16 Jul The Basics of Contract Law
The Basics of Contract Law
Contracts seem to be one of those basic legal concepts that can be so utterly confusing, so it is simply ignored. Most everyone now just accepts the “Terms of Acceptance” that our new app has and we barely read any legal document we sign. Contracts are very important though and it is imperative that you take at least a few seconds to skim through the clauses, if not read the document in its entirety. The principles of contract law govern much of our lives, especially if you are involved in running your own business. The following article sheds light on contract law basics and what you need to have in your contract to make it a binding legal document.
What is a Contract?
A contract is a voluntary, legally binding agreement, that is written or oral, between two or more competent parties that imposes an obligation to do or not do certain actions. To form a contract you must have an offer, acceptance, and valid consideration.
For a contract to become legally binding, regardless of whether it is oral or written, it must contain these basic contract principles:
- Offer and Acceptance: There must be a clear offer to contract and an unqualified acceptance. Remember, there is a difference between an offer and an invitation to deal (such as an advertisement)
- Consideration: Something of value given by the involved parties that induces the parties to enter into the agreement to exchange mutual performances. Consideration is also known as bargained for detriment.
- Capacity: To have legal capacity to make a contract, the parties must be able to understand what they are entering into. The law presumes that minors and legally insane people do not have the capacity to enter into contracts. Therefore, any contracts entered into by a party that does not have legal capacity is not enforceable.
- Mutual Assent: The contracting parties must have a “meeting of the minds” and have the intent to be bound by the contract and its essential terms.
- Lawful purpose: The purpose of the contract may not be illegal.For example, a contract to hire a hit-man is not an enforceable contract.
Keep in mind that even if your agreement meets all of these requirements, it may still not be legally enforceable. Some contracts must be in writing or they will violate the Statute of Frauds. Examples of contracts that must be in writing include:
- Sale or Transfer of Ownership of a Piece of Land
- Sale of Goods over $500
- Contracts that cannot be completed in a Year
- Contracts in which a party becomes a guarantor or surety for another party’s debt
This is not a conclusive list. If you are unsure of whether your contract should be in writing, please contact an attorney.
Breach of Contract
Unfortunately, contracts are not always completed as planned. Sometimes a party will breach a contract by not fulfilling the agreed-upon obligations. When a breach occurs, usually the parties will want to have the contract enforced by the court. This usually results in a breach of contract lawsuit. The court can either enforce the contract on its terms or the court may award damages in the lawsuit. There are three kinds of monetary damages that a party can receive during a contract case. These three monetary damages are:
- Restitution: Restitution is returning the breaching party back to the start of the contract. Restitution is also known as returning the ill-gotten gains.
- Reliance: Reliance puts the non-breaching party back to the start. Reliance intends to compensate the non-breaching party for any losses that result from the breach.
- Expectation: Expectation, or the benefit of the bargain, seeks to place the non-breaching where they would be if the contract had been completed.
There is a fourth type of monetary damages known as Liquidation Damages. Liquidation Damages are typically found and agreed upon in the contract. However, for the court to enforce liquidation damages the parties must show that the damages were hard to estimate and that the liquidation damages in the contract were the best estimate. Sometimes the court finds the liquidation damages to be excessive and do not award them.
In addition to monetary damages, the court may also have the power to award equitable remedies. Equitable remedies are used when monetary damages will not properly compensate the non-breaching party. The three main types of equitable remedies are:
- Specific Performance: A court orders the breaching party to perform their part of the bargain in the contract. Specific performance is never used in a contract for personal services and rarely used in sale of goods contracts. Specific performance is most always used in sale of land contracts and the sale of rare or priceless goods.
- Contract Recission: The former contract is cancelled. The court will only award this if both parties agree to cancel the contract or if the former contract was created through fraudulent actions.
- Contract Reformation: The court facilitates the former contract being rewritten under the parties’ true intent. Reformation is only allowed when the former contract is legally valid and if the parties had a mistaken understanding when forming the contract.
If you need to form a contract or are facing a lawsuit involving a contract, it is best to seek the counsel of an attorney experienced in business law or contracts. Attorney Jacqueline MacLaren may be contacted here.
Authored by: Mary E. Zoldak