What is a contract?
A contract is a legally binding agreement to do something, or to refrain from doing something. Contracts may exist between individuals, businesses, organizations or governmental agencies. While many contracts are written (and it is good practice to have a written agreement), there is no requirement that every contract be in written form. Oral contacts can be perfectly binding; so can arrangements that are written in informal terms.
The key issues are always: was there an agreement (a "meeting of the minds")? What in fact was agreed upon (what are the terms of the contract)? Was there a breach of the agreement? (Did someone fail to perform?) Did the breach cause someone to lose money (i.e., did the breach cause damages)? What is the nature and extent of the damages?
What makes a contract?
First, there must be an agreement between two or more competent parties. Note the word "competent." The parties themselves must be competent to make an agreement. For example, minors (children under a certain age) are not competent to enter contracts; neither is a person who is not of sound mind. The agreement must be mutual. Both parties must agree to the same thing. One of the best reasons for writing down contacts and having them signed by the parties is that the written document tends to eliminate disputes over what was agreed to.
Usually the process of making a binding contract begins when one party makes an offer. An offer is a proposal to enter into a contract; it is not the contract by itself. An offer blossoms into a binding contract when it is accepted by the other side. It is important to remember that offers, standing alone, are not contracts. An offer may be revoked before it is accepted by the other side, and if that happens, there cannot be a binding contract because the two sides have not come to an agreement. Sometimes if an offer is made and a counter-offer is the response, it is viewed as though the original offer was rejected, and the counter-offer becomes the only viable offer on table. If the counter-offer is accepted, there is a contract. The process of bargaining back and forth continues until both sides agree on the same terms.
The second basic building block of a contract is an exchange of value, called consideration. In order to hold the other side to a promise, you must have given up something in the bargain. Often times, the consideration is money. You pay someone to do something. But it doesn't have to be money. You can give up property; refrain from taking a certain action; or perform a job or deed for the other party. One key here is that the consideration must be lawful; agreeing to perform an illegal act is not consideration and a contract based on an illegal act is void.
Does a contract have to be notarized or witnessed?
No, unless there is a special statute that imposes specific requirements for special types of contracts.
How do you accept an offer?
Acceptance of an offer can occur in several ways. There can be an express acceptance, such as when a party either says or writes words to the effect of "I accept your offer," or else it can be implied from the circumstances. An example of an implied acceptance is when a party hears a promise ("I will pay you $200 to paint my barn") and then takes action based on it. If a person goes out and paints the barn in response to the offer, he has impliedly accepted the offer by his performance.
There can also be a conditional acceptance, such as when a party offers to do something, but the party accepting the offer imposes conditions. For example, assume a person offers to wash another person's car for $10, and the car owner says, "OK, but only if you can do it within an hour." There has been a conditional acceptance.
What types of contracts have to be in writing?
The rules vary from state to state. In California, for example, contracts dealing with real estate must be in writing. Retail automobile sales agreements also must be in writing. There are many types of contracts that the legislature has required be placed in written form, and you should check with your lawyer to find out if a contract you are contemplating has to be written down.
Must every contract be negotiated? What if a contract is imposed by one side without any negotiation or agreement by the other side? Are such "adhesion" contracts, offered on a "take it or leave it" basis, binding?
An "adhesion" contract is just what the name implies: you are stuck with it. It is imposed, often by a large company, on a take it or leave it basis. If you do business with that company, you must agree to its terms. Generally, courts allow such contracts unless they are manifestly unfair, or impose unconscionable terms.
What is "performance" and how do you know it has happened?
In lay terms, performance is living up to the deal. It is doing the acts called for by the contract. If the agreement calls for a ton of strawberries to be delivered by the end of the month, in exchange for payment of a set amount within ten days after delivery, performance occurs as follows: When the strawberry supplier delivers the goods, he has performed. When the recipient pays for the strawberries, he has performed, too. Usually the parties know when performance has occurred because measurable, observable events have taken place.
When does a breach of contract occur?
A breach occurs when a party does not live up to his promise. In the previous example, if the strawberry merchant had not delivered the strawberries (or if he delivers them late), a breach has occurred.
Breaches can occur when a party does not perform, or when a party obstructs the performance of the other side.
What happens if there is a breach?
If a breach does not cause damages, the old basketball saying applies: No harm, no foul. But many breaches do cause damages. In our strawberry example, the recipient may have been required to purchase other goods, at a greater price, when the supplier did not deliver on time. If his costs went up, he has been damaged because he has not been able to earn as much profit.
What are the remedies in the event of a breach that causes damages?
The most basic remedy is a claim for compensatory damages. Usually, this amounts to a straightforward money claim. The courts usually do not order injunctive relief or specific performance in contact cases. But there are exceptions to that rule. If the contract involves unique property, the court may order the breaching party to perform. An example is a contract to deliver a valuable painting. If a party refuses to perform, the court may order him to deliver it. The rules of specific performance can be complicated, so if that is an issue, you should consult with a lawyer to get advice as to how to proceed and what remedy (or remedies to invoke).
Generally, the theory of compensatory damages is to place the injured party in the position he would have occupied had the breaching party actually performed he contract.
There are additional remedies, however and they include the following:
Liquidated Damages: sometimes a contact spells out a measure of damages in advance. Often this is done in situations where the parties agree that it would be difficult and/or expensive to calculate actual damages, so they agree in advance on a particular measure, which is called liquidated damages. As long as liquidated damages are not completely irrational, they it will probably be upheld by the courts.
Punitive Damages: these are imposed to punish wrongdoers, and usually they cannot be collected in contract cases. (Note that in many states, punitive damages cannot be collected even if there is an intentional breach of contract.)
Emotional Distress Damages: these, too, usually do not apply in contract cases (they are reserved for tort (personal injury) cases. Sometimes, however, courts do allow emotional distress damages in contract cases, especially if they are within the reasonable contemplation of the parties at the time the contract is made. The classic example is the funeral parlor that places the wrong corpse on display, or improperly embalms the right corpse. It is obvious that botching the funeral will have a great emotional impact on the bereaved relatives (especially a surviving spouse or child) and emotional distress damages can be imposed in these types of cases. But they are the exceptions rather than the rule.
Attorney's fees and costs: usually, the winning side in a case an recover its costs, but that does not usually include attorney's fees. Under the American legal system, you can generally only recover attorney's fees in two situations: (1) where there is a contractual agreement that the prevailing party can recover fees; or (2) where there is a statute that provides that the prevailing party can recover fees. There are many examples of each situation: most promissory notes and leases have "attorney's fee" clauses. Many commercial contract have them, too. As for statutes, many consumer statues contain attorney's fee provisions. As with many of these issues, it is advisable for you to consult an attorney in your locality to see if you can invoke this type of remedy.
Can I change my mind after entering in to a contract?
The answer is: it depends. Some statutes have "cooling off" periods, which means that a party who enters a contract has a limited period to back out. Sometimes this period is only 72 hours. But in many cases, once you sign the papers, you have a deal. Of course, if you back out and there is a technical breach, there still will be an issue as to whether the other side has been damaged. Check with an attorney if this issue comes up. Counsel may be able to negotiate you out of a sticky situation.
What is a release?
A release is an agreement to give up a legal claim. Sometimes releases are signed by injured parties after an accident has occurred, in order for them to receive a settlement payment from the party who caused the injury. The party paying want to "buy his peace" - he wants to pay the settlement, walk away, and know he can never be sued again for the same claim.
Releases often are signed before an injury or event takes place. The best example of this is when a person is required to sign a release in order to participate in various sporting activities. Although many releases have been suspect and voided over the years, there is a strong recent trend (especially in California) to uphold releases that are clearly worded, especially in recreational cases. By the same token, if a release is required in order to obtain medical treatment (i.e., a person is required to waive a malpractice claim in order to obtain life saving medical treatment) the release will probably be voided as violating public policy.