The Basics

At its core, a contract is made up of an offer, acceptance of the offer, and some exchange of what’s called “consideration,” such as money or property, or a promise of money or a promise to do — or not to do — something. A valid, enforceable contract can be consciously intended — a written or oral “express” contract — or it can be simply implied.

All things being equal and provable, an oral contract may be just as valid and enforceable as a written contract.

But certain contracts must be in writing. Most states have laws commonly known as “statutes of fraud,” which require a written contract for activities, such as selling land (or rights regarding land), selling goods over a certain dollar amount or for promises that can’t be fulfilled within a certain period, typically a year.

Your business contracts will likely consist of:

  • A description of the parties’ duties and obligations
  • Underlying facts or conditions vital to the deal
  • “Warranties,” or promises that the product is fit for its intended purpose (the law may imply warranties guaranteeing the product is fit for it’s general intended use, or for a specific use the seller was aware of)
  • Conditions for terminating the contract or identifying specific breaches
  • Ways to resolve disputes (for example, requiring arbitration or deciding upon a court’s jurisdiction or which state’s law should apply)
  • Remedies for breaches
  • “Merger,” which means limiting the agreement to the terms in the contract, excluding conditions, oral agreements or terms not written into the contract

The parties to the contract must have consented to the terms and be “competent,” or legally permitted to consent — for example, be an adult and not mentally disabled. Each party must have the authority to bind any organization they represent.

The contract must also be for legal purposes — for example, not for slavery or prostitution — and be “performable” in that the parties must be able to deliver on their promise. For example, a contract to buy the Brooklyn Bridge from a con man may appear valid, but, aside from being a fraud, the seller hasn’t the authority to fulfill the contract.

Types Of Contracts

Whether a contract is valid or enforceable by a court often depends on the type of personal or business relationship involved.

Some contracts are contingent upon whether the other party actually does something, as opposed to just promising to act. For example, if Sarah offers to sell Bob her car if Bob will pay Sarah $500, that is a unilateral contract. If Bob just promised to pay Sarah the $500 later, that’s a bilateral contract. The unilateral contract’s offer to sell may be withdrawn or may be unenforceable until the money is paid. The bilateral contract is enforceable as soon as the promise to pay is made.

You may find yourself being held to a contract — or wishing to enforce one — that was neither oral nor written, but simply implied. For example, suppose a vendor sends you regular shipments of paper. You regularly pay the invoice, even though you never had a contract. The vendor may be able to force the payment — at the price you’ve been paying — for its most recent regular shipment, even though you’ve decided you don’t want any more paper.

The “contract” between you and the vendor was implied, based on previous dealings. With notice, you can of course end such a contract, but beware of possible unintended consequences of your conduct.

Contracts made for the benefit of someone other than those entering into the agreement are often called “third party beneficiary contracts.” A life insurance policy, for example, provides benefits to third parties — your beneficiaries. The third parties may be able to enforce some of the terms of the contract, including filing a lawsuit.

Consumers often get stuck with “take it or leave it” contracts they have no say in — or even notice — called contracts of “adhesion.” An example might be a ticket for a show that has fine print on the back: you neither bargained for, nor consciously agreed, to the terms, nor did you see them until after you bought the ticket. The fine print terms might not be entirely enforceable, especially if they’re clearly unfair or onerous to consumers.

Getting Help

Can you write and use your own contracts to run your business without the help of a lawyer? Of course, and many people do.

Keeping in mind the elements of a contract, and minding the details of what you’re promising and precisely what you expect in return — price, quantity, quality, delivery, and so on — you should be able to draft valid agreements for simple sales or services. But if you venture into areas such as installment sales, professional services contracts, construction, property, or anything involving hefty sums of money or a high risk of liability, you’ll save yourself future headaches and losses by getting an attorney.

Ask other business owners about their attorneys or others they’ve worked with. Of course, the type of attorney you need depends on where you’re at in the contract process. Do you need a contract that you can use repeatedly? Are you negotiating a deal, renegotiating the terms of an existing agreement or heading to court over a broken contract?

It usually pays to negotiate before you litigate. Getting something is better than walking away with nothing. Going to court on a contract dispute costs time and money and may be asking for the proverbial blood from the turnip.

What’s Next?

Both parties to a contract may agree to modify it without necessarily breaking or invalidating the contract. But if the party you’ve contracted with unilaterally changes the terms of a contract, or begins acting contrary to what was agreed upon, you should immediately express your concerns. Do not passively accept the new terms or actions, or you may find yourself locked into a contract you don’t want. Your passivity could be considered acceptance of a contract.

When a contract is breached, a court may decide there is a substantial or “material” breach if it alters the core spirit or purpose of the contract. A court may ignore minor breaches, and the parties will be required to fulfill their promises.

What are the consequences when someone breaches a contract? Generally, courts will only award money “damages” to compensate for direct losses. Indirect or “consequential” losses are seldom awarded unless the parties clearly knew those losses would occur if they breached the contract.

Sometimes a court may order “specific performance,” meaning that the terms of the contract must be fulfilled. This typically occurs when money would be an inadequate remedy because the subject of the contract is considered unique — such as a house or land — or perhaps an antique.

A court may award “liquidated damages” — a sum of money agreed upon in the contract to value the loss should a breach occur. “Punitive damages,” or sums designed to punish a party for breaching a contract, are almost never awarded if the legal claim only concerns contract law. Punitive damages could, however, be awarded under different legal theories or where a specific state statute allows punitive damages.

There are generally common defenses for breaching a contract, such as competence, a mistake — usually only where both parties were mistaken about an underlying fact — fraud and misrepresentation, duress, failure to follow through on a promise, statute of frauds, or that the contract was for an illegal or immoral purpose.

How a court interprets a contract depends on the parties involved. For example, experienced businesspeople in a particular trade may use “terms of art” which are enforceable against one another, even though outsiders may not understand their meaning. Otherwise, a court will likely interpret a contract in its simplest language and with commonly accepted meanings. Also, if the terms of the contract appear clear and unambiguous as written, a court generally will not consider other outside evidence or explanations of the contract language.

Note that there are often state or federal laws which come into play, which may govern general or specific types of contracting, such as the Uniform Commercial Code, which is a set of rules that standardize the sale of most goods between businesses.