Contract law is one of the most important aspects of business. A contract is a legally binding agreement between two or more parties, and it can be used for a variety of purposes, such as to establish terms and conditions, to assign responsibilities, or to document the exchange of goods or services. In this blog post, we will discuss the basics of contract law, including what a contract is, how it is formed, and some common issues that may arise in contractual disputes.
What Is A Contract?
A contract is a legally binding agreement between two or more parties. It can be oral or written, and it can be for a variety of purposes, such as to establish terms and conditions, to assign responsibilities, or to document the exchange of goods or services.
How Is A Contract Formed?
A contract is formed when both parties agree to the terms of the agreement what legal phylosophy calls “the meeting of the minds”. This can be done orally or in writing, but it is important to remember that a contract does not have to be in writing in order to be enforceable. In fact, most contracts are formed orally, and only become formalized later on when they are written down.
The Concept of “Meeting of The Minds”
In order to form a contract, both parties must agree to the terms of the agreement. This is known as “the meeting of the minds”, and it refers to the fact that both parties must be in agreement about what the contract entails. It is important to note that this does not mean that both parties have to agree on everything; they only need to agree on the essential terms of the agreement.
Types of Contracts
There are three types of contracts: express, implied, and constructive.
An express contract is a written or oral agreement that is expressly agreed to by both parties. It is the most formal type of contract, and it is typically used for transactions that involve a lot of money or that are considered to be high-risk.
An implied contract is an agreement that is not expressly agreed to by the parties, but rather is inferred from their actions or words. It can be oral or written, and it typically arises in situations where the parties have not specifically addressed all the terms of the agreement. For example, if you go to a restaurant and order food, you are implicitly agreeing to pay for that food.
A constructive contract is an agreement that is not expressly or implicitly agreed to by the parties, but rather is created by the law. It is typically used in situations where the parties have not had any contact with each other, or where their actions or words are ambiguous. For example, if you borrow a book from a friend and fail to return it, you are constructively agreeing to pay for that book.
Elements of a Valid Contract
Offer and Acceptance
In order to form a valid contract, there must be an offer and acceptance.
What is an Offer?
An offer is a proposal from one party to another party, and it must be clear, definite, and unequivocal. It can be oral or written, but it must be specific in terms of what is being offered and who is making the offer. The offeror (the person making the offer) is typically required to fulfill the terms of the offer if it is accepted by the offeree (the person accepting the offer).
What is an Acceptance?
An acceptance is a response from the offeree to the offeror, and it must meet all three requirements listed above for acceptance (unconditional, unqualified, and unequivocal). It must also include all of the terms of the offer, including any changes or additions that the offeree may want to make. If the offeror does not agree to all of the terms of the acceptance, then the contract will not be formed and both parties will be free to walk away.
Acceptance must also meet three requirements:
Acceptance must be unconditional, unqualified, and unequivocal. It cannot be conditional on the fulfillment of any further conditions by either party. In other words, both parties have to agree to all the terms of the agreement in order for it to be binding.
It must be communicated to the offeror. This can be done orally or in writing, but it is important to remember that silence cannot be interpreted as acceptance.
It must be timely. The offeror typically has a specific timeframe within which the offer must be accepted, and if it is not accepted within that timeframe, then the offer will expire and it will no longer be valid.
In order for a contract to be valid, it must also include consideration. This is a legal term that refers to something of value that is given by one party to another party in exchange for the other party’s agreement to do something (e.g., give them money, perform a service, etc.). Consideration can be monetary or non-monetary, but it must be something that is legally binding and capable of being enforced.
Both parties involved in a contract must have the legal capacity to enter into a contract. This means that they must be of sound mind and be able to understand the terms of the agreement. They must also have the legal authority to enter into a contract, which typically requires that they are over the age of 18 or have the consent of their legal guardian.
Intention to Create Legal Relations
In order for a contract to be valid, the parties must have the intention to create legal relations. This means that they must intend for the agreement to be legally binding and not just a mere social or business arrangement.
Legality of Purpose
The purpose of the contract must also be legal. This means that the parties cannot use a contract to perform an illegal act or to circumvent the law.
Formation of a Contract: How Are Contracts Formed?
There are four common ways in which a contract can be formed:
By Express Consent
This is where both parties expressly agree to the terms of the contract and there is no need for any further formality. It can be done orally or in writing, but it is typically recommended that it be in writing so that there is a clear record of what was agreed to.
By Implied Consent
This is where one party accepts an offer from another party without any express consent. It can happen either orally or in writing, but it is important to note that an acceptance without any objection or qualification is typically considered to be an implied consent.
By Operation of Law
This is where a contract is formed without any agreement from either party. It can happen in a number of situations, such as when one person dies and leaves property to another person, or when two companies merge.
This is where both parties enter into a contract based on a mutual misunderstanding of the terms. For example, if Party A agrees to sell Party B 100 widgets for $100 each, but they mistakenly believe that Party A agreed to sell them 1000 widgets for $100 each, then there would be a mistake in the contract. In this case, the contract would be voidable by either party.
Void and Voidable Contracts
A contract can be either void or voidable. A void contract is one that is invalid from the beginning and never actually comes into effect. A voidable contract, on the other hand, is a valid contract that can be cancelled by either party if they decide they no longer want to be bound by it. Typically, a contract becomes voidable when one of the parties involved lacks the legal capacity to enter into a contract (e.g., they are underage), or when there is some sort of fraud or misrepresentation involved.
What Makes a Contract Void?
There are a few things that can make a contract void, including the following:
- Illegal Purpose – The purpose of the contract must be legal, and if it is not, then the contract will be void.
- No Consideration – If there is no consideration given by either party, then the contract will be void.
- Duress or Undue Influence – If one party forces another party to sign a contract against their will, or if they use their position of power to get the other party to agree to terms that they wouldn’t normally agree to, then the contract will be void.
- Mistake – If both parties enter into a contract based on a mutual misunderstanding of the terms, then the contract will be void.
- Incapacity – If one of the parties involved does not have the legal capacity to enter into a contract, then the contract will be void.
- Illegal Contract – If the contract is illegal from the beginning, then it will be void.
When is a Contract Voidable?
A contract can be voidable if one of the parties involved lacks the legal capacity to enter into a contract, or when there is some sort of fraud or misrepresentation involved. Additionally, a contract can be voidable if it is not possible to perform the obligations outlined in the contract due to unforeseen circumstances.
For example, if Party A agrees to sell Party B 100 widgets for $100 each, but they are unable to deliver the widgets because they have run out of stock, then Party B would be able to terminate the contract based on impossibility.
Frustration of a Contract
If a contract is frustrated, it means that the purpose of the contract has been rendered impossible to achieve. This can happen due to a number of reasons, such as war, natural disasters, or changes in the law. When a contract is frustrated, both parties are released from their obligations under the contract.
Termination of A Contract
One of the most common issues that arises in contractual disputes is the termination of a contract.
There are a variety of reasons why a party may want to terminate a contract, such as if one party breaches the agreement, if there is a change in circumstances that makes it impossible for the contract to be fulfilled, or if one party decides they no longer want to be bound by the terms of the contract.
In order for a contract to be terminated, both parties must agree to end the agreement.
10 ways to terminate a contract
There are a number of ways to terminate a contract, and the method used will depend on the terms of the agreement. The following are some of the most common ways to end a contract:
Contracts may sometimes have termination clauses outlining conditions fulfilment of which relieves parties of contractual obligations and therefore in effect terminating the contract. These conditions in many occassions are self activating making their fulfillment an automatic termination of the contract. These conditions may include the happening of an event such as the bankruptcy of one party, the breach of a term by one party, or the completion of a particular task.
If one party fails to perform their obligations as outlined in the contract, the other party may terminate the contract. This may be done by giving notice to the non-performing party that they have breached the contract and then terminating it if the breach is not fixed.
A contract can also be terminated if an unforeseen event occurs that makes it impossible for one or more of the parties to fulfil their obligations. This is known as frustration and typically happens when a natural disaster or war prevents one of the contracting parties from performing their duties.
Both parties to a contract can agree to terminate it at any time. This can be done orally or in writing, and either party can initiate the termination.
When both parties agree to terminate the contract, it is considered a mutual agreement. This can be done in writing or orally.
Death or Incapacity:
If one party dies or becomes incapacitated, the contract will automatically terminate.
In most cases, contracts will require that notice be given before terminating the agreement. The amount of notice required will vary depending on the terms of the contract.
If one party breaches a term of the contract, the other party may choose to terminate the contract.
Rescission is a legal term that refers to the cancellation of a contract. This can be done if one party breaches the contract, or if it can be shown that the contract was based on fraudulent misrepresentation.
If a contract is illegal, it will automatically terminate. For example, contracts for the sale of illegal drugs are automatically void.
Operation of Law:
Certain events, such as the expiration of a lease or the completion of a sale, may trigger the automatic termination of a contract.
A force majeure event is an unforeseen occurrence that prevents one or both parties from performing their obligations under the contract. If a force majeure event occurs, the contract will usually terminate.
How to Review a Contract: What to Check for Before You Sign a Contract
When reviewing a contract, it is important to consider the following factors:
The parties to a contract are the people or organizations who are involved in the agreement. Each party should be clearly identified, as well as their role in the contract.
The subject matter of a contract is what it covers. This should be spelled out in detail, including the goods or services that will be exchanged, the price, and any other important terms and conditions.
Consideration is what each party gives up in order to enter into the agreement. It can be money, goods, or services.
A contract should always include an expiration date or termination clause, which specifies when it will end or how it can be terminated.
The terms of a contract are the specific conditions that must be met in order for it to be valid. These should be clearly outlined in the contract, including any important deadlines or payment terms.
Promises and Warranties:
Each party should carefully review the promises and warranties that are being made. These can be very important if a dispute arises later on.
Conditions for Breach:
It is also important to consider the conditions that would lead to a breach of contract. This can help you understand what actions could potentially lead to a legal dispute.
Finally, you should also consider the dispute resolution process. This is the procedure that will be used to resolve any disagreements that may arise between the parties. Some contracts include Arbitration, mediation and negotiation Clauses which require the parties to resolve any disputes through arbitration instead of going to court.
Applicable Law and Jurisdiction:
The law that will be used to interpret and enforce the contract should also be specified. In addition, the jurisdiction where any disputes will be resolved should be identified.
Always Insist on Having a Copy of Every Contract You Sign
It is always a good idea to have a copy of every contract you sign. This way, you can review it carefully and make sure that you understand all of the terms and conditions. If there is ever a dispute, you will have the contract to refer to.
Contract law is a complex area of the law, and there are many things to consider when reviewing or drafting a contract. However, by understanding the basics, you can protect yourself and your business. If you have any questions or need assistance with a contract, please contact us. We would be happy to help.