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The fundamentals of US contract law
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Contracts are a part of everyday life, not only for businesses but also individuals. Given the importance of contracts, let’s take a look at U.S. contract law.
What is a contract?
A contract is a written or oral agreement between two or more parties enforceable by law. A valid contract involves:
- An offer
- Mutual assent
An agreement is not a valid and enforceable contract if it lacks one of these elements. It’s also not enforceable if the subject of the contract is against the law or public policy, or one of the parties lacks mental capacity.
What is contract law?
Contract law governs how courts assess and enforce agreements between parties. When one party claims the other breached the contract – in other words, they failed to adhere to the terms of the agreement – the injured party can seek to enforce the contract or ask for damages.
Most contract law is state-based common law, though a majority of contract law is consistent throughout the U.S. The result is individual states may interpret and enforce contracts differently.
You can find the fundamentals of contract law in the Restatement (Second) of the Law of Contracts, which is a legal treatise. However, for laws governing sales-related contracts and other commercial agreements, you’d look to the Uniform Commercial Code.
How do parties form a contract?
To begin, each party involved in forming a contract must be of legal age and mentally competent. There are additional laws regarding when minors contract with other people and businesses.
The first essential element of a contract is the offer. Party A must offer a set of terms, often related to a product or service, to Party B. These parties can be individuals or organizations.
Acceptance occurs when Party B agrees to Party A’s offer. In the simplest scenario, Party B agrees to the original terms.
However, after an offer might come a counteroffer. Instead of accepting Party A’s terms, Party B might suggest a slightly different arrangement. It then becomes Party A’s job to accept, counter, or reject the new offer.
Entering into a contract requires intent on both sides. This concept is also called a meeting of the minds. Both parties have to mean to enter into a formal and enforceable agreement. This is why agreements between friends typically aren’t considered contracts — because either one or both don’t intend for that outcome.
The most confusing and potentially complicated element of a contract is consideration. This legal term means each party gives something up to receive something else. For example, an employee gives up certain freedoms, like their time, and performs labor in exchange for a salary. A company gives up money in exchange for the employee’s work product.
Who can form a contract?
Mentally competent adults, whether for themselves or on behalf of an organization, can create contracts.
Contract law regarding minors is complicated. In many cases, adolescents under 18 years old can enter into certain contracts. However, there are usually ways for minors to “void” (get out of) those contracts, with a few exceptions (signing up for military service, for example).
Do contracts have to be in writing?
Every state has a statute of frauds, which defines which contracts must be in writing. These statutes can vary slightly, but the fundamental principles stay the same.
Examples of contracts you have to put in writing include:
- Contracts that last longer than one year
- Contracts involving the sale or transfer of land
- Contracts involving products sold for over $500
- Contracts that require an executor of a will to repay debts
- Contracts that promise a party’s dent or responsibility to someone else
- Marriage-related contracts, like prenuptial agreements
Most other contracts can be finalized verbally, though best practice for anyone is to put the terms in writing.
Unilateral versus bilateral contracts
You may come across the terms unilateral contract and bilateral contract. Under a unilateral contract, only one party makes the agreement. They put an offer out there that’s open for someone to act on. The offeror will fulfill their promise once someone acts on their offer.
In other words, Party A makes an offer. There is no Party B to formally accept it, but some other party can act on it. A good example is an offer the police make for information about a crime. No one initially accepts the offer, but if they provide material information, they’ve accepted the offer and the police owe them the reward.
In a bilateral contract, at least two people complete all four traditional elements of a contract. If either party doesn’t live up to their responsibilities stated in the contract, they’ve breached the contract.
Contracts of adhesion
Another term you may run into is contract of adhesion. This is a standardized contract offered by a person or organization with more power than the other person. Party B, the person receiving the offer, doesn’t have enough power to negotiate the terms of the contract. They either accept it or not.
Many common contracts are contracts of adhesion, including leases, insurance policies, vehicle purchase agreements, and loans.
Contracts of adhesion can be valid or invalid depending on the circumstances and what a reasonable person would think and do. A court might strike one down if all or part of it is unenforceable or unconscionable.
Choice of law and contracts
An important part of commercial contracts is the choice of law provision. Because not every jurisdiction handles contract issues the same way, the parties negotiating the agreement should decide what jurisdiction controls if there’s a dispute. It’s common for businesses to use the state where they’re headquartered.
It’s important to note a choice of law provision determines which state’s substantive law will decide the contractual issue. The choice of law doesn’t control procedural aspects of the case. A party could file a lawsuit in Washington, depending on appropriate jurisdiction, even though California law will decide the outcome of the case.
What is a breach of contract?
A breach of contract is a violation of one of the terms stated in the agreement. It could mean someone fails to perform, one of the parties goes back on their promise, or someone interferes in a party’s ability to meet their obligations.
For example, Party A leased a vehicle from a dealership, Party B. If Party A doesn’t pay the lease amount one month, that’s a breach of contract. However, when it comes to commercial contracts, violations are often more complicated than simple nonpayment or nonperformance. For instance, it could be that a supplier delivers the necessary products weeks late. Or, it could be that the quality of the supplier’s materials aren’t up to snuff.
What are the possible remedies for breach of contract?
When someone violates a contract, the other party can take them to court. The court will first ensure the contract is valid and enforceable. Then, it will determine if the defendant breached the contract, and if so, whether the breach injured the plaintiff.
There are a few remedies courts can offer:
Damages: The most common outcome is for the plaintiff to receive money in the court’s attempt to make them whole. Courts have several types of damages they can calculate, including expectation damages, consequential damages, liquidated damages, and nominal damages.
Injunction: Sometimes, a court can stop a party from acting a certain way. A prohibition against doing something might be temporary or permanent. Courts often use temporary injunctions to stop further damages.
Performance: In rare cases, when compensation isn’t an appropriate remedy, the court might order a party to perform what they were supposed to in the contract. This is usually for contracts involving land, not agreements involving personal services.
Rescission: A court can cancel a contract. The party who didn’t breach the contract may prefer this outcome because it terminates any obligations they still had under the agreement.
Do you need a lawyer to create a contract?
You aren’t required to work with a lawyer to negotiate and finalize a contract. However, for many of life’s circumstances, it’s best for lawyers to handle contract matters.
Different types of lawyers work with different types of contracts. For example, family lawyers are well-versed in prenuptial agreements. Real estate lawyers can help you with the agreements involved in buying and selling a house. Commercial contracts for any sized business should be handled by a transactional lawyer.
Do you need a lawyer for a breach of contract?
Unless you are willing and able to take your case to small claims court, it’s best to hire a lawyer who specifically handles breach of contract litigation.
Ontra: At the heart of your contracts
Ontra frees businesses from routine legal work. We help companies negotiate and manage their routine contracts with a combination of data-driven technology and a distributed network of top-tier legal talent, turning their legal documents into easily referenceable key terms and valuable insights that lead to better business outcomes.
Learn more through Ontra’s Executive Perspective Webinar.
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