Section Library
Contract Law
The ability of individuals, partnerships, corporations and other types of entities to enter into binding and legally enforceable contractual obligations is truly one of the cornerstones of a civilized society.
Rudimentary forms of contracts were undoubtedly in effect even during prehistoric times, as individuals began to actively engage in the bartering or exchanging of food, goods and services. Unfortunately, when such an individual struck a bad bargain or was treated unfairly in a transaction, he could not redress his grievances in court. However, he probably pursued a more direct and punitive solution to his dilemma.
Since contract law has evolved into an immensely complex and intricate component of our modern legal system, for purposes of this discussion I shall endeavor to provide the reader with a very brief overview of certain general contract law principles.
Needless to say, this discussion should not be construed as a substitute for legal advice. Although many types of contracts can be handled in the routine course of business, as contracts increase in size, scope, value or complexity, the need for competent legal advice also increases in a concomitant fashion.
A contract can be defined as a promise or set of promises for which the law gives a remedy, or the performance of which the law, in some way, recognizes as a duty. Therefore, by establishing a mutual agreement, the parties to a contract create enforceable duties or obligations that are legally binding.
Although there are four basic elements to every contractual agreement, an additional or fifth basic element is required for certain types of contracts.
Mutual Assent ("Meeting of the Minds")
The parties to a contractual agreement must voluntarily consent to the creation of the agreement. Typically, an agreement arises when one person (an offeror) makes an offer, and the person to whom the offer is made (an offeree) accepts.
Competent Parties
The parties to a contractual agreement must have the capacity or ability to understand that the formation of a contractual relationship is being contemplated, and comprehend the general nature of the agreement.
As previously mentioned, individuals, partnerships, corporations and other types of entities can be classified as competent parties, for the purposes of entering into contractual relationships.
For purposes of simplicity, more than one pundit has suggested that a competent party can be classified as a person can, at least 18 years of age, with the "weakest" of sound minds.
Consideration
The parties to a contractual agreement must exchange some form of consideration.
For example, cash might be exchanged for goods or services, or one party may promise to do something in exchange for a similar promise from another party.
Although consideration can take many possible forms, it is most important to remember that each party to a contract will derive a benefit, but also suffer a detriment.
Lawful Purpose
Contracts may only be entered into for lawful purposes or they will be construed as void or unenforceable.
For example an "agreement" between two parties, which violates either civil or criminal law, is both illegal and void.
Although contracts are usually valid in oral or written form, all of the states have enacted statutes designed to cover (and protect) certain types of contracts. It is from these statutes, which are typically called "Statutes of Frauds", that we derive the fifth basic element.
Agreement in Writing
Certain types of contracts are more susceptible to fraud and abuse. To mitigate the potential for fraud and abuse, the typical Statute of Frauds requires parties to memorialize certain types of contracts, in order to create enforceable contractual relationships.
For example, a written agreement (or memorandum) would typically be required for the following types of contracts: a contract which cannot be completely performed within one year of its commencement; a contract involving the sale or purchase of real estate or the creation of a security interest (mortgage) in real estate; a contract to answer for the debt of another person; or, a contract involving a sale of goods for a price in excess of $500.00.
Although a complete written contract would be imminently preferable to a verbal agreement, in order to establish a viable and enforceable contractual relationship, the typical Statute of Frauds only requires the parties to prepare a note or memorandum, that contains all of the material elements of their agreement and which is signed by the party or parties who is/are charged with the alleged breach of contract.
Theoretically, a substantial transaction, covered by a typical Statute of Frauds, could be evidenced by a relatively simple document, written and signed in crayon, on a Big Chief tablet. (Definitely not recommended!)
Conclusion
Obviously, in most instances, it is preferable to establish written contractual relationships. However, written contractual instruments that are ambiguous or poorly drafted, can create more problems than they solve.
Written contracts should always be drafted in a clear, concise and understandable fashion.
The rights, duties, responsibilities and obligations of all of the parties to a contract must be clearly delineated or enumerated. Ideally, a reasonably intelligent and objective third party should be able to independently review a contract and generally comprehend its terms, conditions and provisions.
Since individuals and organizations vary considerably with respect to their degree of sophistication concerning the negotiation, preparation and interpretation of contracts, prudence and common sense should dictate when legal advice should be sought!