What Is a Contract?
A contract is a promise between two or more persons involving the exchange ofsome good or service. Some of the basic elements of a contract include: an offer and an acceptance; "capacity," or being of legal age and sound competence; "mutual assent," or agreement on the terms of a contract; and "consideration," or compensation for goods or services rendered. The element that distinguishes a contract from an informal agreements is that it is legally binding:the law provides a remedy in the event that the promise is not fulfilled. Bylaw, certain types of contracts must be in writing, but oral contracts are valid in many situations. An oral contract may be held to exist even in the absence of agreement as to all its terms.
Sources of Contract Law: The Statute of Frauds
The Statute of Frauds was enacted in England in 1677, and it has been adoptedin one form or another by all 50 states. In order to prevent fraud on the part of either party in the exchange of goods, the statute requires a written contract for: one, the sale of land; two, the assumption of the obligations ofanother party, such as the co-signing of a loan; three, transactions that take more than one year to complete; and four, sale of personal property for more than $5,000 (under the Uniform Commercial Code, discussed below, the threshold is $500).
The Uniform Commercial Code
The Uniform Commercial Code (UCC) is the main body of law that governs transactions involving goods. It was developed by the National Conference of Commissioners on Uniform State Laws and the American Law Institute, a nonprofit legal research organization. Since its completion in 1952 it has been adopted byall 50 states (Louisiana, however, did not adopt all of the code). The purpose of the code is to facilitate commerce by simplifying and clarifying the law regarding commercial transactions and to create a uniform set of rules nationwide. The UCC is largely based on common law, which means that it usually adheres to legal guidelines established in court cases. However, in many casesthe UCC is forced to establish codes outside of traditional legal precedentin order to conform to the rapid pace of modern business practices.
In the United States, the UCC governs the sale of tangible, movable goods, property leases such as business equipment, and financial transactions such asbank deposits and letters of credit. The sale of services and real property are not covered by the UCC. International transactions are governed by the United Nations International Sale of Goods Convention, adopted by the United States in 1988, provided the foreign country involved is party to that agreement. Various state and federal statutes regulate contracts for services, consumer credit, the sale of land, and other specialized areas such as employment. Where no relevant statute exists, contracts are evaluated using common law principles. The Restatement of Contracts, created and published by the American Law Institute, summarizes and "restates" common law principles of contract. Although it does not have the force of law, it is heavily relied upon by legal professionals, including judges, who often quote it in written opinions.
Classification of Contracts
For purposes of analysis, legal scholars have classified contracts in many different ways. The most common classifications of contracts include: "express"and "implied" contracts; "void" and "voidable" contracts; and "enforceable"and "unenforceable" contracts.
Express and Implied Contracts
Express contracts, which may be written or oral, are contracts in which the terms of the agreement made are explicitly stated: when a valid offer is accepted, an express contract has been created. Implied contracts, usually referred to as "implied in fact," are contracts that are formed by the behavior of the parties in the absence of directly negotiating the specifics of the transaction. Making an appointment with a repairman to have a broken washing machine fixed is an implied contract--the repairman may reasonably expect to be paid for making the repairs. The term "implied in fact" is used to distinguish this type of implicit arrangement from an "implied in law" contract, or "quasi-contract." A quasi-contract is not an actual contract; it is a non-binding legal mechanism used in special circumstances to prevent one party from beingseverely harmed or unjustly enriched by an implicit arrangement.
Void and Voidable Contracts
The term "void contract" is an oxymoron--a contract held to be void does notexist under law. In other words, although two parties may have come to an agreement, it is not recognized as a legal contract. Perhaps the simplest example of a void contract is a contract formed in which one party agrees to perform an illegal act. A contract that is illegal in part may be void in that respect, however, it is still a valid contract if the deletion of the illegal portion of the contract does not defeat the purpose of the broader agreement. Agreements in which an essential feature of a valid contract is lacking, are void contracts as well. Voidable contracts are contracts that may be canceled by one of the two parties involved. A contract may be voidable for various reasons, but in most cases a voidable contract provides for one of the parties to withdraw from the agreement without penalty.
Enforceable and Unenforceable Contracts
A contract may be enforceable or unenforceable. An enforceable contract is one for which a legal remedy is offered in the event that the contract is not fulfilled. A contract may be unenforceable when certain statutory requirementshave not been met. For example, an oral contract to buy land would not be enforceable because the Statute of Frauds requires such an agreement to be in writing. Similarly, statutes of limitations, which limit the length of time available for legal action, may apply to contracts of certain types and renderthem unenforceable after a certain period of time.
Validity of Contracts
Several requirements must be met for a contract to be valid and legally binding. The agreement must specifically define the terms under which the promisecan be considered fulfilled by both parties. In addition, the agreement mustprescribe remedies for conditions unfulfilled by one of the parties involved.The essential feature defining these requirements are: "capacity," "mutual assent," and "consideration."
Fundamentally, two or more parties enter into a contract. A "party" may be anindividual, a group of people, or even an "artificial person" such as a corporation. The parties to a contract must have the legal capacity to enter intothat contract. Persons who are deemed incompetent due to physical or mentalillness lack capacity to enter into contracts. Minors, which in most states refers to persons under the age of 18, may enter into contracts. However, anycontract involving a minor is voidable. When a contract involving a minor goes unfulfilled it may be affirmed or disaffirmed when the minor reaches maturity, or legally becomes an adult. Parties to a contract also must have the legal right to do what the contract promises; for example, one cannot sell whatone does not own.
Traditionally, mutual assent has been described as a "meeting of the minds."This means that the parties involved in a contract must come to an agreementabout the particulars of the transaction. Mutual assent is demonstrated by "offer" and "acceptance."
An offer is made when someone proposes an exchange of some sort. "I will sellyou my guitar for $400" is an example of an offer. (Advertisements are usually not offers because they lack specific parties.) When the offer is accepted, the parties have mutually assented to enter into a contract.
Both offers and acceptances must be explicit in a contract. The statement "Imight sell you my guitar for $400" would be considered an intent to negotiaterather than an actual offer. "Sure, I'll give you $300 for it" or "Yes, if you include the case and some strings" would not be an acceptance because theterms "accepted" are not the terms originally offered; such a statement wouldbe deemed a counter-offer.
Consideration must also be present for a legal contract to be formed. The essence of consideration is that a party receives some kind of benefit in returnfor his promise. Consideration may consist of money, goods, or a promise todo or not do something. The statement "I'll give you my guitar" is not a contract because the giver would receive no specified consideration in return.
When the mutual assent of legally capable parties<--which includes an offer and an acceptance, accompanied by consideration<--to a specific exchangeor set of promises occur, a valid contract has been formed.
Interpretation of Contracts
When interpreting contracts courts tend to avoid questions regarding the intent of the parties involved in the contract and rely on the contract itself, particularly when the contract is in written form. Under the "plain meaning" rule, the words of a contract are to be read according to their plain, everyday meanings, with the exception of terms that have been specifically defined in the contract. To discourage the drafting of deliberately ambiguous language, any ambiguous terms in a contract is interpreted in a way that penalizes the party that drafts the document. In other words, if "party X" deceptively drafts a contract with ambiguous language such that the terms of the contract benefit the interests of "party X" over "party Y," the ambiguous language of the contract will deliberately be interpreted to benefit "party Y."
Contracts are frequently modified to reflect a change in preference by one ofthe parties or because unforeseen circumstances arise. For instance, a person may contract with a builder to have a house constructed but during the course of construction he or she may desire that more rooms be included, or the builder may be forced to change the agreed-upon completion date due to problems with the weather. Both the initial contract and the subsequent modifications may be in written or oral form. Contracts can be designed to accommodate future complications by including provisions that leave matters open. For example, a contract may leave certain matters to be resolved at a later date to reflect future conditions such as changes in prices or availability of goods. Such modifications may be in writing but are more often simple oral agreements.
Interpreting contracts is often difficult because of the complexity and subjectivity of the agreement. To simplify the process a set of standard procedures for interpretation are usually followed. First, the latest and most final agreement of the parties is considered to be the valid contract. Second, written agreements are given much more weight than oral agreements. In fact, in cases involving written contracts, oral evidence that either contradicts or supplements a written agreement, may not be introduced if the written contract is deemed final and complete. Oral evidence may be considered when a contractis final but incomplete, but only as an addition to the contract; oral evidence in contradiction of the basic terms of the contract is not allowed.
Enforcement of Contracts
When a party does not fulfill the promise made in a valid, enforceable contract at the time such fulfillment, or "performance," is due, the contract has been "breached." At this point legal remedy may be sought. (Legal remedy may be sought even before this time, if a party has indicated it will not honor its previously agreed upon promise.) Most commonly, some form of monetary compensation is sought for a breach of contract. In some cases, the contract may have stipulated the maximum amount of money recoverable in the event of breach. Specialized laws regulate damages for many types of contracts, such as sales of goods, real estate transactions, and employment contracts.
The most common form of compensation sought for a breach of contract is "compensatory damages," which is an estimation of the loss incurred or the gain prevented, by the other party's failure to honor the contract. Thus compensatory damages may include the projected loss of profits by a business due to a breach of contract even if such a stipulation was not included in the originalcontract. "Punitive damages," which are intended to punish the party who hasbreached the contract rather than merely to compensate the aggrieved party, traditionally are not considered part of contract law. Punitive damages are usually awarded in situations involving illegal conduct. In some cases "specific performance" may be sought, which means that the specific promise of the contract must be fulfilled. This usually occurs in the instance of a contract for the sale of some unique commodity or service, rather than a replaceable item. The most common example of a "specific performance" case is land. Land isconsidered unique for obvious reasons, but other items such as rare or unusual antiques or artwork, might also be sought in a specific performance suit.
There are a number of valid defenses to a claim of breach of contract. As mentioned above, contracts involving minors are open to subsequent invalidation."Mutual mistake" occurs when both parties to a contract have made an erroneous assumption about something material to the contract such as the conditionof a piece of equipment or the size of a parcel of land. Contracts made under"duress," that is, under threat of force or some other consequence, may be subsequently voided. A contract may also be voided if a party has entered it under "undue influence." For example, if someone is given alcohol until his orher judgment is impaired, then enters into a contract, the contract may be justifiably voided.
A party may cite "unconscionability" to defend a breach of contract if the contract in question is so unjust that no reasonable person would have agreed to its conditions had he or she clearly understood its provisions. (This oftenoccurs in contracts containing fine print or contracts that are laden with unintelligible jargon). "Misrepresentation" is also grounds for justifiable breach of contract. For example, when a certain material provision of a contract misleads one of the parties, such as claiming an automobile is in good condition when it is not, is a valid defense for breach of contract. However, a person who enters a contract is responsible for reading all of its terms and raising questions before signing it. Lastly, a party may cite "impossibility"to justify a breach of contract if intervening events have made it impossibleto fulfill the contract.
- Burnham, William. Introduction to the Law and Legal System of theUnited States. St. Paul, MN: West, 1995.
- Calamari, John D. and Joseph M. Perillo. The Law of Contracts. 3rded. St. Paul, MN: West, 1987.
- Murray, John Edward. Murray on Contracts. 3rd ed. Charlottesville,VA: Michie Co., 1990.