A contract is a legally binding agreement between parties to do or not do something. Businesses enter into contracts all the time; it is important for any business owner to have at least a small understanding of contract law.
There are several factors to look at to determine whether a contract has been made. Once a contract has been created, the question becomes whether there are any issues that call into question its validity. Finally, if there has been a breach of the contract, there is a question of whether damages have occurred.
Elements of a Contract: Forming a Valid Contract
There are three elements that must be present for a contract to be valid: an offer, acceptance, and consideration.
The first step to a contract is an offer. An offer is a statement, written or spoken, by a party of his or her intention to be held to a commitment upon acceptance of the offer. Many a business owner has gotten into a legal dispute because, during negotiations, a customer believed an offer had been made when the businessperson believed the parties were still only discussing possible options. A businessperson should carefully consider whether his or her statements or the statements of other parties constitute offers.
The second requirement for there to be a valid contract is acceptance. Acceptance must have been done while the offer is still open; in some situations the offer will have expired. For example, if the person withdraws the offer or the offer expired, the acceptance will not be valid.
A third, less obvious requirement is the legal concept of consideration. Consideration distinguishes contracts from gifts. It is a promise to do something where there is no legal obligation to do so, or a promise not to do something you have a legal right to do. . All parties in an agreement must give consideration in order to create a contract, but courts typically do not look at the adequacy of consideration unless there is evidence of some type of wrongdoing by the party benefiting most from the contract. Promises to exchange money, goods, or services are forms of consideration are all forms of consideration.
Defenses to Contract
Once it is determined that there is a contract, it must be determined whether there are any defenses that call into question the validity of the contract. There are some defenses that make the contract unenforceable (void) and other defenses that may give the parties the option to enforce the contract or not (voidable).
Although two persons may exchange an offer, acceptance, and consideration, if the subject matter of the contract is illegal, an enforceable contract does not exist. For example, if a person offers to pay another person money for illegal drugs, this is a void contract and such a contract is unenforceable.
In order to be bound to a contract, the parties must be competent to enter into the legal arrangement. Underage persons, persons who are mentally ill, and intoxicated persons are usually not bound by the contracts they enter. However, a minor may have the option of enforcing a contract.
A business may challenge the validity of a contract by alleging that the person who signed for the company was not an agent of the company and therefore had no authority to act on the company’s behalf. Agency is the legal status in which one person, the agent, has authority to conduct business for another party, the principal. Unless their businesses are very small, most business owners must rely on other people to conduct business and enter into contracts on behalf of their businesses. Because principals are bound by contracts entered into by their agents, business operators should be familiar with the laws of agency.
A mutual mistake by both parties to a contract on an important issue makes the contract unenforceable. However, a mistake by only one party does not necessarily make the contract void.
Duress is the use of force or pressure by one party to make the other party agree to the contract. The force does not have to be physical; mental pressure can be sufficient to find duress. The use of duress makes the contract voidable by the party under duress.
Fraud is the intentional misrepresentation of an important issue of the contract. The presence of fraud in a contractual proceeding makes the contract voidable by the party upon whom the fraud was perpetrated. Fraud can take many different forms.
Written by former law clerk Sean Taylor