Law of Contracts: Everything You Need to Know
Understanding the law of contracts is important when drafting a legally binding document. 3 min read
2. Elements of a Contract
3. Types of Contracts
Understanding the law of contracts is important when drafting a legally binding document. A contract is an agreement between two or more parties that is enforceable by law. It assumes a legal obligation must be met.
Everything You Need to Know About Contracts
Many aspects of life involve legal contracts, such as applying for an auto loan, buying a house, agreeing to a computer software's terms and conditions, and signing employment-related paperwork. A contract is essentially a promise recognized by law that can be enforced.
Contract law falls under a state's common law. As such, court interpretations might vary between states. Contracts are needed when one of the parties involved makes a promise. To be legally binding, the contract must involve some sort of promise or agreement.
There are two definitions or theories regarding contracts and adequate consideration: the benefit-detriment theory and the bargain theory.
- Benefit-Detriment Theory of Consideration
- In this scenario, the contract either benefits of the promisor or is to the detriment of the promisee
- For example, gift promises are not enforceable because the promisor might gain personal satisfaction from the act, so there isn't sufficient detriment to constitute adequate consideration
- Bargain Theory of Consideration (also known as Bargain-for-Exchange Theory)
- Adequate consideration exists only when an individual makes a promise in return for something
- The condition is that the person making the promise was given something in exchange for making that promise
Essentially, the difference between the bargain-for-exchange theory and the detriment-benefit theory is each party's motive for making the agreement. Bargain theory involves subjective mutual assent (two parties agree on something), while the detriment-benefit theory involves objective legal detriment (the promisee loses something to the promisor).
In cases where the intention isn't clear, a court examines any usage or custom that might determine the agreement's intention. With an oral contract, a court might consider both parties' intentions that led to the contract's formation.
There is no legal requirement for a contract to be in writing, although certain statutes require certain types of agreements to be in writing. New Mexico, for instance, enforces oral contracts in situations where the Statute of Frauds (which requires that certain contracts be in writing and signed) does not.
Keep in mind that oral and written contracts have different statutes of limitations. For written contracts, the general statute is six years, while for oral contracts it's four years. If a written contract involves a sale of goods, however, the statute of limitations is four years unless the contract specifies a shorter period, which can be no less than one year.
Most contracts are written and signed by the parties involved. While most contracts are enforceable, those that only serve as a way to determine a party's obligation are not.
Elements of a Contract
Every contract must contain a few basic elements to be considered legally binding.
- Offer — one of the parties involved makes a promise to do or not do something
- Consideration — a party promised something of value in exchange for the specified action or nonaction
- Consideration is defined as the value that motivates the parties to enter into a contract, and it distinguishes the contract agreement from a gift
- Unlike promises made in a contract, failing to follow through on a promise made with a gift is not enforceable by law because it isn't considered a breach of contract
- Consideration can take the form of effort or money expenditures, a promise to perform a service, a reliance on a promise, or an agreement not to perform an action
- Acceptance — the offer was clearly accepted
- The contract can be accepted verbally or through performance or deeds called for in the agreement
- This acceptance must mirror the offer terms; otherwise, it's viewed as a counteroffer or rejection
- In cases where a contract involves a sale of goods between merchants, the acceptance doesn't need to mirror the terms to be valid
- Mutuality — all contracting parties must mutually agree to the contract
- Each party involved in the contract must understand and agree to the agreement's basic terms and substance
Types of Contracts
Contracts can take the following forms:
- Express contract — the most common type of contract, in which all elements are clearly stated
- Implied in-fact contract — no expressed terms exist
Regardless of the contract type, legal issues arise when one of the parties involved in the contract fails to perform their legal obligation.
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