Essential Contractual Issues
Overview
"Contract" may be the most familiar legal concept in our society because it is so central to the essence of our political, economic, and social life. In common parlance, "contract" tends to be used interchangeably with agreement, bargain, undertaking, or deal. Whatever the word, the concept it embodies is our notion of freedom to pursue our own lives together with others. So commonplace is the concept of contract—and our freedom to make contracts with each other—that it is difficult to imagine a time when contracts were rare, when people’s everyday associations with one another were not freely determined.
📜 The freedom to contract is one of the few individual freedoms identified in the U.S. Constitution proper (i.e., not in an Amendment):
No State shall ... pass any ... Law impairing the Obligation of Contracts ....
Modern capitalism, indeed, would not be possible without contract law, and contract law may be viewed economically as well as culturally. In An Economic Analysis of Law, Judge Richard A. Posner (a former University of Chicago law professor) suggests that contract law performs three significant economic functions:
It helps maintain incentives for individuals to exchange goods and services efficiently.
It reduces the costs of economic transactions because its very existence means that the parties need not go to the trouble of negotiating a variety of rules and terms already spelled out.
It alerts the parties to troubles that have arisen in the past, thus making it easier to plan the transactions more intelligently and avoid potential pitfalls.
The Definition of Contract
Although businesses tend to use the terms “agreement” and “contract” interchangeably, as noted above, the terms have very different legal meanings. An agreement is a mutual understanding between two or more parties about their rights and duties toward each other, which involves the combination of an offer and an acceptance of the offer.
📌 For contract purposes, an agreement must demonstrate a "meeting of the minds," which refers to all parties mutually assenting to the terms, conditions, and subject matter.
On the other hand, as a practical matter, a contract is a promise that is legally enforceable in court. More specifically, the legal definition of a contract is "a promise or a set of promises for [1] the breach of which the law gives a remedy, or [2] the performance of which the law in some way recognizes as a duty." Accordingly, it is correct to infer that not all promises are enforceable. The law takes into account the way in which contracts are made, by whom they are made, and for what purposes they are made.
📝 All contracts are agreements, but not all agreements are contracts.
When contracts are breached the injured party can seek damages. In contracts, the concept of damages usually refers to an amount that would make that party whole again.
Generally speaking, contracts are a form of private law, because the terms of the contract are binding on the parties to the contract and no one else. Parties may enter into contracts for whatever they wish and under any terms that they agree on. In other words, parties may assent to agreements even if those agreements represent a "bad" bargain for one or more parties.
Contracts may restrict parties’ future activity. For example, a non-compete clause in an employment contract may be enforceable in the future against an employee after termination of employment.
However, contracts that are illegal or against public policy are not enforceable.
Contract law performs three significant economic functions:
It helps individuals and businesses exchange goods and services efficiently.
It reduces the costs of economic transactions because parties do not need to negotiate a variety of rules and terms with each separate transaction.
It alerts the parties to problems that have arisen in the past, making it easier to avoid potential pitfalls.
Essential Issues in a Contractual Relationship
Although contract law has many wrinkles and nuances, there are a few essential issues that arise:
Did the parties create a valid contract?
There are a number of basic requirements necessary for a contract to be valid, including:
Assent: (1) mutual assent (an agreement, which is the combination of an offer and acceptance) and (2) real assent (i.e., the assent was freely voluntary/consensual and did not arise out of duress, undue influence, misrepresentation, mistake, or incapacity). (Also, even if both mutual and real assent exist, the contract also must be "legal"; and
Is the contract in the proper form to carry out this meaning?
Sometimes contracts need to be in writing (or evidenced by some writing), or they can’t be enforced. Sometimes it isn’t clear what the contract means, and a court has to figure that out.
Do persons other than the contracting parties have rights or duties under the contract?
Can the right to receive a benefit from the contract be assigned, and can the duties be delegated so that a new person is responsible?
Can someone not a party to the contract sue to enforce its terms?
How do contractual duties terminate?
What remedies are available if a party has breached the contract?
Together, the answers to these questions determine the rights and obligations of contracting parties.
Law in Practice
We live in a world of contracts, which are the bread and butter of business transactions. However, many consumers, employees, and small businesses are afraid to read and understand contracts. That fear allows others to take advantage of them. Take the time to read contracts provided to you. Ask questions about anything you don’t understand before you sign. Have the courage to revise and edit contracts to ensure your interests are protected. Or even write your own. It’s not hard and the more you do it, the more confidence you will have to negotiate business transactions and protect your interests.
~ Darnell T., attorney
Attributions and Licensing
Except where otherwise noted, this page's content is adapted from:
Contracts in Fundamentals of Business Law by Melissa Randall (2020), used under CC BY-NC-SA 4.0.
General Perspectives on Contracts in The Legal Environment and Foundations of Business Law by Mayer, D., Warner, D. M., Siedel, G. J., Lieberman, J. K., & Martina, A. R., used under CC BY-NC-SA 4.0.
This page is licensed under CC BY-NC-SA 4.0.
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