Contract Law

Introduction

One of the most significant areas of business law is contracts. All industry relationships are shaped by contracts, which are ubiquitous. An agreement is created whenever a business hires a worker, a company purchases a product or service, or a patient seeks a healthcare provider. Contracts are structured promises. A patient commits to pay the doctor’s reasonable price in exchange for the doctor using her best judgment in treating them. Beyond making promises, another way to see a contract is as a record of a relationship. The agreement outlines each party’s obligations and rights. Contracts can typically be express (written or verbal), implied by fact (handshake), or implied by law. Both express and implied contracts are the product of an agreement between the contracting parties. This consensus of opinion is known as mutual assent. In an express contract, the parties formally agree to the terms of the agreement through written or verbal communication. A contract that is implied in reality is one where the actions of the parties and the environment indicate that they agree on the conditions. Voidable contracts allow one of the parties (but not the other) to escape the legal obligations of the contract. In an implied contract, the conduct of the parties and the surrounding circumstances show mutual assent to the terms. Contracts implied in law are recognized by the law on the basis of justice and equity but may not include the literal assent of both parties. These unique situations are referred to as contracts “implied in law,” “quasi-contract,” or “quantum meruit” (Perry & Thompson, 2017).

What is a contract?

Essentially, a contract is a legally enforceable promise. Typically, a contract is formed with two or more parties agreeing to something, and if one fails to uphold the agreement, that is considered a breach of contract. To be considered a legal contract, the following items must be present: mutual assent, consideration, legality, and capacity. The elements of a contract, whether written or verbal, include offer, consideration, and acceptance. An enforceable contract is legally binding. A breach of contract occurs when one or more of the terms of the contract are violated (Perry & Thompson, 2017).

Contracts Law [YouTube] 2016 by Lanard and Associates, P.C.

Elements of a contract

For a contract to be legally enforceable when executed, several factors must be considered. The first is the competency of the parties. Certain classes of individuals (minors, prisoners, or mentally incompetent) are considered incompetent in a legal capacity to create a binding contract. Whether verbally or written, the following elements of a contract must exist: offer, consideration, and acceptance (Morgan, 2019).

A. Offers

An offer must be created with reasonable expectations where the offeror presents a commitment in exchange for one of the three following responses by the offeree:

1. does something (performs an act),
2. refrains from doing something (forbearance), or
3. promises to do something or to refrain from doing something.

Contracts: The Offer [YouTube] 2012 by Center for Innovation in Legal Education

1. Intent (intent to be bound to terms) statements lacking intent
2. Definite terms: material and essential terms
3. Communication by offeror or offeree

Duration

The duration of an offer typically refers to the period during which the terms and conditions of a particular offer or proposal are valid. The duration of an offer is important because it sets a time limit for the recipient to accept the offer before it expires. The specific duration of an offer can vary widely depending on the context and the intent of the parties involved. In some cases, offers might be open for a short period, such as a few days or a week, while in other cases, they might have a longer duration, such as several months. The duration of an offer is often outlined in the offer itself or accompanying documentation (Morgan, 2019).

It’s important to note that if an offer has a stated expiration date or time frame, the offer generally becomes invalid once that time has passed. If the recipient wishes to accept the offer after it has expired, they would need to reach out to the offeror (the party making the offer) to see if the offer can be extended or renegotiated. For legally binding contracts and important agreements, it’s advisable to clearly specify the duration of the offer to avoid misunderstandings and ensure that all parties are on the same page regarding the timeframe for acceptance. The offeree has the power to accept until the offer is terminated. An offer that has been properly communicated continues in existence until it

1. lapses or expires,
2. is terminated by operation of law (illegality and incapacity),
3. is rejected by the offeree,
4. is revoked (directly or indirectly) by the offeror, or
5. receives a counteroffer (Morgan, 2019).

Methods of terminating an offer:

1. 1. Lapse of time
   2. Termination by operation of law
   3. Rejection by offereeCounteroffer
   4. Revocation by offeror
   5. Counteroffer

Mutual Assent

For a contract to be formed, parties must voluntarily agree to the terms, which is mutual assent (Perry & Thompson, 2017). Once an offer is made by the offeror and accepted by the offeree, it is validated, provided the following exists:

1. Present intention to contract
2. Reasonably definite terms
3. Communication of offer to the proper party

Once an agreement is reached, an offeree performs tasks requested by the offeror. Tasks must be clearly communicated; otherwise, there is no mutual assent. Moreover, there is a need for clarity in defining the specific terms.

Defenses to Mutual Assent

• Duress
  • When someone is involuntarily forced to sign a contract under some sort of threat
• Misunderstanding
  • When parties have attached different meanings to a term but one party is unaware of the assumption
• Undue Influence
  • Unfair persuasion/abuse of trust in a Confidential or Fiduciary Relationship
• Misrepresentation or Fraud
  • Misrepresentation or concealment of material fact opinion/value
  • Reasonably or Justifiably Relied upon by the defrauded party
  • Causes damages to that party
  • Fraudulent assertations
• Mutual Mistake of Fact
  • Erroneous beliefs of the parties that induce an agreement
  • Must be made by both parties, involve basic assumptions, and materially affect the agreed-upon exchange
  • This contract is only voidable by the party that is adversely affected by the mistake.

Contract Defenses for Lack of Mutual Assent: Mistake, Misunderstanding and Misrepresentation [YouTube] 2020 by LawShelf

B. Consideration

Consideration is not a concrete concept. For consideration to exist, there must be a legal detriment (forgoing something a person is entitled to or doing something a person does not have to do) as a result of “bargained for exchanged.” An example of this could be the exchange of money. Furthermore, courts do not determine if consideration is fair; however, if no money is exchanged for the promise, the courts will not enforce it because it lacks consideration. In the absence of fraud, oppression, undue influence, illegality, or statutory limitation, parties have the freedom to make any contract; moreover, the fact that it is onerous or burdensome for one or the other has been immaterial (Perry & Thompson, 2017).

Contracts: What is Consideration? [YouTube] 2014 by USLawEssentials

C. Acceptance

Once an offer by one party (offeror) has been made, the acceptance by the offeree is an indication of their willingness to be bound to the terms of that offer. Once accepted in the affirmative, there is typically a written or electronically signed offer. It must be noted that the offeree is the only person that can accept the offer. In other words, the offeree cannot assign the offer to a third party. Offerees are protected by a rule making the acceptance effective at the time of dispatch, also known as the mailbox or deposited acceptance rule. However,  applying the mailbox rule can be avoided if the offeror states that the offer is not effective until it is actually received (Perry & Thompson, 2017). Courts can enforce offers that prescribe an exclusive method of acceptance. A valid acceptance requires the following:

• Meeting of the minds: mutual assent
• Definite and complete: terms agreed upon are complete and understood by both parties
• Duration: offeree’s time limits to accept the offer
• Complete & conforming: acceptance of all terms mirrors offer

Contracts: Acceptance [YouTube] 2012 by Center for Innovation in Legal Education

C. Other Requirements

For a contract to be lawful, other requirements in addition to mutual assent and consideration are needed. Both parties must have sufficient legal capability to enter the contract. This is similar to consent for treatment in healthcare. For a party to have capacity, the person must be conscious, have the ability to understand the contract, or has a legally appointed guardian by the court (Perry & Thompson, 2017).

Contracts must also contain legality. Courts will not enforce contracts that extend over the limits of public policy. One common example is a “non-compete clause” where one party promises not to compete with the other prohibiting them from working for competing businesses. Most courts hesitate to enforce this because it reduces competition and limits labor mobility. Whether to enforce a non-compete clause is determined by whether:

(1) there is a legitimate business interest for the clause and

(2) whether the clause is tailored to protect legitimate business interests (Perry & Thompson, 2017).

Table 1. Reasonable Terms for Business Interests

Non-compete agreements are generally violations of public policy and are unenforceable in many states unless:

• It protects legitimate property interests or some legitimate interests of the employer
• It is reasonably tailored to the circumstances, including time, location, and business activity, within reason

It should be noted that these types of contracts must be put in writing to be enforceable. The Statute of Frauds requires certain contracts to be in writing. These contracts include contracts for real estate, contracts for goods over a certain value, suretyships, and contracts that cannot be performed within one year. To enforce a contract that falls under the Statute of Frauds, there must be a written document signed by both parties (Perry & Thompson, 2017).

Statues of Frauds [YouTube] 2013 by Center for Innovation in Legal Education

Balancing Test

The balancing test is a complex and evolving legal concept. However, it is an important tool that allows judges to make informed decisions about the enforceability of contracts. In contract law, a balancing test is a judicial test in which the judge weighs the importance of multiple factors in a legal case (Morgan, 2019). The factors that are weighed may vary depending on the specific case, but they may include the following:

• The intent of the parties to the contract
• The fairness of the contract
• The public interest
• The economic consequences of enforcing or not enforcing the contract

The balancing test is often used in cases where there is no clear rule or precedent to apply. In these cases, the judge must weigh the competing interests of the parties and decide which interest is more important. One example of a balancing test in contract law is the unconscionability doctrine. Unconscionability is a doctrine that allows a court to invalidate a contract if it is found to be unfair or one-sided. The balancing test is a flexible tool that allows judges to take into account the specific facts of each case. However, it can also be criticized for being subjective and unpredictable (Morgan, 2019).

Here are some other examples of balancing tests used in contract law:

• The reasonable expectations test
• The good faith and fair dealing doctrine
• The economic duress doctrine
• The adhesion contract doctrine

Remedies

Remedies are an important part of the legal system. Remedies help to ensure individual rights are projected and wrongdoing should be compensated. In terms of legal remedies, it is divided into two main categories: legal remedies and equitable remedies. Legal remedies are based on the law and awarded by the court. Equitable remedies are based on fairness and justice and are awarded by a court of equity (Perry & Thompson, 2017).

Table 2. Legal and Equitable Remedies

Often, the calculations of damages can be uncertain. However, contracts can stipulate the level of damages in the case of breach, and this is termed liquidated damages. Liquidated damages act to provide assurances that both parties intend to uphold their portion of the contract. Unfortunately, courts may hesitate to enforce liquidated damages, specifically if they are seen as punitive. Enforcement of liquidated damages relies on whether or not the agreed-upon damages are reasonable estimates of damages based on the information known at the time of contracting. Consequential damages arise when the breach of one contract affects the breached-upon party’s ability to perform another contract. Punitive damages are awarded to discourage particular behaviors, like fraud (Perry & Thompson, 2017).

Injunctions are court-enforced orders that require one party to do or refrain from doing something, and it can be either temporary or permanent. Damages are monetary awards that are given to compensate someone for a loss that they have suffered. Damages are typically awarded when someone has been injured or harmed by the wrongful act of another person. Damages are a liability rule because they allow the injured party to recover money from the person who caused the harm. An injunction is a court order that requires someone to do or refrain from doing something. Injunctions are typically used to prevent someone from causing harm to another person or to protect someone’s rights. Injunctions are a property rule because they allow the person who is being harmed to prevent the harm from happening in the first place. In other words, damages are a way of compensating someone for harm that has already been done, while injunctions are a way of preventing harm from happening in the first place (Perry & Thompson, 2017).

Table 3. Types of injunctions and damages

Equitable Doctrines

Equitable doctrines are a set of legal principles typically used to supplement the common law. Equitable doctrines are an important part of contract law. They help to ensure that contracts are fair and just and that they are enforced in a way that is consistent with the principles of equity (Morgan, 2019). Equitable doctrines can be used to intervene in contract law in a number of ways. For example, they can be used to:

• Invalidate a contract that is unconscionable: Unconscionability is a doctrine that allows a court to invalidate a contract if it is found to be unfair or one-sided.
• Prevent a party from enforcing a contract that they have obtained through fraud or duress: Fraud and duress are both grounds for invalidating a contract.
• Order-specific performance: Specific performance is a remedy that requires a party to a contract to perform their obligations under the contract. This remedy is typically only available when damages are not an adequate remedy.
• Remedy a breach of contract: If one party breaches a contract, the other party may be able to seek equitable relief, such as an injunction or specific performance.

Promissory Estoppel

Promissory estoppel is a legal doctrine that prevents a party from withdrawing a promise made to another party if the latter has reasonably relied on that promise. A promise made without consideration is generally not enforceable. Estoppels were created as rules of evidence, and some (such as estoppel by deed and judgment estoppel) remain evidential in character. It has the same binding effects as a valid contract, where a breach can result in reliance damages or expected damages (Morgan, 2019).

Quasi-Contract (Quantum  Meruit)

A quasi-contract (implied contract) is a legal obligation imposed by the court to prevent one party from unjustly benefiting at the expense of another party and arises when one party provides services to another party without any agreement. Courts can award a reasonable value for services provided. Quasi-contracts can be imposedunjust enrichment by law to prevent unjust enrichment. In the absence of a true contract, it is either expressed or implied in the fact. However, because quasi-contracts are not true contracts, mutual assent is not necessary. Furthermore, when a party sues for damages under a quasi-contract, the remedy is typically either restitution or recovery under the theory of quantum meruit (Morgan, 2019).