Contract Law: Everything You Need to Know
Contract law is usually governed by state common law; thus, different courts interpret particular elements of a contract differently. 6 min read updated on January 01, 2024
Contract law is usually governed by state common law; thus, different courts interpret particular elements of a contract differently. The standard elements in any contract include mutual assent, valid offer and acceptance, adequate consideration, capacity, and legality. A contract can be classified as either unilateral, bilateral, or multilateral. A unilateral contract is a promise from one party to another. A bilateral or multilateral contract is one that is entered into between two or more parties.
A contract can be either oral or written. It can be an express (in writing) or implied (based on the conduct of someone) promise. While a contract can be oral, it is rather difficult to prove.
Consideration and Mutual Assent
One of the several theories of consideration is called the benefit-detriment theory, which specifies that an adequate consideration exists only if there is a mutual benefit and detriment to both parties involved in the contract. The other common theory of consideration is called the bargain-for-exchange theory of consideration where one party provides subjective consent.
Contracts are primarily governed by statutory law, which is governed by the Uniform Commercial Code (UCC).
Contracts must include specific terms to be able to easily identify what is being promised between the promises. The contract need not set forth every specific term, however, it must be specific enough and include the parties to the contract, what each party is promising, the price of each party’s performance to the contract, and how long the performance will take place.
Assignment is when one party to the contract transfers his or her rights to another person or business that was not initially part of the contract. So long as the contract states that the promise can be assigned to a third party, then the transferring party need not obtain consent prior to the transfer. However, if the parties wish to prohibit assignment, they can indicate as such in the contract itself. In addition, if the contract doesn’t have an assignment clause and one of the parties assigns his or her interest to a third party, the “injured” party may be able to prohibit the assignment if he or she can prove one of the following:  that the assignment would cause a considerable impact to the contract;  that there is a risk in the return performance of the contract; or  that the value of the performance is reduced due to the assignment.
Steps to Entering into a Contract
Offer, Revocation, Acceptance. In every contract, there must be an initial offer. The offer is the indication that someone is bound to the agreement, and as such, promise to fulfill the agreement should the other party accept it. Before the receiving party accepts the offer, the offeror may revoke the offer. However, if the offeror doesn’t revoke the offer, the offeree will either accept the offer or make a counter-offer. Assuming the person making the offer doesn’t revoke, the offeree can accept the offer.
Counter-offer. If the receiving party doesn’t accept, he or she may counter-offer thereby putting the choice in the hands of the offeror.
Consideration. Every contract must have something of value, also referred to as consideration. Generally, consideration is in the form of monetary value. A mere promise to perform is not enough.
Detrimental Reliance. This is a condition that can substitute consideration; it essentially states that one party detrimentally relied on the other’s promise to perform under the terms of the contract.
Legal capacity. Both parties must have the legal capacity to enter into a contract with one another. For example, a contract entered into by a minor may be voidable by the minor or his guardian after the minor becomes an adult. In addition, parties that are impaired by permanent or temporary disabilities may still have the legal capacity to enter into a contract.
Rules of Contract Construction
When drafting a contract, the parties must remember that specificity of the terms are given more weight than general statements. Negotiated terms are also more useful than boilerplate or common terms identified in the contract.
Therefore, it is important that both parties agree upon the terms of the contract while also including some boilerplate language that can be found in most contracts, i.e. choice of law clause, arbitration clause, etc. The words used in the contract must be mutually understandable to all parties involved. You’ll want to ensure that the contract cannot be interpreted in more than one way so to avoid any legal disputes that may arise.
A warranty guarantees that a product or service being sold or provided meets certain conditions. In certain circumstances, the law presumes that the seller has given implied warranties even if none are expressly given in the contract. If the warranty is not met, then this could in fact be considered a breach of contract.
Breach of Contract
A lawsuit can be filed when one of the parties breaches the contract. The lawsuit will be an attempt to force the other party to perform the duties set forth in the contract. The party that is granted enforcement by the court may be granted specific performance or damages. Therefore, either the party that breached will be forced to perform his duties or owe the injured party money based on the value of the performance.
- Lack of capacity. When one of the parties is a minor, drugged without knowledge, or suffers from a mental disability, there may be no obligation to perform the contract.
- Duress. Duress, also referred to as undue influence or misrepresentation, is when one party would not have entered into the contract had he or she not been forced into it.
- Unconscionability. If the contract is so one-sided and favors only one party, then the contract will be deemed unconscionable and thus unenforceable.
- Illegality. This concept, also referred to as public policy, is a defense when one of the parties asks the other to break the law.
- Mistake or fallacy. This is another defense in which a false impression was given at the time the contract was made.
- Frustration of purpose. Frustration of purpose occurs when an unforeseen event undermines one of the party’s purpose for entering into the contract in the first place. As such, the performance of the contract is radically different than what was originally contemplated by both parties.
- Four Corners. This term refers to the court looking at all conditions beyond the express terms of the contract and more at the vague or general terms that can be interpreted in more than one way.
- Parol Evidence Rule. This term applies only to the statements and expressions that were made before or at the same time the contract was entered into. However, statements made after the contract will not be considered parol evidence. Parol evidence is admissible in court if there is fraud or forgery, to prove the existence of prior agreements, vagueness in the contract, or evidence doesn’t contract the terms.
- Extrinsic Evidence. There are some types of extrinsic evidence that are also considered by the court such as the type of conduct between the parties, the use of industry terms, and manner of communication between the parties as well as external parties.
- Covenant of Good Faith and Fair Dealing. The covenant of good faith and fair dealing is a commitment between the parties to the contract that they act both honestly and fairly, in good faith, and not try to unfairly advantage over the other parties to the contract.
- Frustration of Purpose. Frustration of purpose occurs when an unforeseen event undermines one of the party’s purpose for entering into the contract in the first place. As such, the performance of the contract is radically different than what was originally contemplated by both parties.
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