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 to his/her/its 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 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.

MUST THE CONTRACT BE IN WRITING?

Must the contract be in writing? Legal answers at FreeAdvice.com's contract law section 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:

sales of real property;

promises to pay someone's debt obligations;

a contract that takes longer than one year to complete;

real property leases that run for more than a year;

contracts for an amount or other consideration that exceeds the state's threshold;

a contract that will go beyond the lifetime of the one performing the contract;

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.

WHAT ABOUT "CONTRACTS" PRINTED IN SMALL TYPE ON THE BACK OF FORMS AND AIRLINE TICKETS?

Many courts have been allowing these so called "contracts of adhesion" or "take it or leave it" to be binding. Except where they are "manifestly unfair" or "unreasonable", or violate some states' specific law or public policy, the small print may be just as binding as the larger print. It thus often makes sense for you to have a lawyer review all contracts for you.

WHEN DOES A BREACH OF CONTRACT OCCUR?

If one side fails to stick to her/her/its 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/she/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:

Compensatory Damages - money to reimburse you for costs to compensate for your loss.

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.

Attorney fees and Costs - only recoverable if expressly provided for in the contract.

Liquidated Damages - these are damages specified in the contract that would be payable if there is a fraud.

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.

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.

Rescission - the contract is canceled and both sides are excused from further performance and any money advanced is returned.

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.
 

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 advice 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:

One side was not competent to enter into the contract, either due to age or mental illness;

One side had a "free way out" and really never provided any form of "consideration";

One side was under pressure and duress or other undue influence to sign;

One side engaged in "fraud" to procure the contract;

One side prevented the other from fulfilling its/her/his end of the bargain;

The original contract was changed with the agreement of all parties;

There was a mistake of fact or mistake of law prior to signing the contract;

The contract has an illegal purpose or act;

Something happened, through no fault of either side, making the duties under the contract impossible to perform;

The side claiming the breach accepted the performance without claiming a breach had occurred.
 

CAN I CHANGE MY MIND AFTER ENTERING A CONTRACT?

That largely depends on the nature of the contract.

As a practical matter, many local merchants will have "return" policies that permit a buyer to return unused merchandise within a certain time for a full return with no questions asked. Some states have laws giving consumers the right to return merchandise within 7 to 14 days, unless the store predominately posts a "No Return" or "Final Sale" notice.

If the contract involves home repairs, you also have the right to change your mind, typically within 72 hours from signing the contract. The FTC and many states also have "cooling-off" laws involving major purchases, such as new cars.

 

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