Contracts

A contract is simply a legally binding agreement between parties to do or not do something. Consumers enter into contracts for many reasons. An agreement to buy a car or buy a home typically involves a contract. If one hires a service to maintain his or her lawn, a contract is created. There are several factors to look at to determine whether a contract has been made. Once a contract has been created, it must be determined if there are any issues concerning the contract’s validity. Finally, if there has been a breach of the contract, there is a question of whether damages have occurred.

This chapter summarizes the elements of a contract, factors that may affect the validity of a contract, and recovering damages if a contract is breached. One should always read and understand a document before agreeing to be held to its contents. Before a person enters into a contract with major implications, he or she should consult an attorney experienced in the subject matter of the contract.

Contract Components

There are three primary elements that must be present for a contract to exist: offer, acceptance, and consideration.

Offer

The first step to a contract is an offer. An offer is a written or spoken statement by a party of his or her intention to be held to a commitment upon the acceptance of the offer. There are several factors to look at to determine whether a statement constitutes an offer.

Is the person making the offer serious? A person who jokingly states that he or she will sell his or her new house for $100 is not making an offer.

Does the statement show a willingness of the party to be held to its contents? A person requesting a price quote or opening negotiations is not making an offer. Advertisements usually are considered invitations to make offers.

Does the statement contain definite terms regarding subject matter? Is the subject matter identified, are parties identified, is the price set, are quantities determined, and is time for performance stated? There should be enough information contained in the statement that, if needed, a court would be able to enforce the contract or determine the damages.

Acceptance

The second requirement for a contract is acceptance of the offer. In order for an acceptance of an offer to be valid, the acceptance must be made while the offer is still open. In some situations, the person making the offer gives a definite time frame (I will sell you my car for $200 but you must decide whether to buy it within two days). Other ways an offer may end include: the person making the offer withdraws the offer, the person who receives the offer rejects it, reasonable time passes after the offer is made, or the subject matter of the offer is destroyed before acceptance.

If a person changes the conditions of the offer in responding, the offer is rejected and a counteroffer is made (I will buy your car, but I will pay only $150 for it). In this scenario, the person who made the original offer responds to the new offer by accepting or rejecting it, or proposing yet another offer.

There are two ways a person can accept an offer: by promising to do or not do something, or by performing the desired act. In the first type, one person offers a car for $150, and a second person promises to pay the $150 for the car. This is a bilateral contract. In the second type, a homeowner offers a neighbor $10 to cut his or her grass and the neighbor cuts the grass; the neighbor accepts the offer by performing the act requested. This is a unilateral contract.

Consideration

Consideration is a legal concept that means something of value given in exchange for a performance or a promise to perform. Consideration can be a promise to do something there is no legal obligation to do, or a promise to not do something there is a legal right to do. Promises to exchange money, goods, or services are forms of consideration. All parties in an agreement must give consideration in order to create a contract; it is consideration that distinguishes contracts from gifts. Courts typically do not question the adequacy of consideration unless there is evidence of some type of wrongdoing by the party benefiting most from the contract.

Defenses to Contract

Once it is determined that there is a contract, it must be determined whether there are any defenses that call into question the validity of the contract. There are some defenses that make the contract unenforceable (void) and other defenses that give the parties the option to enforce the contract or not (voidable).

Legality of the Contract

Although two persons may exchange an offer, acceptance, and consideration, if the subject matter of the contract is illegal, a valid, enforceable contract does not exist. For example, if a person offers to pay another person money for illegal drugs, this is a void contract.

Capacity of the Parties

In order to be bound to a contract, the parties must be competent to enter into such a legal arrangement. Underage persons, persons who are mentally ill, and intoxicated persons usually are not held to the contracts they enter. However, a minor may have the option of enforcing a contract.

Mistake, Duress, and Fraud

A mistake by both parties to a contract on an important issue makes the contract unenforceable. However, a mistake by only one party does not necessarily make the contract void.

Duress is the use of force or pressure by one party to make the other party agree to the contract. The force does not have to be physical–one could be put under mental duress. The use of duress makes the contract voidable by the party under duress.

Fraud is the intentional misrepresentation of an important issue of the contract. The presence of fraud in a contractual proceeding makes the contract voidable by the party upon whom the fraud was perpetrated.

Unconscionability

A contract may be unenforceable if it is found by a court to be flagrantly unfair. This defense is usually found in consumer cases in which a person buys an item under terms so grossly unfair to the customer that the court refuses to enforce the contract.

Statute of Frauds

Contracts, in many instances, do not have to be in writing to be legally binding. However, a law known as the statute of frauds requires that some contracts must be written to be valid. In Texas, contracts involving the sale of real estate; loan agreements involving more than $50,000; contracts for commissions from certain oil, gas or mineral sales; contracts that cannot be performed within one year; contracts to pay off someone else’s debts; leases for more than one year; certain medical care contracts; and contracts concerning a marriage or nonmarital cohabitation must be in writing and signed by the person making the argreement.

Parol Evidence Rule

Although it is not a defense to a contract, the parol evidence rule may affect the contents of a contract and how a contract is enforced. The parol evidence rule applies once parties have come to a final, written contract. Once there is a final, written contract between the parties, the parol evidence rule forbids the introduction in a court proceeding of any previous agreements between the parties on the subject matter of the contract. The parol evidence rule generally permits the judge or jury in a contract dispute to look only at the written contract and not at any previous discussions between the parties. The impact of the parol evidence rule is that all factors that are important to the contract and have been decided by the parties should be stated in the final, written contract. The parol evidence rule does not forbid the introduction of subsequent agreements between the parties.

Contract Termination

Once there is a valid contract between parties, it can end in several ways. A contract may have a limited time span and finish at the end of the stated time. If a person is hired to work for two weeks, the contract concludes at the end of two weeks. In many instances in which there is a specific time frame stated in the contract, parties to the contract have the option to extend the contract for a longer period of time. Contracts also may be project, not time, specific. Goods or services may be contracted for a project and upon the completion of the project, the contract for the goods or services ends. Parties to a contract may mutually agree to rescind the contract. In that case, the parties may agree on the duties and responsibilities of each party after the rescission.

A contract also may end because of a breach. A breach occurs when a person does not fulfill his or her responsibilities as promised in the contract. A breach may be minor or major. A minor breach is one that affects small, minor details of the agreement and usually does not affect the outcome of the contract. A major breach is one that does affect the subject matter of the contract and usually affects the outcome of the contract. This also is known as a breach of a material issue. When there has been a breach in a contract, the question of damages is raised.

Damages

The damages due to a party when there is a contract breach depend on many factors, including which party breaches, what damages were incurred, what the contract states with regard to damages, whether the breach was material, and the subject matter of the contract. When a person is damaged by a contract breach, courts usually award only foreseeable damages. Foreseeable damages are those damages that the parties anticipate or should anticipate at the time the contract is formed.

Money Damages

In most cases in which an injury results from a contract breach, the injured party receives money damages. The court places the person in the position he or she would have been in if the contract had been performed. For example, suppose a homeowner contracts with a person to paint a house, but the painter stops in the middle of the job and refuses to finish painting. If the homeowner finds another painter to finish the job at an additional cost of $150, the damages are $150.

Although one is entitled to the money difference between what was promised and what it costs to complete the promise, the injured party must mitigate the damages. Mitigation means the injured party takes reasonable steps to limit the extent of the injury and finish the job. In the previous example, the homeowner could not hire a famous painter from Italy to finish painting the house and expect the first painter to pay for the extra expense of plane fare and room and board.

Specific Performance

There are some situations in which money damages are inadequate. Typically, in a contract involving the sale of land, awarding money damages for a breach does not put the nonbreaching party in the same position he or she would have been in if the contract had been fulfilled. Because real estate is unique, one cannot simply go out and buy property that is the same as originally contracted. In a case such as this, the court may order the breaching party to perform the duties set forth in the contract. This is called specific performance. Courts only order specific performance in the rare case in which the subject matter of the contract is unique, and it is difficult to put a monetary amount on the damage incurred as a result of the breach. Specific performance is not awarded in personal service contracts. In the previous example, the court would not order the original painter to complete the job.

Liquidated Damages

In an attempt to set a monetary damage amount in a case in which it may be difficult to do so, the parties may include a contractual provision that specifies the amount of damages in event of a breach. Such predetermined damages are called liquidated damages. An example is when a person puts down earnest money for a house and later changes his or her mind. In a real estate contract with a liquidated damages provision, the buyer may forfeit the earnest money to the seller as a damage award.

Rescission

In most contract disputes, a court puts the nonbreaching party in the position he or she would have been in if the contract had not been breached. However, there are times when the court may place the party in the position he or she was in before the contract was executed. In cases in which there was a mutual mistake on the subject matter of the contract, the parties may be returned to their positions before the contract. If the parties have exchanged goods or money, these items are returned. This remedy also may be selected in cases in which one party intentionally misrepresents a material fact.