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CONTRACTS BASICS

What is a contract? A contract is a legally enforceable agreement, express or implied,

between two or more parties that creates an obligation to do or not do particular things.

The term "party" can mean an individual person or company. An express contract is stated

in words, written or oral, or partly written and partly oral. An implied contract may be

manifested by conduct (a reasonable person aware of this conduct would infer that a

contract exists).

 Capacity of the parties. Under the law, only a person who is legally competent has the

power to make a binding contract and can be held responsible to any promises

contained therein. Persons who may be considered to be legally incompetent include

minors, insane persons and sometimes intoxicated persons. A person under the age

of 18 lacks capacity to make a contract. Therefore, a minor can cancel a contract at

any time during minority age and for a reasonable period of time after his eighteenth

birthday. If a minor accepts the contract after reaching the age of 18, he is bound by it

because of ratification. Insanity is a ground for cancellation of a contract. If, however,

the insane person has not been adjudicated insane and if the other party acted in good

faith, the mentally impaired party must restore the value received if he wishes to

cancel. A contract made by a person so intoxicated by alcohol or drugs that he did not

understand the nature of the agreement is voidable, if the intoxication was apparent to

the other party.

 Mutual agreement or meeting of the minds on a specific subject (a valid offer and

acceptance). The offer must indicate a clear intent to make a contract, it must be

sufficiently definite so that a court can determine the actual intent of the parties, and it

must be communicated to the other party. If an offer does not specify a period of time

during which it is to remain open, it expires after the passage of a reasonable time. An
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offer may expire at an earlier time than stated because of rejection, counteroffer, or the

death or incompetency of either offeror or offeree. The acceptance of an offer should

be clear and unconditional. A conditional acceptance is treated as a counteroffer, and

is a new offer.

 Consideration: something of value given in exchange for a promise. Consideration is

based on the idea “something for something”: some action, forbearance or promise. It

is not necessary that the thing promised be affirmative; it may be refraining from acting

or promising not to act. A promise made to give $1,000 to a friend if she does not

smoke is mutual and binding. A legal detriment or benefit, not necessarily an

economic or material loss or benefit, but any lawful alteration of responsibilities (e.g.,

giving up one’s right to sue) can be consideration.

 Legality of subject matter. An agreement may be illegal because it violates a statute or

because it violates public policy, that is, it is contrary to general morality as declared by

a court of law. If an agreement is illegal, it does not have any legal existence and

evidence of the agreement cannot be introduced into court.

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 (i.e. sale of goods, property lease), a contract may be governed by the common

law or statutes. The majority of contracts (employment agreements, leases, general

business agreements) are controlled by the state's common law. The common law does

not control contracts that are for the sale of goods, however. Such contracts are instead

governed by the Uniform Commercial Code (UCC), a collection of guidelines governing the

law of commerce.

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. If
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the amount at issue is below a certain dollar figure (usually $3,000 to $7,500 depending on

the state), the parties may be able to use "small claims" courts to resolve the issue. Also,

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 agree with the mediator’s rules to

avoid a costly court battle. 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 (the arbitration award). This is cheaper and less time-

consuming than filing an action. 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.