Contract law

A contract intends to formalize an agreement between two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute, and ownership of intellectual property developed as part of a work for hire.


 

• 1The Elements of a Contract
• 2Oral Contracts
• 3Accord and Satisfaction
• 4Business Contracts Discussion Forum
• 5Related Links

[top]The Elements of a Contract

Typically, in order to be enforceable, a contract must involve the following elements:

A "Meeting of the Minds" (Mutual Consent)

The parties to the contract have a mutual understanding of what the contract covers. For example, in a contract for the sale of a "mustang", the buyer thinks he will obtain a car and the seller believes he is contracting to sell a horse, there is no meeting of the minds and the contract will likely be held unenforceable.

Offer and Acceptance

The contract involves an offer (or more than one offer) to another party, who accepts the offer. For example, in a contract for the sale of a piano, the seller may offer the piano to the buyer for $1,000.00. The buyer's acceptance of that offer is a necessary part of creating a binding contract for the sale of the piano.

Please note that a counter-offer is not an acceptance, and will typically be treated as a rejection of the offer. For example, if the buyer counter-offers to purchase the piano for $800.00, that typically counts as a rejection of the original offer for sale. If the seller accepts the counter-offer, a contract may be completed. However, if the seller rejects the counter-offer, the buyer will not ordinarily be entitled to enforce the prior $1,000.00 price if the seller decides either to raise the price or to sell the piano to somebody else.

Mutual Consideration (The mutual exchange of something of value)

In order to be valid, the parties to a contract must exchange something of value. In the case of the sale of a piano, the buyer receives something of value in the form of the piano, and the seller receives money.

While the validity of consideration may be subject to attack on the basis that it is illusory (e.g., one party receives only what the other party was already obligated to provide), or that there is a failure of consideration (e.g., the consideration received by one party is essentially worthless), these defenses will not let a party to a contract escape the consequences of bad negotiation. For example, if a seller enters into a contract to sell a piano for $100, and later gets an offer from somebody else for $1,000, the seller can't revoke the contract on the basis that the piano was worth a lot more than he bargained to receive.

Performance or Delivery

In order to be enforceable, the action contemplated by the contract must be completed. For example, if the purchaser of a piano pays the $1,000 purchase price, he can enforce the contract to require the delivery of the piano. However, unless the contract provides that delivery will occur before payment, the buyer may not be able to enforce the contract if he does not "perform" by paying the $1,000. Similarly, again depending upon the contract terms, the seller may not be able to enforce the contract without first delivering the piano.

In a typical "breach of contract" action, the party alleging the breach will recite that it performed all of its duties under the contract, whereas the other party failed to perform its duties or obligations.

Additionally, the following elements may factor into the enforceability of any contract:

Good Faith

It is implicit within all contracts that the parties are acting in good faith. For example, if the seller of a "mustang" knows that the buyer thinks he is purchasing a car, but secretly intends to sell the buyer a horse, the seller is not acting in good faith and the contract will not be enforceable.

No Violation of Public Policy

In order to be enforceable, a contract cannot violate "public policy". For example, if the subject matter of a contract is illegal, you cannot enforce the contract. A contract for the sale of illegal drugs, for example, violates public policy and is not enforceable.

Please note that public policy can shift. Traditionally, many states refused to honor gambling debts incurred in other jurisdictions on public policy grounds. However, as more and more states have permitted gambling within their own borders, that policy has mostly been abandoned and gambling debts from legal enterprises are now typically enforceable. (A "bookie" might not be able to enforce a debt arising from an illegal gambling enterprise, but a legal casino will now typically be able to enforce its debt.) Similarly, it used to be legal to sell "switchblade kits" through the U.S. mail, but that practice is now illegal. Contracts for the interstate sale of such kits were no longer enforceable following that change in the law.

[top]Oral Contracts

There is an old joke that "an oral contract isn't worth the paper it's written on". That's a reference to the fact that it can be very difficult to prove that an oral contract exists. Absent proof of the terms of the contract, a party may be unable to enforce the contract or may be forced to settle for less than the original bargain. Thus, even when there is not an opportunity to draft up a formal contract, it is good practice to always make some sort of writing, signed by both parties, to memorialize the key terms of an agreement.

At the same time, under most circumstances, if the terms of an oral contract can be proved or are admitted by the other party, an oral contract is every bit as enforceable as one that is in writing. There are, however, "statute of fraud" laws which hold that some contracts cannot be enforced unless reduced to writing and signed by both parties. For more information on the Statute of Frauds, please see this associated article.

Please note that, although sometimes an oral contract is referred to as a "verbal contract", the term "oral" means "spoken" while the term "verbal" can also mean" in words". Under that definition, all contracts are technically "verbal". If you mean to refer to a contract that is not written, although most people will recognize what you mean by "verbal contract", for maximum clarity it is helpful to refer to it as an "oral contract".

[top]Accord and Satisfaction

In contract law, accord and satisfaction is the purchase of the release from a debt obligation. The payment is typically less than what is owed and is not paid by the actual performance of the original obligation. The accord is the agreement to discharge the obligation and the satisfaction is the legal "consideration" which binds the parties to the agreement.

If a person is sued over an alleged debt they bear the burden of proving the affirmative defense of accord and satisfaction.

Accord and satisfaction is a settlement of an unliquidated debt. For example, a builder is contracted to build a homeowner a garage for $35,000. The contract called for $17,500 prior to starting construction, to disburse $10,000 during various stages of construction, and to make a final payment of $7,500 at completion. At completion, the homeowner complained about inferior work quality and refused to make the final payment. After a mutual settlement agreement, the builder accepted $4,000 as full payment. Thereby, new contract was formed by offer, acceptance, and consideration. The consideration is that for a $3,500 savings, the homeowner gives up that which he is entitled, a well-constructed garage. The builder gives up his right to full price to avoid suit for inferior performance. When accord and settlement has occurred, the homeowner and builder have given up his right to sue for more money under this settlement agreement.

Accord and satisfaction is best described as the settlement of a claim. It is therefore often used as a special defense in responding to a complaint. Let's say a lender agrees to loan $100,000 at 5.0% interest for 30 years, and at the closing the loan documents are all drawn up for a loan with a 6.0% interest rate. If the lender agrees to reduce the closing costs by an extra $1000 and the borrowers agree, then there has been an accord and satisfaction. If the borrowers later sue for breach of contract, the settlement (offer and acceptance of the $1000) constitutes an accord and satisfaction and is a valid defense to the borrowers law suit.

[top]Business Contracts Discussion Forum

Latest threads from the forum Business Contracts

Oral and written contracts, corporate partnership, partnership agreements, transactions, disputes, litigation, etc.

 

[top]Related Links

Contract - Wikipedia, the free encyclopedia

Category:Contract law - Wikipedia, the free encyclopedia

Contract Law: The Basics



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