Contract

Definition

An agreement between private parties creating mutual obligations enforceable by law.  The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.  In some states, element of consideration can be satisfied by a valid substitute.  Possible remedies for breach of contract include general damagesconsequential damagesreliance damages, and specific performance.  

Overview

Contracts are promises that the law will enforce.  Contract law is generally governed by the state Common Law, and while general overall contract law is common throughout the country, some specific court interpretations of a particular element of the Contract may vary between the states. 

If a promise is breached, the law provides remedies to the harmed party, often in form of monetary damages, or in limited circumstances, in the form of specific performance of the promise made.  

Elements -- Consideration and mutal assent 

Contracts arise when a duty comes into existence, because of a promise made by one of the parties. To be legally binding as a contract, a promise must be exchanged for adequate consideration.  There are two different theories or definitions of consideration: Bargain Theory of Consideration and Benefit-Detriment theory of consideration.  1) Under the Benefit-Detriment theory, an adequate consideration exists only when a promise made to the benefit of the promisor or to the detriment of the promisee, which reasonably and fairly induces the promisor to make a promise for something else for the promisee.  For example, promises that are purely gifts are not considered enforceable because the personal satisfaction the grantor of the promise may receive from the act of generosity is normally not considered sufficient detriment to constitute adequate consideration.   
2) Under Bargain-for-Exchange theory of consideration, adequate consideration exists when a promisor makes a promise in return for something else.  Here, the essential condition is that the promisor was given something specifically to induce the promise being made.  In other words, the Bargain for Exchange theory is different from the detriment-benefit theory in that the focus in bargain for exchange theory seems to be the parties’ motive for making the promises and the parties’ subjective mutual assent, while in detriment benefit theory, the focus seems to be an objective legal detriment or benefit to the parties.         

Governing Laws                           

Contracts are mainly governed by state statutory and common (judge-made) law and private law (i.e. the private agreement). Private law principally includes the terms of the agreement between the parties who are exchanging promises. This private law may override many of the rules otherwise established by state law. Statutory law, such as the Statute of Fraud, may require some kinds of contracts be put in writing and executed with particular formalities, for the contract to be enforceable.  Otherwise, the parties may enter into a binding agreement without signing a formal written document. For example, Virginia Supreme Court has held in Lucy v. Zehmer that even an agreement made on a piece of napkin can be considered a valid contract, if the parties were both sane, and showed mutual assent and consideration.

Most of the principles of the common law of contracts are outlined in the Restatement of the Law Second, Contracts, published by the American Law Institute. The Uniform Commercial Code, whose original articles have been adopted in nearly every state, represents a body of statutory law that governs important categories of contracts. The main articles that deal with the law of contracts are Article 1 (General Provisions) and Article 2 (Sales). Sections of Article 9 (Secured Transactions) govern contracts assigning the rights to payment in security interest agreements. Contracts related to particular activities or business sectors may be highly regulated by state and/or federal law. See Law Relating To Other Topics Dealing with Particular Activities or Business Sectors.  In 1988, the United States joined the United Nations Convention on Contracts for the International Sale of Goods which now governs contracts within its scope.

Remedies for Breach of Contract -- Damages

If the agreement does not meet the legal requirements to be considered a valid contract, the “contractual agreement” will not be enforced by the law, and the breaching party will not need to indemnify the non-breaching party.  That is, the plaintiff (non-breaching party) in a contractual dispute suing the breaching party may only win Expectation Damages when they are able to show that the alleged contractual agreement actually existed and was a valid and enforceable contract.  In such case, expectation damages will be rewarded, which attempts to make the non-breaching party whole, by awarding the amount of money that the party would have made had there not been a breach in the agreement plus any reasonably foreseeable consequential damages suffered as a result of the breach.  However, it is important to note that there is no punitive damages for contractual remedies, and the non-breaching party may not be awarded more than the expectancy (monetary value of the contract, had it been fully performed). 

However, in certain circumstances, certain promises that are not considered contracts may be enforced to a limited extent.  If one party has made reasonable reliance to his detriment on the assurances/promises of the other party, the court may apply an equitable doctrine of Promissory Estoppel to award the non-breaching party a Reliance damages to compensate the party for the amount suffered as a result of the party’s reasonable reliance on the agreement.

In another circumstance, the court may award Unjust Enrichment to a party, if the party who confers a benefit on another party, if it would be unjust for the party receiving the benefit to keep it without paying for it.   

 

Finally, one modern concern that has risen in the contract law is the increasing use of a special type of contract known as "Contracts of Adhesion" or form-contracts.  This type of contract may be beneficial for some parties, because of the convenience and the ability by the strong party in a case to force the terms of the contract to a weaker party.  Examples include mortgage agreements, lease agreements, online purchase or sign-up agreements, etc.  In some cases, courts look at these adhesion contracts with a special scrutiny due to the possibility of unequal bargaining power, unfairness, and unconscionability. 

 

Last Updated May 2017, Jonathan J. Kim

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