Contracts Essay, Research Paper


A contract is an agreement that is enforceable by law. Modern business could not

exist without such contracts. Most business transactions involve commitments to

furnish goods, services, or real property; these commitments are usually in the

form of contracts.

Use of the contract in business affairs ensures, to some extent, the performance

of an agreement, for a party that breaks a contract may be sued in court for the

damages caused by the breach. Sometimes, however, a party that breaks a contract

may be persuaded to make an out-of-court settlement, thus saving the expense of

legal proceedings.

A contract arises when an offer to make a contract is accepted. An offer

contains a promise (for example, “I will pay $1,000″) and a request for

something in return (a person’s car). The acceptance consists of an assent by

the party to whom the offer is made, showing that the person agrees to the terms

offered. The offer may be terminated in a number of ways. For example, the party

making the offer may cancel it (a revocation), or the party to whom the offer is

made may reject it. When the party to whom the offer is made responds with a

different offer, called a counteroffer, the original offer is terminated. Then

the counteroffer may be accepted by the party making the original offer.


For a contract to be valid, both parties must give their assent. They must act

in such a way that the other people involved believe their intention is to make

a contract. Thus a person who is clearly not sincere in saying that he or she

accepts an offer usually is not held to a contract by the courts. On the other

hand, a person who secretly has no intention of making a contract but who acts

in a manner that leads people to believe he or she had, may be held to a

contract. Legally, it is the external appearance that determines whether one is

held to a contract.


A contract results from a bargain. This implies that each party to the contract

gives up something, or promises to, in exchange for something given up or

promised by the other party. This is called consideration. In the example given

above, the consideration on one side is the promise to pay $1,000, and on the

other, the promise to deliver a car. With rare exceptions, a promise by one

party, without some form of consideration being extended by the other party,

does not result in a contract or other enforceable obligation, regardless of the

sincerity of the promise. Although each party must extend consideration to the

other in order to form a contract, the value of the consideration need not be

equal. Determining how good a bargain is becomes the responsibility of the

parties involved. Otherwise, the courts would be in the impossible position of

having to appraise the relative value of millions of promises made every year.


For a contract to be enforceable it must be between competent parties. A

contract with a person who has been adjudicated insane is likely to be declared

void. A contract involving a minor–in most states of the United States a minor

is now a person under 18–may be enforced or voided by the minor, unless the

contract is for necessities such as food, lodging, or medical services, in which

case he or she may be held responsible for the reasonable value of what was

purchased. Persons suffering from a disability such as intoxication from drugs

or liquor, or insane persons not adjudicated insane, usually may void a contract

if the other party knows or should have known of the disability and if the

consideration received is returnable.


The last requirement of a valid contract is that its provisions be legal. If a

purported contract requires an illegal act, the result is a void contract.

Parties to an illegal contract have no standing in court. If one party receives

money or property under an illegal contract, the other may not sue to recover

what was paid under the contract. Not only are contracts requiring criminal acts

illegal, so are contracts requiring commission of a TORT (a breach of civil law

such as misrepresentation or trespass) or those in breach of public policy.

Although public policy is difficult to define, it includes some serious breaches

of conventional morality or ethics.

It is commonly assumed that an enforceable contract must be in writing. This is

usually untrue. Most oral contracts are enforceable, but written contracts are

easier to prove.

Some types of contracts must be in writing, for example, contracts for the

purchase or sale of any interest in real property, contracts to pay debts of

others, and contracts that require more than a year to perform. Contracts for

the sale of personal property–that is, movable property–as distinguished from

land, at a price above a specified sum set by law must be in writing unless

payment or delivery has been made or unless the goods were specially


Although only a few types of contract must be in writing, the terms of a written

contract ordinarily may not be contradicted in court by oral testimony.


In the event of a breach of contract, the injured party usually sues for money

damages (the award of a sum of money designed to compensate for losses stemming

from the breach). Damages are measured by what may reasonably be foreseen as

financial losses; unforeseeable losses may not be collected. If an award of

money is not compensatory because something about the promised performance was

unique, the party who breaks a contract may be ordered by the court to perform

as agreed. This is called specific performance. For example, real estate is

always considered unique. Therefore, when a party has contracted to sell real

estate but changes his or her mind, the court may grant specific performance and

order that the deed for the real estate be delivered to the agreed buyer.

Most contracts are formed with an implicit understanding that neither party need

perform unless the other has completed his or her promised performance. An

exception to this understanding occurs when a party has performed most of his or

her obligation and the part not performed is relatively immaterial. The doctrine

of substantial performance provides that in such a case, the opposite party must

perform, although he or she may secure money damages to the extent that he or

she was damaged by lack of complete performance.

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