milestone 1
angmil
Contract Basics
A contract is a legally enforceable agreement between two or more parties. According to the American Law Institute, in the Restatement (second) of Contracts §3 (as cited in LexInter.net, n.d.), a contract 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.”
The subject matter of contracts is extremely broad. A contract may involve transfer of property, rights to use to a property and a multitude of other exchanges. For example, Party A agrees to sell his boat to Party B for $5,000, and Party B agrees to pay Party B $5,000, for ownership of the boat. Party A is now bound to transfer ownership of the boat to Party B and Party B is legally obligated to pay Party A $5,000. If one of the parties fails to perform his 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. It would be impossible to list all of the types of contracts, as the possibilities are almost limitless. Therefore, it is more important to understand the concepts involved in the formation and termination of contracts.
A contract requires competent parties, subject matter, legal consideration, mutuality of agreement, and mutuality of obligation. In other words:
The parties to the contract must be competent to enter into the contract; a minor is not considered competent to enter into contracts. The subject matter must be enforceable; illegal acts will not be enforced under contract law. There must be consideration; something of value must be exchanged; and. Both parties must be obligated to do something.
Courts are strict in holding parties to their obligations. It is understood 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 breach his/her promise to the detriment of another party and not be held responsible. As such, one should never enter into a contract lightly.
Formation of the Contract
Generally, contracts involve an offer, acceptance and consideration. Assume that Party A sends a written proposal to Party B stating that Party A wishes to buy Party B’s boat for $5,000. This is an offer. Of course, it should be noted that the offer need not be in writing, except in certain circumstances, which will be discussed in Module 4. An oral offer can, in many circumstances, be legally binding.
Party B can choose to accept the offer, decline it, or make a counter-offer. If Party B accepts, he or she must do so in its entirety. For example, if Party B states that he or she will sell the boat for $6,000, 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 a presumably valid contract. However, 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, as opposed to a subjective standard. In other words, the question becomes whether a reasonable person would believe that the party intended to be bound by the contract. With this in mind, businesses would be wise to clearly state in the writing that the proposal is not an offer if it wishes to avoid a binding contract upon acceptance.
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. Promises of gifts are not contracts, as the receiving party has given no consideration. On the other hand, if the parties agree that they each will give the other party $500 if either of them wins or inherits money, then mutual consideration is present. As this example illustrates, a mutual exchange of promises is sufficient to create consideration.
Also, each of the parties to the contract must have contractual capacity. For example, a mentally ill person who is not competent to make decisions would not have contractual capacity. Therefore, even if all other requirements of the contract are present, the contract would void ab initio.
Reference: LexInter.net. (n.d.). Definition of contract. Retrieved June 15, 2010, from http://www.lexinter.net/LOTWVers4/definition_of_contract.htm