Contract Basics

Contract Law Basics

What’s a Contract?

A contract (or Agreement, it’s the same thing) is a voluntary promise between two or more people to do something (or not to do something). Most types of contracts don’t have to be in writing (a purchase in a retail store, for instance) although it’s obviously tough to prove the existence of a contract otherwise.

All parties to the contract must be over 18 and mentally competent, and the mutual promises must be supported by the exchange of something of value, or what lawyers call consideration (good manners). Also, the purpose of the contract cannot be illegal: for instance, a contract for the sale of cocaine would not be enforceable, except in Hollywood.

A contract that meets these requirements will be enforced by the law, unless one of the parties is a professional athlete.

What if I’m drunk?

A common question. The courts usually will enforce the contract unless you were so obviously intoxicated that the other party must have known about your impaired state. Also, if you can show a medical history of alcohol abuse (preferably with blackouts and episodes of placing multiple orders for products advertised on the Home Shopping Network), the courts may void the contract.

What kind of contracts must be in writing?

This varies from state to state. In general, they include: contracts for the sale or lease of land; promises to be responsible for someone else’s debts; contracts for the sale of goods worth more than $500 and for the sale of stocks and bonds; contracts to bequeath property in a will; and promises to marry. Your mileage may vary.

Nevertheless, it’s a good idea to put all contracts in writing so that it is easier to prove their existence. Even an order form or receipt in a retail transaction can serve this purpose.

Do I need a lawyer to make a contract?

Not if you meet the maturity and mental health requirements set forth above. So you probably need one.

In the business world, it is often customary to use a pre-contract document called a “Letter of Intent.” A Letter of Intent simply puts the offer into words, but gives the offeror a chance to back out. The following language should be used:

“This letter is not intended to be a binding contract, and until the contract is executed, neither party will be bound.”

“Executed,” by the way is legal shorthand for “signed.” Makes you wonder.

Okay, what about a newspaper advertisement or web banner? Is that an offer?

Yes and no. The courts have ruled that an advertisement is really a semi-offer: only an expression of intent to sell. But if Battlin’ Bert Blyleven, the Tire King, promises a set of recap snow tires to the first ten customers through the door on Saturday morning, that is an offer with respect to the snow tires, and it can be accepted by spending the night camped out in Bert’s parking lot.

What’s an option?

An irrevocable offer for which the offeree provides consideration. (Well, you asked). For instance, you might want to tie up some real estate until you can figure out whether you can afford it. If the Seller was willing, you could pay him $500 to give you the option to purchase the property at a specified price for a specified period of time. If you decide not to buy the property (perhaps because it didn’t meet your specifications) you would lose your $500.

How do I accept an offer?

Say yes. Actually, every term of the offer must be accepted, or your acceptance of some terms and modification of others constitutes a counter-offer. And that makes you the offeror, and the original offeror becomes the offeree, and so on and so on…

Is there a minimum amount of consideration, or payment, necessary to make a contract valid?

No. In fact, consideration doesn’t even have to be money. It can be any promise or act that induces the other party to enter into the contract. Lawyers, however, being conservative creatures, often put the following clause into contracts which otherwise would have no financial terms:

“The [one of the parties] hereto, in consideration of Ten and 00/100 Dollars in hand paid by [the other party], receipt of which is hereby acknowledged, agrees as follows…”

The theory behind this is that it will prevent the contract from being held invalid for “failure of consideration.” This is unnecessary, but lawyers do it anyway.

Keep in mind that both parties must provide consideration: mutuality is very much part of the contract ritual. Each side has to give up something — money, or a promise to do something they wouldn’t otherwise do and which they are not already obligated to do. Otherwise, the contract is invalid.

What’s an agent?

If you authorize someone to negotiate a contract on your behalf, that person is an agent. A literary agent is one example, but agency law (principal/agent relationships) occur in everyday life. The clothing salesperson who sold you the silk teddy with the zippered crotch didn’t really own it, but had authority from the owner to sell it to you, even though your wife will fling it back into your face because what she really wants is intimacy.

Anyway, the law refers to the owner of the clothing store as the principal. As long as the agent doesn’t exceed the authority of the principal (the conditions set by the owner as to price and other terms), the agent can bind the principal to a contract.

Can I make a contract to do something illegal?

You can make such a contract, but the courts will not enforce it: it’s void. For example, if you make a contract with a biker gang to kidnap Rush Limbaugh and transport him, bound with telephone cord to his ego, across state lines to the Bronx, where he will be left on the street, naked and smeared with peanut butter and crack cocaine, I would shake your hand.

What if the contract isn’t illegal, but is immoral?

It’s enforceable. However, in rare cases a legal contract might not be enforced because it is against public policy.

Okay, I understand that an illegal contract can’t be enforced. But what if someone forces me to sign a legal contract? Or tricks me into signing?

You’ve stumbled into a fertile area of litigation: In addition to the reasons mentioned above, such as lack of consideration and being underage or incompetent, you can get out of a contract by using the following defenses:

• duress (the other guy was holding a gun to your head)
• economic duress (the other guy was holding money to your head)
• fraud (the other guy didn’t give you all the facts, or lied to you)
• undue influence (The other guy is your father)
• mistake (you made a mistake regarding a material part of the contract — but only if the other guy knew about your mistake and deliberately didn’t correct it. This defense is not available in all states)
• unconscionability (the contract is so one-sided as to “shock the conscience of the court.” )
• Impossibility of performance (It just can’t be done)

Each of these defenses to a contract may make the contract either void or voidable.

The Difference Between Void and Voidable

This has nothing to do with urinary retention. If a contract is void, it will not be enforced by a court even if all the parties agree that it should be enforced. If a contract is voidable, it means that one of the parties has the right to make the contract void, but doesn’t have to. For example, if you are tricked into signing a contract, the contract is still valid until you declare it to be void. This distinction can be very important to “third parties” (other people) who may rely on the contract.