Posted: December 2nd, 2014

Contract Basics;

Contract Basics;

A contract, as noted above, is a legally enforceable agreement between two or more parties.
The definition
of a contract, according to the Restatement of Contracts § 3 is “a promise or a
set of promises for the breach of which the law gives a remedy, or the performance of which
the law in some way recognizes as a duty.”
Contracts can encompass a myriad of agr
eements. A typical contract may include a sale of
property. For example, Party A agrees to sell his or her car to Party B for $500 and Party B
agrees to pay Party A $500 for ownership of the car. Party A is now bound to transfer
ownership of the car to Par
ty B and Party B is legally obligated to pay Party A $500. If one of
the parties fails to perform his or her legal obligations under the agreement, the other party
may sue for money damages or to force the other party to adhere to the terms of the
contract
.
Contracts may also arise when personal or professional services are involved. For example,
Party A agrees to lease an apartment to Party B for a term of one year at a rate of $1000 per
month. If Party B fails to pay during any one month,
Party A may su
e to have Party B
removed from the apartment and may also receive money damages for the portion of the
rent which is due under the lease, such as an example.
These two types of contracts are only a small sample of the types of contracts which may be
crea
ted. It would be impossible to list all of the types of contracts, as the possibilities are
almost limitless.
A contract requires competent parties, subject matter, leg
al consideration, mutuality of
agreement, and mutuality of obligation. In other words,
the parties to the contract must be
competent to enter into the contract (for example a minor is not competent to enter into
contracts); the subject matter must be enforceable (illegal acts will not be enforced under
contract law); there must be considerat
ion, such as something of value, including a promise;
and both parties must be obligated to do something.
Contracts are not to be taken lightly. Society in general, and courts in particular, are strict in
holding parties to their obligations. It is unders
tood that contracts are utilized frequently, and
without them, businesses would be in chaos. Because parties rely on contracts in making
business decisions, it would be unfair if a party were to renege on his or her promise to the
detriment of another part
y.
Formation of the Contract
2
M
BA 610
Module
Three
There are several requirements to make a contract binding. This starts with the offer. For
example, Party A sends a written contract to Party B stating that Party A wishes to buy Party
B’s car for $500. Of course, it should b
e noted that the offer need not be in writing, except in
certain circumstances. An oral offer can be legally binding.
Next, Party B must accept the offer in whole. For example, if Party B states that he or she
will sell the car for $600, this is not an
acceptance of Party A’s offer, as Party B has now
changed the terms. This is what is known as a counter
–
offer. A counter
–
offer is the same as
an offer. Party A can now accept the counter
–
offer, reject it, or submit a further counter
–
offer.
Assuming Party B
accepts the original offer from Party A, there is presumably valid contract.
However, it is important to note that intent is an important aspect of contract formation. Both
parties must intend to be bound by the contract. For example, if Party A is simply
“testing the
waters” with his or her offer, he or she may not intend to be legally bound. Whether or not
intent is present is judged by an objective standard. In other words, the question becomes
whether a reasonable person would believe that the party in
tended to be bound by the
contract.
There must also be
consideration
by both parties to make a contract enforceable. In other
words, both parties must give up something of value to the
other party. Party A stating that
he or she will give Party B $500 if Party A hits the lottery is not sufficient. Party B has given
up nothing of value. On the other hand, if the parties agree that they will give the other party
$500 if either of them hits
the lottery, then mutual consideration is present. As you can see
from this example, a mutual exchange of promises is sufficient to create consideration.
Also, each of the parties to the contract must have contractual capacity. One example noted
in 3.1 a
bove is when a minor attempts to enter into a contract. Although all other
requirements of the contract are present, because the minor lacks capacity, the contract is
void
ab initio
, or from the beginning. Other situations where one might lack contractual
capacity include persons with mental deficiencies or other illness which make him or her
unable to competently agree to terms of a contract or understand that a contract is being
formed.
Finally, in some situations, oral contracts are not enforceable.
The
se situations fall under the
Statute of Frauds
, which has been enacted into law in all states.

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