Contract law is a body of law that governs, enforces, and interprets agreements related to an exchange of goods, services, properties, or money. According to contract law, an agreement made between two or more people or business entities, in which there is a promise to do something in return for a gain or advantage, is legally binding. Contract law is the center of many business dealings, and anyone entering into a contract should that failing to abide by the contract, even by mistake, could result in serious problems. To explore this concept, consider the following contract law definition
Definition of Contract Law
- The branch of civil law that deals with interpretation and enforcement of contracts between two or more parties.
What is Contract Law
Contract law governs the legality of agreements made between two or more parties when there is an exchange of some sort intended to take place. In nearly all business transactions, contracts are made. Such contracts, even if made by a verbal agreement, are legally enforceable, as an obligation to fulfill the terms of the agreement has been created. Anytime an individual, business, or other entity agrees to take action, or to make an exchange or payment for something of value, a contract has been created. Examples of such agreements in business include bills of sale, purchase orders, and employment agreements.
Laws Governing Contracts
There are laws governing contracts at the federal, state, and local levels, though most contracts are subject to the laws of the state in which it was created. Because the laws governing contracts vary a little by jurisdiction, most contracts include a governing law provision. This is a section of the contract itself in which it is specifically stated which state’s laws will apply to interpreting and enforcing the contract should a dispute arise. Many contracts also specify how a dispute is to be dealt with, often stating that the parties will use arbitration, rather than go to court over a dispute.
Anticipatory Breach vs. Actual Breach
Contracts are breached in two primary ways, referred to as (1) and actual breach, and (2) an anticipatory breach. An actual breach occurs when one party to the agreement fails or refuses to honor his part of, or complete his duties under, the contract.
Josh agrees to deliver 300 pavers to Charles at his home on Monday, for $150.00. Charles pays Josh the full amount up front, but Josh fails to deliver the pavers on Monday. When the pavers still haven’t been delivered on Wednesday, Charles is angry and simply wants his money refunded. Josh has committed an actual breach of his contract with Charles.
An anticipatory breach refers to an intended or anticipated failure of one party to perform his duties under the contract. Anticipatory breach occurs when one party informs the other party of his unwillingness, or inability, to perform under the contract ahead of time. In such a case, the party that will be harmed by the breach does not have to wait until all other terms, or a required date, has come and gone before taking legal action.
Mary is moving out of her rental home, into the home she recently purchased with her new husband. Mary contracts with the Happy Housekeepers service for a thorough cleaning of the rental on Thursday, a full day after she has removed all of her belongings, so that she can do a walk-through with the landlord on Friday, the 31st of the month. Mary pays the $300 fee to the cleaning company in advance. On Monday, three days before the company is to clean the house, Mary receives a phone call informing her the service will be unable to do the job on Thursday, due to other obligations.
Happy Housekeepers has committed an anticipatory breach, letting Mary know in advance that it will not be performing its duties as agreed. There are several actions Mary can take, all of which may take anywhere from a few days, to months, to wrap up. The major problem from Mary’s point of view is that she must turn the clean apartment over to the landlord no later than Friday, or she will incur another month’s rent.
If Mary is unable to get another service to handle the job on time, Happy Housekeepers may be held liable, not only to return Mary’s $300 payment, but for the extra month’s rent incurred because of the company’s breach of contract.
Elements of a Legally Binding Contract
Contract law requires certain elements of a legally binding contract to be met in order for the agreement to be enforceable. Regardless of the type of contract, if any of these four elements is not met, the contract may not be enforceable:
An offer must be made in a contract. Such an offer may be to exchange goods or services for something of value, or an offer to act or refrain from acting in a certain manner. For example, a construction contractor offers to build a house in exchange for a specified amount of money. An offer may be made in person, or in writing.
Acceptance is the agreement of the other party to the offer presented. In most contracts, the method of signaling acceptance is left open. While in many contracts, both parties add their signatures to demonstrate their agreement to the terms, others assume an acceptance of the offer to be made when one or both parties perform their duties under the contract.
All parties to any contract must provide the other parties something of value, which entices the other party to enter into the agreement. The “something of value” is referred to as “consideration,” and it does not necessarily need to be money. For example, Paul agrees to give Nancy his above-ground swimming pool in exchange for daycare services in her home.
All parties entering into a contract must have a legal capacity, or competency, to do so. Each must be able to understand his legal liability and responsibilities under the contract. This prevents someone from taking advantage of minors and those who are mentally incapacitated, as these individuals cannot legally enter into an enforceable contract.
Under the doctrine of mutuality, all parties must be willing, and have an intent, to perform their obligations under the contract at the time it is made. Without mutual intent, neither party would be bound by the contract. Additionally, mutuality requires any cancellation of a contract to be agreed to by all parties involved.