Contracts

A contract is a writing intended to formalize an agreement between two or more parties. Contracts can cover a broad range of matters, from the sale of goods or real property, a residential or commercial lease, the terms of an employment agreement, the settlement of a dispute, and ownership of intellectual property. Any time you agree to take some action or make a payment in exchange for anything of value, a legally recognizable contract has been created. As an example, most bills of sale, purchase orders, employment agreements, and other common business transactions are legally enforceable contracts.

Typically, in order to be enforceable, a contract must involve the following elements:

  • Mutual Consent or a "Meeting of the Minds" - The parties to the contract have a mutual understanding of what the contract covers. For example, if in a contract for the sale of a "mustang" the buyer thinks he is buying a car and the seller thinks he is selling a horse, there is no meeting of the minds and the contract will likely be unenforceable.
  • Offer and Acceptance - The contract must involve at least one offer from one party to another party who accepts that offer. For example, in a contract for the sale of a piano, the seller may offer the piano to the buyer for $1,000. The buyer's acceptance of that offer is a necessary part of creating a binding contract for the sale of the piano. A counter-offer is not an acceptance, and is typically treated as a rejection of the offer. For example, if the buyer counter-offers to purchase the piano for $800.00, that typically counts as a rejection of the original offer for sale. If the seller accepts the counter-offer, a contract may be completed. However, if the seller rejects the counter-offer, the buyer will not ordinarily be entitled to enforce the prior $1,000 price if the seller decides to raise the price or to sell the piano to someone else.
  • Mutual Consideration (The mutual exchange of something of value) - The parties to a contract must exchange something of value. In the above example, the buyer receives the piano and the seller receives money. While the validity of consideration may be subject to attack on the basis that it is illusory (e.g., one party receives only what the other party was already obligated to provide), or that there is a failure of consideration (e.g., the consideration received by one party is essentially worthless), these defenses will not let a party to a contract escape the consequences of poor negotiation. If a seller contracts to sell a piano for $100 and later gets an offer from someone else for $1,000, the seller can't revoke the contract on the basis that the piano was worth a lot more than he bargained to receive.
  • Performance or Delivery - In order to be enforceable, the action contemplated by the contract must be completed. In the above example if the buyer pays the $1,000 purchase price he can enforce the contract by requiring delivery of the piano. However, unless the contract provides that delivery will occur before payment, the buyer may not be able to enforce the contract if he does not himself "perform" by paying the $1,000. Similarly, again depending upon the contract terms, the seller may not be able to enforce the contract without first delivering the piano.
In a typical "breach of contract" action the party alleging the breach will argue that it performed all of its duties under the contract and the other party failed to perform its duties or obligations.

Additionally, the following elements may factor into the enforceability of any contract:

  • Good Faith - It is implied within all contracts that the parties act in good faith. For example, if the seller of a "mustang" knows that the buyer thinks he is purchasing a car, but secretly intends to sell the buyer a horse, the seller is not acting in good faith and the contract will not be enforceable.
  • No Violation of Public Policy - An enforceable contract cannot violate "public policy." If the subject matter of a contract is illegal a court will not enforce the contract. A contract for the sale of illegal drugs, for example, violates public policy and is not enforceable. Please note that public policy can shift over time. Traditionally, many states refused to honor gambling debts incurred in other jurisdictions on public policy grounds. However, as more and more states have permitted gambling within their own borders, that policy has mostly been abandoned and gambling debts from legal enterprises are now typically enforceable. (An illegal "bookie" might be unable to enforce a gambling debt while a legal casino will be able to do so.)
  • Oral Contracts - As an old saying goes "an oral contract isn't worth the paper it's written on." This refers to the fact that it is typically very difficult to prove that an oral contract exists. Absent proof of the terms of a contract, a party may be unable to enforce the contract or obtain the benefit of his bargain. Even when there is no opportunity to draft up a formal contract, it is advisable that both parties make and sign some sort of writing (even on a napkin) to memorialize the key terms of an agreement. That said, if the terms of an oral contract can be proved or are admitted by the other party, an oral contract is just as enforceable as one that is in writing. However there are a few exceptions where the "statute of frauds" requires that a contract be in writing and signed by both parties to be enforceable. Contact me if you have additional questions in this area.

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