Contract Law

Contracts FAQs

What is a contract?

A contract is a legally enforceable agreement. Contracts have many elements, and absence or fault in one of them may render the agreement unenforceable.

What must a contract have in order to be enforceable?

  • "Mutual assent" to set terms
  • "Consideration"
  • Proper form (written v. oral)
  • Lawful purpose

"Mutual Assent" to Set Terms

The agreement must be based upon a mutual exchange of promises, made freely, by competent parties. Mutual assent is often achieved by one party making an offer and the other party making an acceptance of that offer. If the accepting party offers to accept something different, a counter-offer is created, to which the original offering party can then accept to create an agreement. The key is that both parties agree to the same, settled terms.

In some circumstances, a court might infer mutual assent from the parties' behavior. The absence of settled terms may not render a contract unenforceable if a party can show the contract was governed by a custom existing between the parties, or an industry-wide practice.

Problems with mutual assent can, however, excuse a party from the obligations of a contract. A contract made under duress is not enforceable. Additionally, contracts made with individuals unable to exercise free will are void. A contract with a party under age eighteen is not enforceable against the minor. An agreement based upon a mutual mistake by the parties is also not enforceable.

"Consideration"

Mere promises are not enforceable. Only promises supported by "consideration" are enforceable. Consideration is present if the parties agree to confer a benefit, or to suffer a detriment, that would not occur absent the agreement. Gifts are not enforceable under contract law because the gratification of giving alone is not valid consideration. However, any amount of consideration of value, even a penny, is sufficient.

Proper Form (Written V. Oral)

Certain types of agreements must be in writing in order to be enforceable. The subject of the contract usually determines whether a "statute of frauds" requires the agreement to be in writing. The "statute of frauds" is a law that applies to certain transactions in order to avoid false claims that a contract existed. For example, contracts involving the sale of land must be in writing. Oral agreements to buy or sell land are not enforceable.

Lawful Purpose

Agreements to perform an illegal act are not enforceable. For example, a court would not enforce an agreement to commit a murder for money.

What happens if a party to a contract does not fulfill its promise?

If a party fails to fulfill its contractual duty to perform, the aggrieved party may initiate a civil lawsuit to enforce the contract. If the contract contains an agreement to submit disputes to arbitration, the aggrieved party must pursue its claim in arbitration.

What kind of compensation can a party receive if a contract is not performed?

Sometimes, a contract will specify the amount of damages that a court may award if one of the parties fails to perform its contractual obligations. Such a provision is known as a liquidated damages clause.

However, if a contract does not include such a clause, the court will award the aggrieved party a level of monetary compensation comparable to the value of what the party would have received, "the benefit of the bargain," had the contract been fully performed. Courts generally do not award punitive damages in breach of contract cases.

In rare instances, a court may order a remedy of "specific performance." Specific performance requires the breaching party to perform what it promised (instead of paying monetary damages). This situation may arise if a court determines that monetary damages are inadequate to make the aggrieved party whole, such as a case involving real estate or rare goods (such as a unique painting).

What laws govern contracts?

The law of contracts was developed over centuries by judges ("common law"). The Second Restatement of Contracts, which is instructive but not binding, is largely based upon common law principles.

State statutory law also governs contracts. Federal law on contracts is limited, applying only to contracts with the federal government. For contracts involving the sale of goods, most state laws are the same because of widespread adoption of the relevant section, Article II, of the Uniform Commercial Code.

International law may also apply to a contract. For example, if a contract is made internationally, between nationals of different countries, the contract may be subject to the rules of "The United Nations Convention on Contracts for the International Sale of Goods," which nearly all countries have ratified.