Your Complete Guide to Contracts
Contracts are the glue that hold our personal and business lives together.
So you’re interested in contracts? Before you go out in search of legal advice, or if you prefer the DIY approach on things, ApproveMe here to guide you through everything contract related. To help you understand the ins and outs, negotiate them, sign and manage them, and hopefully save your business money on legal services down the road.
Contracts are the glue that holds our personal and business lives together. Contracts are essential because they infiltrate almost every aspect of our daily lives. Most of us have a common-sense concept of what a contract is. It represents an exchange of one thing for another. For example, if you rent an apartment, you more than likely signed a lease. A lease is a contract. The plan you have with your cell phone company is a contract. However, not all contracts are legally binding.
What is a Contract?
According to the Restatement of Contracts, Second, a contract is “a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Restatement (Second) of Contracts § 1 (1981)
A Contract is an Enforceable Promise
Let’s eliminate the legal jargon. The law basically provides a remedy if one of the parties to the contract breaches their duty to perform under the contract. However, in order for a contract to hold up, it must be enforceable. Think of it like this; contract law is the law of enforceable promises.
A contract is simply an exchange relationship that is established by a written or oral agreement. The agreement is between two or more people, and it contains at least one promise. A contract must answer questions like who, what, when, where, and why.
Let’s break it down even further:
- Oral or Written Agreement – The agreement is between two or more parties and is a consensual and voluntary relationship. The minimum number of parties is two, but there is no limit on the number of parties that can be a part of a contract.
- Exchange Relationship – The parties intend to create a contract for a common purpose. The overall purpose of a contract is the exchange itself.
- Promise – A promise, meaning a future commitment, must be created for a contract to exist. If there is no commitment, there is nothing to really enforce.
- Enforceability – This is one of the most fundamental parts of a contract. Enforceability in contract law ensures the promise between the parties is upheld. It allows for a variety of remedies if one or more of the parties breach the contract.
What are the Elements of a Contract?
The following elements must be met to have an enforceable and legally binding contract. Without all of the elements, the contract may be considered void (“no good”), which is just like not having a contract in the first place.
Essential Elements of Most Valid (Enforceable) Contracts:
- Offer – a promise to do something or a promise not to do something.
(I will mow your lawn for $20)
- Consideration – The incentive or value to perform.
(The money and the mowing of the lawn)
- Acceptance – The performance or promise.
(I agree to pay $20)
A contract should be detailed and thorough. A well-drafted contract ensures both parties are on the same page when it comes to the duties and responsibilities of the parties to perform a service or deliver certain goods. The purpose, or the subject of the contract, should be clear and understood by both parties. This is typically referred to as the “meeting of the minds.”
There is not a contract if these three basic elements are not satisfied, the contract is void. A void contract was never valid in the first place, and it was never legally binding. A voidable contract is a valid legally binding contract, but it can become voidable under the following circumstances:
- Lack of Capacity – This includes mentally incompetent individuals, minors, or any individual forced to sign under undue influence or against their free will. Contracts entered into by a minor are not enforceable. The age of consent varies from state to state, but it is usually 18 years old (the age of majority).
- Failure to Disclose – The nondisclosure of one or more important (material) facts.
- Mutual Mistake – Both parties misunderstood the terms of the contract.
- Breach – A material (significant) breach of the terms of the contract.
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Types of Contracts
Contracts can be written (express), implied, or oral. Oral contracts may be upheld, but to be on the safe side, contracts should be written. Verbal contracts are risky because they are difficult to prove and create confusion between the parties.
Implied contracts are contracts that are assumed. For example, when you go out to a restaurant for lunch, there was not a written agreement for you to pay for the meal, nor was it spoken, but it is assumed that you were willing to pay for the meal.
There are other situations when a written contract is necessary. For example, when leasing an apartment, you agree to pay a certain amount of rent each month over a specific amount of time. A few other examples of written contracts include:
- Renting a car
- Buying or selling a house (the sale or transfer of real estate)
- The sale of goods worth more than $500
- The sale of services worth more than $500, such as hiring someone to paint your house
- An arrangement that will take more than one year to perform
The Importance of a Written Contract
Written contracts act as preventive care. Written contracts also supersede or replace any prior conversations, such as “this is how we have always done it.” A contract must be signed before the parties start performing the obligations under the contract.
If a party to a contract wishes to make changes after it is signed, it must be in writing. This is referred to as a modification or amendment to a contract. Again, the amendment or change must be in writing and signed by both parties. Conversations in texts or emails are not enough to change the terms of a contract.
Written contracts demonstrate the clarity of the parties’ obligations and promises. It eliminates confusion, and if one party chooses to file a lawsuit to enforce a contract, it can be challenging to show the terms if they are not written. Money is also an essential factor in written agreements. It is risky to enter into an oral contract, especially when there is a great deal of money at stake.
Enforceability of a Contract
It is critical to have an enforceable contract so that you are protected in the event of a breach. A breach is when a party to the contract fails to fulfill their obligation as agreed to in the contract. If the party does breach the contract, the other party can pursue legal action to enforce the contract. However, a breach must be material to meet the standards required in a lawsuit or give rise to damages.
When a party does not complete its contractual obligation, it is referred to as an actual breach. If a party verbalizes or states they will not perform under the contract, it is referred to as an anticipatory breach. It is important to understand that just because one party breaches the contract, it does not mean the other should too. It is critical to consult with an attorney before deciding to breach your end of a contract even if the other party breached first.
Conversely, a contract may be unenforceable if one or more of the parties lacks the required capacity to enter into a contract. This may include minors, mentally ill, intoxicated persons, or duress). Additionally, a contract is not enforceable if it contains an illegal subject. Contracts involving the commission of crimes (gambling) or any other purpose for violating the law or public policy will not be enforced. A contract may not be enforceable if it is “unconscionable,” meaning it is so extreme and unreasonable that any rational person would accept it.
The law provides three main remedies for a breach of contract:
- Monetary Damages
- Equitable Relief
Other Names for a Contract
A document may not be specifically referred to as a contract, but the document by any other name is still considered a contract. Here are a few examples that have a different title, but are still contracts:
- Nondisclosure Agreement (NDA) or Confidentiality Agreement
- “Click” Agreements
- Letter of Engagement or Retainer Agreement
- Memorandum of Understanding (MOU)
- Licensing Agreement
- Employment Agreement or Benefit Program
- Severance Agreement
- Consulting Agreement
- Partnership Agreements
Contracts are Essential
Contracts can be found when applying for a job, running a small business, buying a car, renting a home, and much more. All and all, contracts are everywhere and an integral part of our everyday life. Contracts are legally binding and set the ground rules of an agreement. The importance of a contract cannot be overstated; they make it easier to work out any issues on the front end rather than leaving concerns unaddressed, jeopardizing a future breach, or risking litigation.
Contracts are not enforceable until they are signed. The parties should review all of the terms in the contract and mutually agree before signing. Drafting an agreement may seem overwhelming, but it helps to sit down and write it out to be sure you do not leave anything out.
ApproveMe’s templates provide a universal and easy to follow guide to help you get started, allowing you to customize your own contract whether it is a freelancer agreement, partnership agreement, or construction contract. The possibilities are endless. Again, contracts are not enforceable until all of the parties named in the agreement have signed. Electronic signatures are legally binding, and ApproveMe helps streamline the signature process.
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