, they may have a defense against contract enforcement. When a person is persuaded to act against their best interests because of the nature of their relationship with the other party, this is referred to as undue influence. Duress occurs when one party agrees due to the other party’s unlawful or wrongful threats. When one party intentionally misrepresents facts to the other party, this is referred to as misrepresentation.
- Unconscionability – When enforcing a contract would result in an oppressive or shocking outcome to the conscience, the court may choose not to enforce the contract. This usually happens when the parties’ strength and sophistication are vastly different.
- Public Policy and Illegality – If a contract includes terms that require a party to break a law the court will refuse to enforce the contract.
- Mistake – If both parties made an error in a fundamental assumption on which the contract is based, the court may refuse to enforce its terms. This error must be related to facts at the time the contract was signed. Failure to read a contract, on the other hand, does not create a defense to enforcement.
All businesses inherently deal with contracts, even if they are unwritten, as with many transactions involving goods or services. Since a contract is a legally binding agreement, and even an honest contractual mistake can cause serious problems, it is crucial that small business owners have at least a basic understanding of contract law.