Contracts and the Law
A business contract is one of the most common legal transactions you will be involved in when running a business. No matter what type of business you run, having an understanding of contract law is a key to creating sound business agreements that will be legally enforceable in the event that a dispute arises. Following is a discussion of the law of contracts.
A contract is a legally enforceable agreement between two or more parties that creates an obligation to do or not do particular things. The term "party" can mean an individual person, company, or corporation. More on creation of a contract follows below.
At its most basic level, a contract is:
- An agreement
- That is legally enforceable
Laws that Govern Contracts
Contracts are usually governed and enforced by the laws in 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 one of two types of state law:
The Common Law. The majority of contracts (i.e. employment agreements, leases, general business agreements) are controlled by the state's common law -- a tradition-based but constantly evolving set of laws that is mostly judge-made, from court decisions over the years.
The Uniform Commercial Code (UCC). The common law does not control contracts that are primarily for the sale of goods. Contracts for the sale of goods are controlled by the Uniform Commercial Code (UCC), a standardized collection of guidelines that govern the law of commercial transactions. Most states have adopted the UCC in whole or in part, making the UCC's provisions part of the state's codified laws pertaining to the sale of goods.
Creation of a Contract
In the eyes of the law, a contract arises when there is an offer, acceptance of that offer, and sufficient "consideration" to make the contract valid:
- An offer allows the person or business to whom the offer is made to reasonably expect that the offering party is willing to be bound by the offer on the terms proposed. The terms of an offer must be definite and certain.
- An acceptance is a clear expression of the accepting party's agreement to the terms of the offer.
- Consideration is a legal term given to the bargained-for exchange between the parties to the contract -- something of some value passing from one party to the other. Each party to the contract will gain some benefit from the agreement, and will incur some obligation in exchange for that benefit.
Types of Contracts
The law recognizes contracts that arise in a number of different ways:
A bilateral contract is the type of agreement most people think of as a traditional contract -- a mutual exchange of promises among the parties. In a bilateral contract, each party may be considered as both making a promise, and being the beneficiary of a promise.
A unilateral contract is one in which the offer requests performance rather than a promise from the person accepting the offer. A unilateral contract is formed when the requested act is complete. A classic example of a unilateral contract is a "reward" advertisement, offering payment of money in exchange for information or the return of something of value.
An express contract is formed by explicit written or spoken language, expressing the agreement and its terms.
An implied contract is formed by behavior of the parties that clearly shows an intent to enter into an agreement, even if no obvious offer and/or acceptance were clearly expressed in words or writing.
Failure to Perform Under the Contract: "Breach"
When disputes arise over contracts, one party may accuse another of failing to perform under the terms of the agreement. Under the law, a party's failure to fulfill an end of the bargain under a contract is known as "breaching" the contract. When a breach of contract happens (or when a breach is alleged), one or both of the parties may wish to have the contract "enforced" on its terms, or may try to recover for any financial harm caused by the alleged breach.
Enforcing Contracts Under the Law
If a dispute over a contract arises and informal attempts at resolution fail, the most common method used to resolve contract disputes and enforce contracts is through lawsuits and the court system. If 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" court to resolve the issue.
Courts and formal lawsuits are not the only option for people and businesses involved in contract disputes. The parties can agree to have a mediator review a contract dispute, or may agree to binding arbitration of a contract dispute.