Contract Information

What is a contract?

A contract is an agreement between two or more persons (individuals, businesses, organizations or government agencies) to do, or to refrain from doing, a particular thing in exchange for something of value. Contracts generally can be written, using formal or informal terms, or entirely verbal. If one side fails to live up his/her/it’s part of the bargain, there’s a “breach” and certain remedies for solving the differences are available. The terms of the contract – the who, what, where, when, and how of the agreement – define the binding promises of each party to the contract.

What are the key elements of a binding contract?

Competent Parties – For a contract to be valid, each side must have the capacity to enter into it. Most people and companies have sufficient legal competency. A drugged or mentally-impaired person has impaired capacity and chances are a court may not hold that person to the contract. Minors (e.g., usually those under eighteen) cannot, generally, enter into a binding contract without parental consent, unless it is for the necessities of life, such as food, clothing, or for student loan contracts.

Consideration – If the other side is to be held to the contract, you must give up something in exchange. This is called consideration. No side can have a free way out or the ability to obtain something of value without providing something in exchange. Money is the most common form of compensation, but it can also be property, giving up a right or valid claim, making a promise to do or not to do something, or anything of value. Agreeing to perform an illegal or illicit act is not consideration and the contract is void.

Mutual Assent or Meeting of the Minds – This means that each side must be clear as to the essential details, rights, and obligations of the contract. Putting the deal down on paper prior to signing it goes a long way to avoid future misunderstandings and disputes. Meeting of the minds sometimes can be expressed by the words spoken or gestures made or can be inferred from the surrounding circumstances. There is no meeting of the minds if: (1) one side is obviously joking or bragging, (2) there is no actual agreement (i.e., the farmer who is selling a gelding and the buyer thinks the horse is a brood mare), or (3) both sides have made a material mistake as to the terms or details of the contract.

The offer of a contract

When you ask someone to do something, or offer to see someone for a price, you are making an offer. An offer is the first step in forming a contract. The middle step is the other party’s acceptance of the deal. The last step is performance – where you each live up to your side of the bargain. Words, gestures, or actions can signal and offer to enter into a contract and an acceptance. If you are forced to make an offer (“your money or your life”) it is not a valid offer. Similarly if you are tricked into accepting, it will not be deemed acceptance of the terms offered. To have a binding obligation on both sides, they must approve and accept the terms and conditions of the offer. Offers remain open until: (1) accepted, (2) rejected, (3) retracted prior to acceptance, (4) countered, or (5) they expire by their own terms. If you reject an offer, you have no contract unless at a later date a new offer is put on the table (called a “counter-offer”). A counter-offer is a new set of terms and conditions given in response to the original offer. The difference between the original offer and the counter-offer may be just one clause in particular or multiple provisions or the entire contract. Be mindful that you can take back or withdraw an offer at any time before the other side has agreed to the deal. This is called retraction (proving that you have withdrawn the offer before the other side accepted may present a problem). On the other hand, changing your mind after you have signed or agreed precludes retraction. Absent compelling reasons for not holding up your end of the bargain, you will be a party to a contract.

Are there any different kinds of acceptance?

Yes.  Acceptance typically can come in one of three types:

1. Express – a direct and absolute outward manifestation of agreement, such as, “I accept your offer.”
2. Implied – the acts of the parties show that the offer has been accepted, such as when both parties to a contract begin to perform the terms of the contract.
3. Conditional – acceptance is conditional on the happening of something, such as, “I accept your offer so long as you trim my tree in the next two days.” By its terms, a conditional acceptance is a counter-offer.

What is the performance of a contract?

Performance is actually completing the deal according to the terms given in the contract. For example, you want to buy that snazzy looking 1997 Ferrari at your local dealer’s clearance sale. Your dealer Mr. X, offers to sell you that slick-looking Italian car if you pay him $97,000. After a bit of bargaining, you agree to the terms and get the car at a reduced price of $96,995, signing on the dotted line. A contract has been accepted. Mr. X, your car dealer, will deliver the 1997 Ferrari and then you pay him the balance due. The dealers’ delivery of the car and your payment of $96,995 are the performance of the contract. Both parties must live up to their end of the bargain in the contract to have closure. In other words, until both parties have properly performed under the contract, the contract remains open.

Must the contract be in writing?

That depends primarily on the nature and subject matter of the contract. If you orally agree to purchase your brother’s 1988 Ferrari that is in “mint condition” for $25,999.99, that agreement is legal. As a general rule, however, it is wiser to have the terms written in understandable language – plain English – to save future misinterpretations and errors. Most states have laws (called “Statutes of Frauds”) listing the types of contracts that must be written in order to be enforceable. The purpose of the Statutes of Frauds is to prevent fraudulent claims from arising. Although the laws vary from state-to-state, the most common examples of contracts that generally must be in writing are:

1. Sales of real property;
2. Promises to pay someone’s debt obligations;
3. A contract that takes longer than one year to complete;
4. Real property leases that run for more than a year;
5. Contracts for an amount or other consideration that exceeds the state’s threshold;
6. A contract that will go beyond the lifetime of the one performing the contract;
7. The transfer of property upon the death of the party performing the contract.

If you agree verbally to a type of contract listed in your state’s Statutes of Frauds without getting the agreement in writing, the contract is not enforceable, although there are some exceptions. Because state laws vary in this area, it is strongly suggested that you consult with your attorney if only to review the proposed contract. Do not wait until after you have signed. That can be too late.

Does a contract have to be notarized?

Typically, no.  A notary public (or simply “notary”) provides an acknowledgement that the signature appearing on the document is that of the person whose signature it purports to be. There is a requirement that some documents be notarized, such as a real property deed. Unless specifically required by state or municipal law, a contract does not have to be acknowledged before a notary public.

When does a breach of contract occur?

If one side fails to stick to his/her/it’s part of the bargain, there is a breach. A breach occurs when:
One party to a contract makes it impossible for the other parties to the contract to perform;
A party to the contract does something against the intent of the contract; or
A party absolutely refuses to perform the contract
Not all breaches of contract are necessarily “contract killers” which would end up in a lawsuit. Much would depend on whether the breach is “material” or “immaterial” and who the parties are. If the breach is immaterial, you may have the option to:
Ignore or excuse the defect and continue on as if nothing occurred,
Point out the problem to the responsible side and give it/her/him an opportunity to fix it,
Refuse to pay anything more until it is fixed, or
Correct the work yourself and deduct the cost from any payment.
What makes sense for you will depend on the facts. Where the matter is substantial, the advice of an attorney can help you.

What are my remedies in the event there is a breach?

You may have a choice of remedies:

1. Compensatory Damages – money to reimburse your for the costs to compensate for your loss.
2. Consequential and Incidental Damages – money for losses caused by the breach that were foreseeable. Foreseeable damages means that each side reasonably knew that, at the time of the contract, there would be potential losses if there was a breach.
3. Attorney fees and Costs – only recoverable if expressly provided for in the contract
4. Liquidated Damages – these are damages specified in the contract that would be payable if there is a breach.
5. Specific Performance – a court order requiring performance exactly as specified in the contract. This remedy is rare, except in real estate transactions and other unique property, as the courts do not want to get involved with monitoring performance.
6. Punitive Damages – this is money given to punish a person who acted in an offensive and egregious manner in an effort to deter the person and others from repeated occurrences of the wrongdoing. You generally cannot collect punitive damages in contract cases.
7. Rescission – the contract is canceled and both sides are excused from further performance. Any money advanced is returned.
8. Reformation – the terms of the contract are changed to reflect what the parties actually intended.

Bear in mind that it often makes sense for both parties to directly negotiate a settlement for a breach. However, if the matter involves a significant amount of money, a wise option would be to retain an attorney to help you propose settlement terms and to review any proposed settlement in advance.
Other alternatives for dispute resolution include mediation and arbitration. These avenues for obtaining a remedy may be more cost effective than simply filing a lawsuit and letting the court settle the dispute.

What are the defenses to a claimed breach of contract?

There are many valid defenses that can be raised to a claim of breach of a contract. Depending upon the particular facts and circumstances of the contract and the actions of the parties, an attorney can advise you of what makes sense. Going it alone is not the wisest choice and legal help is almost a certainty.
The more common defenses to a breach of contract claim are:

1. One side was not competent to enter into the contract, either due to age or mental illness;
2. One side had a “free way out” and really never provided any form of “consideration”;
3. One side was under pressure and duress or other undue influence to sign;
4. One side engaged in “fraud” to procure the contract;
5. One side prevented the other from fulfilling its/her/his end of the bargain;
6. The original contract was changed with the agreement of all parties;
7. There was a mistake of fact or mistake of law prior to signing the contract;
8. The contract has an illegal purpose or act;
9. Something happened, through no fault of either side, making the duties under the contract impossible to perform;
10. The side claiming the breach accepted the performance without claiming a breach had occurred.

How are contract damages figured?

If your claim involves a contract, the purpose of compensatory damages is to put you in as good a position as if the defendant had performed the contract. You will be entitled to damages that you can show were actually caused by the defendant’s breach of the contract, which were reasonably foreseeable at the time you entered into the contract, and which are sufficiently certain so as not to be “speculative”. In other words, if you agreed to sell a product for $1,000 that would have cost you $600 to manufacture and deliver, and before you incurred any costs the buyer changed its mind, the damages would consist of the profit $400 you lost. However, even if you could prove that you would have invested $400 in a stock that later went up ten-fold, that extra amount would be regarded as speculative and unrecoverable.