FAQ: Contract Formation and Enforcement

What is a Contract?

A contract is a legally enforceable agreement between two or more parties that creates an obligation to do or not do particular things. The term "party" can mean an individual person, company, or corporation. No matter who the parties are, contracts almost always contain the following essential elements – competency and agreement. Parties who are competent to enter into a contract. For example, a mentally disabled person could not enter into a contract. Minors can enter into contracts, but can void them in most cases before they reach majority age. Mutual agreement by all the parties means that all parties have a meeting of the minds on a specific subject. Each party either promises to perform an act that the party is not legally required to perform, or promises to abstain from performing an act that it is legally entitled to perform.

What is "Consideration" and How Much is Required?

Generally, the courts will not reform a contract because one party made a bad bargain. Consideration is the value bargained for by the parties, and most decisions indicate there is no reason to inquire into a party's motivation for giving another party an incredible deal. In a famous legal quote, a single peppercorn was considered adequate consideration.

Having said that, consideration must meet other requirements. The consideration must be an exchange for the bargain in question; past consideration is no good.

Why should a contract be written?

To be enforceable, some agreements must be in writing. The situations in which an agreement must be in writing can differ from state to state, but usually include transfers of real estate, sales of goods valued at over $500, and contracts that require more than a year to perform. Your written agreement becomes your proof of what was agreed upon, and prevents someone from forgetting or changing the story later. Writing the contract down also makes the parties focus on the essential points, and come to a definite agreement.

What laws govern contracts?

Contracts are usually governed and enforced by the laws of the state where the agreement was made. Depending upon the subject matter of the agreement , a contract may be governed by one of two types of state law. The majority of contracts (i.e. employment agreements, leases, general business agreements) are controlled by the state's common law. The common law does not control contracts that are primarily for the sale of goods, however. Such contracts are instead governed by the Uniform Commercial Code (UCC), a standardized collection of guidelines governing the law of commerce.

What is "breaching" a contract?

In the business world, disputes can arise over contracts, and one party or both may accuse the other of breaking his or her obligations under the agreement. In legal terms, a party's failure to fulfill an end of the bargain under a contract is known as "breaching" the contract. When a breach of contract happens, or at least when a breach is alleged, one or both of the parties may wish to have the contract "enforced" on its terms, or may try to recover for any financial harm caused by the alleged breach.

How are contracts enforced?

The most common method used to resolve business contract disputes and enforce contracts, if informal resolution methods fail, is through lawsuits and the court system. If the amount at issue is below a certain dollar figure, the parties may be able to use "small claims" court to resolve the issue. Courts and formal lawsuits are not the only option for people and businesses involved in contract disputes. The parties can agree to have a mediator review a contract dispute. The parties are not bound by a mediator's decision, but may be convinced to avoid a costly court battle by how the mediator rules The parties can also agree to binding arbitration of a contract dispute. In arbitration, a neutral party listens to the arguments from both sides and issues a decision that is binding on the parties. This is cheaper and less time-consuming than a court battle. When attempting to enforce a contract, an individual or business should always consider the effect any dispute will have on any long-term business relationship between the parties involved.

Could a contract exist based on just a promise?

If one party makes a statement or a promise that causes another party to rely on that statement in such a way that he or she is financially injured by that reliance, then a court will enforce the statement or promise as if it was a completed contract. The court does not need to find an agreement or consideration in order to enforce the promise like a contract. The idea of giving a remedy against a person who has broken his or her promise appeals to most people. However, the "detrimental reliance" of the promisee (the person to whom the promise is made) on the promise must be reasonable and foreseeable by the promisor (the person who made the promise) at the time of his or her statement. If the promisee took action that the promisor could not have anticipated, the promisor is not required to live up to the promise.

What Contracts are Required to Be in Writing?

Most contracts can be either written or oral, but some agreements must be in writing in order to be binding. The following types of contracts need to be executed in writing:

• real estate sales;
• agreements to pay someone else's debts;
• contracts that take longer than one year to complete;
• real estate leases for longer than one year;
• contracts for over a certain amount of money (depending on the state);
• contracts that will last longer than the life of the party performing the contract; and,
• a transfer of property at the death of the party performing the contract.

An English law from 1677, called the "Statute of Frauds," provides the basis for current written contract requirements. The goal of written contract rules is to avoid fraud by requiring written proof of the underlying agreement. This legal goal makes sense as a practical objective as well. Although other types of contracts may be oral, it is advisable to "get it in writing" to insure both parties understand their obligations. If court enforcement is required, a written contract shows the parties' obligations and avoids a "he said, she said" dispute. It is easier to check with an attorney prior to signing to see whether a contract is valid than it is to enforce a poorly-drafted agreement after problems arise.

What is "Specific Performance" as a Legal Remedy?

"Specific performance" is a specialized remedy used by courts when no other remedy, such as money, will adequately compensate the other party. If a legal remedy will put the injured party in the position he or she would have enjoyed had the contract been fully performed, then the court will use that option instead. The most common reason courts grant specific performance is that the subject of the contract is unique. When a contract is for the sale of a unique property, mere money damages will not remedy the purchaser's situation. Courts will enforce specific performance only if the underlying contract was fair and equitable. Other commodities that courts have found to support specific performance include works of art, custom-made products, and goods in short supply.