CONTRACTING ISSUES

Legal Contract

A contract is a legally enforceable agreement between two or more parties. It may be oral or
written. A contract is essentially a set of promises. Typically, each party promises to do
something for the other in exchange for a benefit.

Required Characteristics

To constitute a legal contract, an agreement must have all of the following five characteristics:

 Legal purpose. A contract must have a legal purpose to be enforceable.

 Mutual Agreement. All parties to the contract must have reached a "meeting of the
minds." That is, one party must have extended an offer to which the other parties have
agreed.
 Consideration. Each party to the contract must agree to give up something of value in
exchange for a benefit.
 Competent Parties. The parties to a contract must be competent. That is, they must be of
sound mind, of legal age, and unencumbered by drugs or alcohol. If you enter into a
contract with a minor or an insane person, the contract will not be enforced.
 Genuine Assent. All parties must engage in the agreement freely. A contract may not be
enforced if mistakes have been made by one or more parties. Likewise, a contract may be
voided if one party has committed fraud or exerted undue influence over another. If
agreement was made under duress, the contract is not valid.
So long as the contract meets the requirements above, it is enforceable in a court of law
which means that a court can compel non-compliant party to abide by the terms of the
contract.
Generally, a contract does not need to be in writing and in many cases an oral agreement
with all of the elements listed above will constitute a valid and enforceable contract.
Some situations however require that a contract be in writing to be enforceable.
Oral v. Written Contract

Contracts made only by spoken agreement may be legally enforceable. However, it is best to
memorialize them in writing, especially if a legal remedy becomes necessary, so that there will
be proof in court. Also, there are certain types of contracts that must be in writing in order to be
enforceable:

 Contracts involving the sale or transfer of land

 Promises to pay someone’s debt obligations
 Contracts that cannot be completed within one year of its making
 Contracts involving the sale of goods for more than $500
 Contracts that will go beyond the lifetime of the one performing the contract

Bilateral or Unilateral Contracts

Most contracts are bilateral. This means that each party has made a promise to the other.

A bilateral contract is an agreement in which each of the parties to the contract makes a promise
or set of promises to each other.
For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000
in exchange for the seller's promise to deliver title to the property. These common contracts take
place in the daily flow of commerce transactions, and in cases with sophisticated or
expensive precedent requirements, which are requirements that must be met for the contract to be
fulfilled.

In a unilateral contract, one party makes a promise in exchange for an act by the other
party. Insurance policies are unilateral contracts. When you buy liability insurance or any other
type of policy, you pay a premium (an act) in exchange for the insurer's promise to pay future
claims.

In unilateral contracts one party makes a promise, but the other side does not promise anything.
In these cases, those accepting the offer are not required to communicate their acceptance to the
offeror.
In certain circumstances, an implied contract may be created. A contract is implied in fact if the
circumstances imply that parties have reached an agreement even though they have not done so
expressly.

Invitation to treat
Where something is advertised in a newspaper or on a poster, this will not normally constitute an
offer but will instead be an invitation to treat, an indication that one or both parties are prepared
to negotiate a deal.

Electronic contracts
Entry into contracts online has become common. Many jurisdictions have passed e-signature
laws that have made the electronic contract and signature as legally valid as a paper contract.

The Contract as a Document

The term "contract" often refers to a written agreement, typically including some or all of the
following elements:

 introductory material (sometimes known as "recitals" or "whereas provisions")

 definitions of key terms
 a statement of the purpose or purposes of the agreement
 the obligations of each party (and conditions that may trigger obligations)
 assurances as to various aspects of agreement (sometimes phrased as warranties,
representations, or covenants)
 boilerplate provisions
 a signature block
 Exhibits or attachments.

The Contract as a Process

"Contract" is a noun, but it can be used as a verb, too. When you contract with somebody, you
participate in a process that typically involves three phases.
  Phase 1: Contemplating the deal. The parties each assess the prospective arrangement
and its risks ("Can I trust her?") and attempt to predict the future ("Will I regret paying
this price for the computer next month? Will it be outdated?").
 Phase 2: Reaching an agreement. During this phase the parties negotiate and agree on the
terms, usually formalized in a written contract or some other documented evidence of the
arrangement (such as a receipt or purchase order, for example).
 Phase 3: Performance and enforcement. Once the contract is in place, the parties are
legally required to perform their mutual obligations. If one party fails to perform, the
other can sue to enforce the deal.

Agreement vs. Contract

An agreement is any understanding or arrangement reached between two or more parties.

A contract is a specific type of agreement that, by its terms and elements, is legally binding
and enforceable in a court of law.

Comparison chart

Agreement versus Contract comparison chart

Agreement Contract

Definition An arrangement (usually informal) A formal arrangement between two or more

between two or more parties that is party that, by its terms and elements, is
not enforceable by law. enforceable by law.
Validity Mutual acceptance by both (or all) Mutual acceptance by both (or all) parties
based on parties involved. involved.
Does it need No. No, except for some specific kinds of
to be in contracts, such as those involving land or
writing? which cannot be completed within one year.
Consideration No Yes
 required
Legal effect An agreement that lacks any of the A contract is legally binding and its terms
required elements of a contract has may be enforceable in a court of law.
no legal effect.

Benefits

The primary benefit of an agreement that does not meet the criteria of a contract is that it is
inherently informal. Where the agreeing parties have a longstanding relationship and share
a considerable degree of trust, the use of a non-contract agreement can save time and allow
for more flexibility in the fulfillment of the agreed-upon obligations.
Agreements lacking all the required elements of a contract may also be more viable in
situations where the drafting of a contract would prove prohibitively burdensome on the
parties involved.
The main advantage of contracts is that they spell out the specific terms that the contracting
parties have agreed upon, and in the event of a breach – where one or more parties fail to
fulfill their obligations – serve as a guide for a court of law to determine the proper remedy
for the injured party or parties. Even where parties have a good relationship and trust one
another, the use of a contract provides an extra layer of assurance that the obligations
entered into under the contract will be fulfilled as the parties themselves intended. Contracts
are generally advisable over less stringent agreements in any official business or commercial
matter due to the added protection they provide.

BREACH OF CONTRACT

If one party fails to fulfill his or her duties under the agreement, that party has breached the
contract.
Breach of contract is a legal cause of action and a type of civil wrong, in which a binding
agreement or bargained-for exchange is not honored by one or more of the parties to the contract
by non-performance or interference with the other party's performance.
Breach occurs when a party to a contract fails to fulfill its obligation as described in the contract,
or communicates an intent to fail the obligation or otherwise appears not to be able to perform its
obligation under the contract.
If one party breaches a contract, the other party may suffer a financial loss. The resulting
damages will have to be paid by the party breaching the contract to the aggrieved party.

What Should You Do in the Event of a Breach

If there has been a breach of contract, your first step is to look at the contract to see if there are
instructions as to what you should do in the event of a breach.
Many contracts will talk about mandatory arbitration or about a liquidated damages clause that
goes into effect. It’s important to thoroughly read the contract before you make any quick
decisions.
Your second step should be to let the other party know that a breach has occurred. If you are
committed the breach but do not want to tell them, then you can face more serious consequences
if you attempt to hide the breach.
If the other party breached, then it’s important to tell them that you are aware of a breach and ask
them if they can verify it. While a breach of contract can be stressful, giving the other party an
opportunity to remedy the breach can strengthen your case if you go to court.
The third step is to discuss the situation either with the other party or a lawyer. If you feel that
the breach will require you to go to court, then contact your lawyer right away and let them know
of the situation.
Be sure to hold onto any documents related to the contract and keep careful record of every
incident that occurred from the contract. This will make it easier for you to argue the merits of
your argument and be compensated for the breach.

Four Types of Contract Breaches

There are four types of contract breaches: anticipatory, actual, minor and material.

Anticipatory breach vs. actual breach

  An actual breach occurs when one person refuses to fulfill his or her side of the bargain
on the due date or performs incompletely.
 Anticipatory breach occurs when one party announces, in advance of the due date for
performance, that he intends not to fulfill his side of the bargain.
Both actual and anticipatory contract breaches are bad news for the individuals and organizations
at hand. They can waste both money and time, and certainly lead to frustration for everyone
involved. A breach of contract, no matter what form it may take, entitles the innocent party to
maintain an action for damages.

Minor breach vs. material breach

 A breach is likely material if one party ends up with something significantly different
than what was specified in the contract.
For example, if you contact with a web designer to build a new site for home cafe, but
end up with a blog about bagels that doesn't even mention your place, the breach is
probably material. In most cases, a material breach means the non-breaching party is no
longer required to perform his or her end of the deal and has a right to remedies.
 A minor breach, sometimes called a partial breach. In many cases, a minor breach means
that one party failed to perform some part of the contract even through the specified item
or service was ultimately delivered.
Consider the cafe website contract. If the finished product met all the client's demands
but was completed a day after it was requested, the breach might be considered minor.
Unless the initial contract terms specifically mentioned that 'time is of the essence' or that
the website was under a tight deadline, a reasonable delay from the web designer would
only be considered a minor breach.

 Fundamental Breach: This occurs when one party violates the contract terms so
egregiously that the other party may terminate the contract (as well as seek damages).

Requirements of a breach of contract

 1. The contract must be valid. It must contain all essential contract elements by law. A
contract isn't valid unless all these essential elements are present, so without them, there
can be no lawsuit.
2. The plaintiff or the party who's suing for breach of contract must show that the defendant
did indeed breach the agreement's terms.
The plaintiff must have done everything required of him in the contract.
The plaintiff must have notified the defendant of the breach before proceeding with filing a
lawsuit. A notification made in writing is better than a verbal notification because it offers more
substantial proof.

Types of remedies for broken contracts

You have several options for obtaining compensation.

1. Sue for Damages. You may sue the contractor for damages.
There are many kinds of damages, including the following:
 Compensatory damages aim to put the non-breaching party in the position that they had
been if the breach had not occurred.
 Punitive damages are payments that the breaching party must make, above and beyond
the point that would fully compensate the non-breaching party. Punitive damages are
meant to punish a wrongful party for particularly wrongful acts, and are rarely awarded in
the business contracts setting.
 Nominal damages are token damages awarded when a breach occurred, but no actual
money loss to the non-breaching party was proven.
 Liquidated damages are specific damages that were previously identified by the parties in
the contract itself, in the event that the contract is breached. Liquidated damages should
be a reasonable estimate of actual damages that might result from a breach.

2. Specific Performance. You can compel the contractor to complete the work required by
the contract.
 If damages are inadequate as a legal remedy, the non-breaching party may seek an
alternative remedy called specific performance.

Specific performance is best described as the breaching party's court-ordered

performance of duty under the contract.
Specific performance may be used as a remedy for breach of contract if the subject matter
of the agreement is rare or unique, and damages would not suffice to place the non-
breaching party in as good a position as they would have been had the breach not
occurred.

3. Other Remedies. If the contractor tricked or forced you into signing the contract, you
might convince a court to terminate the agreement or amend its terms.

Cancellation and Restitution

A non-breaching party may cancel the contract and sue for restitution if the non-
breaching party has given a benefit to the breaching party.
"Restitution" as a contract remedy means that the non-breaching party is put back in the
position it was in prior to the breach, while "cancellation" of the contract voids the
contract and relieves all parties of any obligation under the agreement.

Defenses to a Breach of Contract Lawsuit

As in all lawsuits, the defendant—the party being sued—has a legal right to offer a reason why
the alleged breach is not really a breach of contract or why the breach should be excused. In legal
terms, this is called a defense. Common defenses against a breach of contract include:
 Fraud
This means “knowing misrepresentation of the truth or concealment of a material fact to
induce another to act to his or her detriment”. When a defendant presents this defense,
he's saying that the contract isn't valid because the plaintiff failed to disclose something
important or because he made a false statement about a material or important fact. The
defendant must establish that the fraud was deliberate.
  Duress
This occurs when one person compels another to sign a contract through physical force or
other threats. This, too, can invalidate a contract because both parties did not sign of their
own free will, which is a standard contractual prerequisite.
 Undue influence
This is similar to duress. It means that one party had a power advantage over the other
and that he used that advantage to force the other to sign the contract.
 Mistake
An error committed by the defendant can't invalidate a contract and take away a breach
of contract case, but if the defendant can prove that both parties made a mistake about the
subject matter, it might be enough to invalidate the contract and this would serve as a
defense.
 Statute of Limitations
Many types of cases have time limits imposed by law, deadlines by which a case must be
brought and filed. A breach of contract case can be thrown out of court if the defendant
can show that the statute of limitations has expired. Statutes of limitations cases are based
on time frames that are set by individual state law so they can vary. They average from
three to six years for a written contract.

If You Think Your Contract Has Been Breached

See an attorney if you think that the party you've entered into a contract with has breached it in
some way. Law is intricate and small details of your case—things that you don't think are related
or are a particularly big deal—can make a significant difference.
Only a lawyer will be able to tell you if you have a strong case before you spend time and money
launching into a lawsuit on your own—one that you could lose because of misunderstanding or
an error.
And, of course, if you're accused of breaching a contract, you'll want legal help to sort out the
details of your case and to help you establish a defense.