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
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
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
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
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 manufactured. 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
losses stemming from the breach). Damages are measured by what may reasonably
be foreseen as financial losses; unforeseeable losses may not be collected. If
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
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.