Frequently Asked Questions
What is a contract?
A contract is an agreement between two or more persons (e.g., individuals, corporations, partnerships, limited liability companies or government agencies) to do, or to refrain from doing, a particular thing in exchange for something of value.
What are the key elements of a binding contract?
The elements of a contract are: (i) an agreement; (ii) between competent parties; (iii) based upon the genuine assent of the parties; (iv) supported by consideration; (v) made for a lawful objective; and (vi) in the form required by law.
Isn’t an agreement the same thing as a contract?
No, an agreement is only one element of a contract. If all six elements are not present, there is no contract.
What is an agreement then?
An agreement arises when at least one person, the offeror, makes an offer and the person or persons to whom the offer is made, the offeree, accepts. There must be both an offer and an acceptance. If either is not present, there is no agreement and therefore no contract.
What constitutes an offer?
To constitute an offer, the offeror must intend to create a legal obligation, or he must appear to intend to create a legal obligation. This intent can be shown by conduct. For example, when one party signs a written contract and sends it to the other party, this action is obviously an offer to enter into a contract on the terms of the writing. Again, the offeror must intend to create a legal obligation. No contract comes into being when an offer is made jokingly, or under any other circumstances that would cause a reasonable person to believe there was no intent to enter into a binding agreement.
Do newspaper advertisements, price quotations, or catalog prices constitute an offer?
No, ordinarily these are just invitations to negotiate and cannot be accepted in a contractually-binding manner. No seller has an unlimited supply of any commodity and therefore cannot possibly be deemed to have intended to make a contract with everyone who sees the advertisement or seeks to accept the price offered.
An invitation to negotiate is not an offer. An invitation to negotiate is merely a preliminary discussion or an invitation by one party to the other to negotiate or make an offer. For example, a school asking a teacher whether or not the teacher wishes to continue teaching at the school the following year is a preliminary discussion and not an offer that could be accepted. If the teacher indicated that she would like to continue teaching, then a formal offer could be made.
Does an offer have to be in writing?
Not necessarily; but, it does have to be communicated in order to be a valid offer. The offer may be communicated by the offeror or at his direction. If the offeree hears about the offer indirectly, through the grapevine so to speak, he cannot accept the offer until it is communicated to him by the offeror or at the offeror’s direction.
Can an offer be withdrawn without incurring liability to the other party?
Yes, an offer can be withdrawn before acceptance and therefore prevent a contract from arising. If an offer is terminated, an attempted acceptance after the termination has no legal effect. Ordinarily, an offer may be revoked at any time by the offeror. All that is required is the showing by the offeror of his intent to revoke the offer and communication of this intent to the offeree.
How else can an offer be terminated?
Offers may be terminated in any one of the following ways: Revocation of the offer by the offeror; counteroffer by offeree; rejection of offer by offeree; lapse of time; death or disability of either party; or performance of the contract becomes illegal after the offer is made.
The general rule is that the revocation is effective only when it is made known to the offeree. Until it is communicated to the offeree, directly or indirectly, the offeree has reason to believe that there still is an offer that may be accepted. The offeree may rely on this belief. If the offeror seeks to revoke the offer, but the offeree accepts the offer before notice of the revocation, a valid contract is created.
What is a counteroffer?
A counteroffer is a new set of terms and conditions given in response to the original offer. A counteroffer causes the original offer to be null and void.
What is the “Mailbox Rule.”
If the offeror does not otherwise specify, a mailed acceptance takes effect when the acceptance is properly mailed. This is known as the Mailbox Rule. If the offeror specifies that an acceptance shall not be effective until received, there is no acceptance until acceptance is received. The Mailbox Rule also would not apply in a situation where the offeror requires receipt of a payment to accompany an acceptance.
Smith owned land. Jones mailed an offer to Smith to buy his land. Smith agreed to this offer and mailed back a contract signed by him. While this letter was in transit, Smith orally notified Jones that his acceptance was revoked. Was Smith bound by a contract? Yes, since the acceptance was effective when mailed subsequent revocation had no effect.
Please explain what competent means regarding the requirement that an agreement be between competent parties in order for a contract to be effective?
The law generally presumes that everyone has the capacity to contract. But if a party does lack capacity, then the contract is usually voidable and the party without capacity may avoid the contract. Parties to an agreement must have contractual capacity before the agreement will be binding on both parties. Contractual capacity is the ability to understand that a contract is being made and to understand its general nature. The fact that a person fails to completely understand the full meaning and all ramifications of a contract does not mean that the person lacks contractual capacity.
What is the difference between a void and a voidable contract?
A valid contract is a legally-binding contract that is made in accordance with all legal requirements. A voidable contract is an agreement that would be binding and enforceable except the circumstances surrounding its execution, or the fact that one of the parties lacks capacity, makes the contract voidable at the option of one of the parties. For example, a person who has been forced to sign an agreement against his will may avoid being bound by the agreement. A void agreement is an agreement which is without legal effect. For example, an agreement which deals with the performance of an illegal act is void
What is an executory contract?
An executed contract is a contract that has been completely performed. Nothing remains to be done by either party. For example, if you go into a furniture store and agree with the salesman to pay $400.00 for a chair and then pay the salesman cash and take delivery of the furniture, the contract has been completely executed. In an executory contract, something remains to be done by one or both of the parties. For example, suppose you and a seller signed a contract regarding the purchase of land, and you both agree that the sale will be consummated after the buyer obtains his loan and the seller gives a certificate of title (showing no defects). This is an enforceable contract, but it is said to be executory.
What is an option contract?
An option contract is a contract that gives the right to one party to enter into a second contract with the other party at a later date. One of the most common forms of option contracts deals with the sale of real estate. In this type of contract, the prospective buyer will be granted an option to purchase the property within a specified period of time. The prospective buyer will pay the seller a nonrefundable sum of money since the seller is, in effect, taking the property off the market during the option period. If the prospective buyer exercises his option during that time, a second contract is entered into regarding the sale of the property. If the option period expires, then neither party has any obligation to the other, but the money paid for the option is not returned.
My 15-year old son, who looks older, just signed a contract joining a health club which has “dues” of $50.00 a month. Is this contract valid?
No, the contract is not valid. Some classes of persons such as people under the age of 21, or in most states, under the age of 18, are deemed by law to lack contractual capacity. With some exceptions, a contract made by a minor is voidable. The minor, in other words, may avoid the legal liability under a contract. Upon reaching the age of majority, a minor may affirm or ratify the contract and therefore make it contractually binding on him.
A minor will be liable for the reasonable value of necessaries. Necessaries would include, at the very least, food, clothing, and shelter. Courts have also included within the definition of necessaries medical care and a minor’s necessary legal services. Loans to procure necessaries are also necessaries.
What if someone holds a gun to my head and threatens to kill me if I do not sign a certain contract?
No enforceable contract would come into existence. The consent or assent of a party to an agreement must be genuine and voluntary. This assent will not be genuine or voluntary in certain cases of duress, mistake, deception or undue pressure.
What about mistakes? How does a mistake affect the enforceability of an agreement?
The agreement of parties may be affected by the fact that one or both of them made a mistake. A unilateral mistake is a mistake made by one party to the agreement. A mistake that is unknown to the other party usually does not affect the enforceability of the agreement. A unilateral mistake regarding a fact does not affect the contract. For example, if a customer orders a water-resistant coat thinking that this means waterproof, the customer cannot legally get out of the contract unless the sale was made with some sort of misrepresentation as to the meaning of those words. An exception to this would be if the seller knew that the buyer misunderstood those terms, but went ahead and sold the coat anyway.
If both parties to an agreement make the same mistake regarding a key factual matter, the agreement is void. For example, a contract is void if both parties mistakenly believe that the contract can be performed when, in fact, it is impossible to perform it. Suppose Smith promises Jones over lunch to sell Jones an antique car located in Smith’s garage. Assume both parties believe the automobile is in Smith’s garage. However, the car had been destroyed by fire an hour before the agreement and Smith had not learned of this. Since this fact was unknown to both parties, there is a mutual mistake as to the possibility of performing the contract. The agreement is therefore void.
What if I sign an agreement without reading it? Does that affect the enforceability of the agreement?
A person who has the ability and the opportunity to read a document before signing it is contractually bound by the terms of the document even if the person signed it without reading it. The signer cannot avoid liability based on the argument that no explanation was given to him of the terms of the contract.
Even if a person is unable to read or understand the terms of the agreement, he is still bound by the terms of the agreement since he should have tried to obtain an explanation of the agreement. The exception to this rule is that if the other party knows, or has reason to know, that the signer cannot read or has a limited education, some Courts would hold that the other contracting party should have read the document to the other party or explained the terms.
What if I could not read and the explanation of the other party regarding the terms of the agreement were wrong?
If a party relies on the explanation of another party as to the contents of the agreement, the contract may be avoided under two circumstances:
- The party was justified in relying on the explanation of the other party; and
- The explanation was fraudulent.
The party making the explanatory statements does not have to be a lawyer, but can be any person who handles theses types of agreements on a regular basis and therefore has a greater knowledge of the contents than the other person. This rule would not apply if the agreement were negotiated between the two parties and therefore both parties had an understanding of the terms as evidenced by the negotiation. This rule is more applicable to a situation where the agreement is on a preprinted form, and the person who explains the agreement deals with these types of forms on a regular basis.
What if there is a mistake as to the legal effect of an agreement?
When parties to an agreement make a mistake as to the legal effect of the contract, the contract is still binding. For example, suppose Smith sold Jones a vacant lot and Jones planned to build an office on the lot. Both Smith and Jones assume that this would be a lawful use of the property. However, if after purchasing the property and applying for a building permit, Jones is told that the property is zoned for residential use, the contract is still binding.
What does it mean to rescind a contract?
Rescission of a contract means to put the parties back in the same circumstances they were in before making the agreement. If the agreement involved the sale of goods, the goods would be returned to the seller and the money for the goods would be returned to the buyer.
What if one party to a contract knows of a fact that has a critical bearing on the transaction, but fails to disclose this fact to the other party?
Generally, the law does not attach any significance to nondisclosure. Thus, generally, an agreement of the parties is not affected by the fact that one party did not disclose information to the other party. This is the general rule. The theory is that it is preferable that the party lacking the knowledge ask questions of the party with the knowledge rather than imposing some sort of duty on the party with the knowledge to volunteer the information. For example, Jones wants to buy Smith’s house. Jones, prior to signing the contract, makes an inspection of the house and sees several cracks in the roof and walls. He assumes that these cracks are just the result of the house settling. Smith makes no disclosure one way or another about the cracks. Jones buys the house and later discovers that the house has severe foundation problems. He sues Smith for the damages incurred in repairing the foundation problems. Under the general rule, Smith would be under no duty to disclose the foundation problems to Jones.
Are there an exceptions to this nondisclosure rule?
Yes, in some instances, the failure to disclose information that was not requested can be regarded as fraudulent, and give the party harmed by the nondisclosure the same remedies as if a false statement were intentionally made. These exceptions fall generally into one of four categories:
- Unknown defect or condition;
- Confidential relationship;
- Fine print; and
- Active concealment.
Many courts would hold that there is a duty for one party, who knows of a defect or a harmful condition, to disclose this information to the other party if the defect or harmful condition is obviously unknown to the other party and is of a nature that the other party would be unlikely to discover or inquire about the defect or condition.
Again, assume Smith is thinking seriously about buying the house owned by Jones. Assume that Smith, while not a professional engineer or building contractor, does have some knowledge about foundations and also knows that several of his neighbors had had foundation trouble due to the type of soil in their neighborhood. Smith therefore has reason to know that the cracks in his wall and roof were the result of foundation problems and not the result of the house simply settling. Assume that Jones does not know that the neighbors of Smith have had foundation problems. In this situation, Jones would have a strong argument that the contract should be rescinded or that Smith should pay Jones damages for the cost of repairs to the foundation.
What is active concealment?
Active concealment can cause a contract to be invalid or result in liability to the concealing party. This is more than a failure to volunteer information. Active concealment consists of hiding information from the other party by concealment. For example, using the Smith and Jones house transaction as an example, if Smith had painted over the cracks in the wall and the ceiling in order to hide the foundation problem, he would be guilty of active concealment and the contract could possibly be rescinded, or Jones could possibly recover damages from Smith in the amount of the foundation repair costs.
Courts may find an intent to conceal when a printed contract contains clauses in such fine print that it is reasonable to believe that the other party will not take the time to read the provisions. Of course, relief will not be granted if the fine print is not material. In other words, if the provisions in fine print are such that the party reading the contract would have entered into the contract in any event, the provisions in the fine print would not cause the contract to be invalid.
What constitutes fraud and how to you prove it?
Fraud consists of five elements:
- The making of a false statement;
- With knowledge that the statement is false or with reckless disregard as to whether or not the statement is false or true;
- With the intent that the listener rely on the statement;
- With the result that the listener relies on the statement; and
- With the consequence that the listener is harmed.
All five elements must be proven by clear and convincing evidence. An essential element in proving fraud is to prove that the defrauded party relied on the statement which is alleged to be fraudulent. If the alleged victim had the same knowledge of the true facts as the alleged wrongdoer, no fraud is present. If the victim should have known the facts or if a reasonable person would have known that the statement was not true, there is no fraud. If false statements are made after a contract has been signed, it is obvious that there was no reliance on the false statements and therefore there is no fraud.
Smith offers to sell Jones a car and represents that the car has never been in a wreck. Jones, who has worked on cars for many years, notices some dents underneath the car that could only have been made a wreck. Jones buys the car anyway. Even if Smith knew this statement was false and was trying to deceive Jones, there is no fraud since Jones did not rely on Smith’s representation.
Ordinarily, a statement of opinion cannot be the basis for fraud liability. The theory is that a person hearing the statement should recognize it as merely the speaker’s personal viewpoint.
A statement of the law that is false is ordinarily treated in the same manner as an opinion and cannot be treated as fraud. The theory behind this is that the listener has an opportunity of discovering what the law is. However, if the speaker has an expert’s knowledge of the law or claims to have such a knowledge, the statement can be the basis for fraud liability. Of course, an obvious example of this would be a statement of law made by a lawyer to a non-lawyer which the lawyer knew was false. The other elements of fraud would also have to be present.
How can a confidential relationship between the parties affect the validity of an agreement between the parties?
An agreement may be set aside if it were in fact not entered into voluntarily by both of the parties. If either party entered into it because of undue influence or duress, it may be set aside. Undue influence arises in a situation where a confidential type relationship exists and one party has such influence over the other party that the other party’s free will is dominated to the benefit of the influencing party. Confidential relationships which may result in undue influence can be such things as the relationship of an elderly parent and an adult child, a physician and patient, an attorney and client, or any other relationship of trust and confidence in which one party exercises a control or influence over another. If such a confidential relationship exists, the law presumes that undue influence has occurred if the influencing party obtains any benefit from a contract made with the person alleged to be unduly influenced. The contract is then voidable and may be set aside unless it can be proven that no such undue influence took place.
Persuasion and argument are not in themselves undue influence. An essential element of undue influence is that the person making the contract does not exercise his free will. Unless there is a confidential relationship, such as that between a parent and child, Courts are most likely to take the attitude that the person who claims to have been dominated was merely persuaded.
What does the term consideration mean as far as the enforceability of an agreement is concerned?
Consideration is what the promisor demands and receives as the price for the promise. The promisor is the person making the promise, and the promisee is the person to whom the promise is made. Consideration consists of something that the promisor is not otherwise entitled to. It is not necessary to use the word “consideration” in a contract.
Consideration is the price paid for the promise. When thinking of consideration, think in terms of legal value as opposed to economic value. While economic value (e.g., money) is the most common form of consideration, consideration does not have to involve money. In order for a contract to be enforceable, each party to the contract must change his or her legal position in some way. If an agreement lacks consideration, it is generally not a binding and enforceable contract.
I have worked for my employer for five years. Last week, he asked me to sign a document entitled Covenant Not to Compete. In this agreement I promised not to compete with him, regarding accounts that I had serviced, for a period of two years after I leave. I did not receive anything for signing this agreement. Where is the consideration? Is this agreement enforceable?
Based solely on the facts you have given me, my opinion would be that the agreement is not binding due to lack of consideration. Some employers would argue that the consideration was the wages you had been paid the last five years. However, past consideration is no consideration.
What if my employer threatens to fire me if I refuse to sign the covenant not to compete?
If you do not have a contract of definite duration in time (i.e., you are an at-will employee (i.e., can be terminated at the will of your employer), the courts of may states would hold that the covenant is binding and enforceable. Your being allowed to work in the future would be the consideration. If you had another year left on a six year contract, the employer cannot enforce a new provision, such as a covenant not to compete, unless consideration is given, such as additional compensation.
What if I were required to sign such an agreement as a condition of being hired?
If this covenant is entered into at the time the employee is employed, the promise of the employer to employ and pay compensation is consideration for the employee’s covenant not to compete.
What does the element “lawful objective” deal with?
Courts will not enforce contracts that are illegal or violate public policy. Such contracts are considered void. If the illegal agreement has not been performed, neither party can sue the other for damages or to require performance of the agreement. If the agreement has been performed, neither party can sue the other for damages or have the agreement set aside. An agreement which calls for the commission of a crime is illegal and therefore void. For example, a person could not enforce an agreement with another party to burn a house down. Also, an agreement that calls for the commission of a civil wrong (such as a tort) is illegal and void. For example, an agreement to slander a third party is void.
I was asked by “Mr. Smith” to find a buyer for his restaurant in exchange for a payment of 15% of the sales price if I found a buyer. I did not have a real estate license nor did I claim to have one. I obtained a buyer and was paid one-half of the commission. Smith refused to pay any more commission saying that he did not have to since I did not have a realtor’s license as required by state law. Is he correct? He also said that I had to return the part of the commission that he had already paid to me. Is this correct?
Smith is correct about not having to pay you the rest of the commission since the state licensing statute was violated by you acting as a realtor without a license. Smith’s agreement to pay you a commission was void and can not be enforced. However, Smith is incorrect regarding his contention that you have to pay back the part of the commission he has paid to you. A court will not help either party to enforce an illegal contract. In most cases, parties to an illegal agreement are denied remedies of any nature. A court will not require parties to perform an illegal agreement, and a court will not award damages because a party fails to perform.
Must a contract be in writing to be enforceable?
No – oral contracts can be just as valid and enforceable as written contracts. However, the law requires that certain contracts must be in writing in order to be enforceable by a Court. The state statutes that require certain contracts to be in writing are called statutes of fraud. Statutes of fraud require that either the contract itself be in writing and signed by the parties or there must be a sufficient memorandum of the agreement signed by the party being sued for breach of contract. The following are general rules that are similar in each state regarding the application of this type of statute.
- The statute of frauds normally does not apply if it is possible under the terms of the agreement to perform the contract within one year. If no time for performance is specified in the oral agreement and the performance will not necessarily take more than one year, the statute of frauds would not apply.
- Contracts involving the sale of land must be evidenced by a writing. This would include deeds and mortgages, as well as the contract between the buyer and the seller setting forth the terms of the sale. This statute applies only to the agreement between the owner and purchaser of the real property. It does not apply to collateral agreements such as between a real estate agent and one of the parties to the sales contract regarding the real estate agent’s commission.
- Another type of contract that must be in writing is the promise to answer for the debt of another person. For example, an oral promise by the president of Acme Company to pay the debt owed by Acme to Tenth National Bank would not be enforceable.
- A promise by the executor or administrator of an estate to use personal funds to pay a debt of the estate must be in writing. An executor of a deceased person’s estate has a duty to pay the debts of the person from the person’s estate. If the executor promises to pay a debt of the decedent from his personal funds, this must be in writing. However, if the executor makes a contract on behalf of the estate, like hiring an attorney to represent the estate, this type of agreement could be enforceable even if it is not in writing.
- A promise made in consideration of marriage must be in writing. An example of this would be a prenuptial agreement.
- If a contract provides for the sale of goods with a price of $500.00 or more, this type of contract must ordinarily be in writing.
Does a written contract have to be signed by both parties in order to be enforceable?
Not necessarily — The statute of frauds requires a writing to evidence the contract which must be in writing. This does not necessarily have to be a formal contract signed by both parties. It can be a letter signed by only one party setting forth the terms of the oral agreement. However, the writing, whether it be a letter or memorandum, must be signed by the person “to be charged.” This means it must be signed by the person against whom you are seeking to enforce the contract. The writing must contain all of the material terms of the contract so that a Court can determine what has been agreed to.
A “Mr. Smith” sent a letter to me agreeing to sell a house to me for a certain price. The house was described as “the house located at 100 Acme Drive, Acme, Mississippi.” Does this letter contain a sufficient description to evidence of an enforceable contract?
A letter evidencing an agreement from the seller of real estate to a potential buyer which fails to adequately describe the property involved in the sale would not be sufficient evidence of an enforceable contract. The description of the land must be adequate in order to allow the appropriate court to tell exactly what land is being referred to. Since no boundaries are set forth in the letter, the agreement would not be enforceable.
Does a contract have to be notarized?
No. A notary public is an officer authorized by the state in which the person resides to administer oaths, take acknowledgments, and certify documents. The signature and seal or stamp of a notary public is necessary to attest to the oath of a person making an affidavit. There is a requirement that some documents be notarized, such as a real property deed in order to be recordable in the land records. However, unless specifically required by state or municipal law, a contract does not have to be acknowledged before a notary public.
What is the parol evidence rule?
In dealing with the statute of frauds, the first question is whether the contract is one that has to be in writing. The second question is whether or not there is a sufficient writing that can be enforced. With the parol evidence rule, there is already a written contract, and the question is whether evidence outside of the written contract is admissible in Court. If a contract is in dispute, often a question arises as to whether or not the writing evidencing the contract represents all that the parties agreed to. The general rule is that spoken words (i.e., parol evidence) will not be allowed to modify or contradict the terms of the written contract. Exceptions to this rule are made in cases of fraud, accident, or mistake, or it can be shown that the writing is not the complete or true contract.
If parties disagree as to the correct interpretation of a contractual term or sentence, how does a court decide upon the correct interpretation.?
If there is a dispute as to the interpretation of a contract, Courts seek to enforce the intent of the parties to the contract. The intent which will be enforced is what a reasonable person would believe that the parties intended. In interpreting contracts, ordinary words are to be interpreted according to their ordinary meaning. Trade terms and technical terms are to be interpreted according to their trade or technical meaning. Software, when referring to a computer, does not mean something that is soft, but it means the actual program.The way parties have used terms in their prior relationships can also be used to determine what the parties meant by the words they used in a contract.
What is a condition precedent?
If an occurrence or a nonoccurrence of an event has an effect on the existence of a contract, the event is called a condition. A condition precedent is the occurrence of an event that precedes the existence of an obligation to perform or the existence of a contract. For example, in a fire insurance policy, there is no obligation on the insurance company to make a payment until there is a fire loss. The occurrence of such a loss is therefore a condition precedent to the duty of the insurer to make payment.
What is a condition subsequent?
The parties may agree that the contract will terminate if a particular event occurs or does not occur. Such a provision is called a condition subsequent. For example, in a contract for the purchase of land, the contract may contain a condition subsequent that cancels the contract if the zoning board turns down a buyer’s application to obtain a zoning permit to use a building for a particular purpose. The contract may state something to the effect that this contract will be void if the buyer is unable to have the property rezoned from residential to commercial within 90 days from the date of the agreement.
What does it mean when a court rules that a contract is ambiguous?
A contract is ambiguous when it is uncertain what the intent of the parties was and the contract is capable of more than one reasonable interpretation. Sometimes ambiguous terms can be explained by the admission of parol evidence. Also, Courts abide by the rule that an ambiguous contract is interpreted against the party who drafted it. In other words, the party who did not draft the contract will be given the benefit of the doubt so to speak. Also, sometimes the background or circumstances surrounding the contract can eliminate ambiguity. For example, in a Minnesota case, suit was brought in Minnesota on a Canadian policy of insurance. The question arose as to whether the dollar limit of the policy referred to Canadian dollars or American dollars. The Court concluded that Canadian dollars were intended since the insurer and the insured were both Canadian corporations, the policy was entered into in Canada, and over the years premiums had been paid in Canadian dollars, and a prior claim on the policy had been settled by using Canadian dollars.
When is a contract deemed to have been performed or discharged?
A contract is usually discharged by performance of the terms of the agreement.
An offer to perform is a tender. If a person offers to perform the contract pursuant to its terms and the other party refuses to allow performance, the contract may be deemed discharged.
What is a tender of payment?
A tender of payment is an offer to pay the amount due when it is due, for example, on a note. The tender must be legal tender, or example, by cash, a check (if allowed), or a bank wire. A payment by a check is a conditional payment. The debt is revived if the check bounces. The payee can sue on the check or on the debt.
What does it mean when a contract states, time is of the essence?”
This phrase in effect means, “the specified time and dates in this agreement are vital and thus, mandatory.” Therefore, any delay, reasonable or not, slight or not, will be grounds for cancelling the agreement. An example of this would be in the case of the sale or purchase of perishable property or property that fluctuates rapidly in value. If a contract states that time is of the essence, but it obviously is not, courts will ignore this clause. When time is not of the essence, courts generally permit parties to perform their obligations within a reasonable time.
What is the covenant of good faith and fair dealing?
In every contract, there is an implied covenant of good faith and fair dealing. One party to a contact is under an obligation to do nothing that would interfere with the performance of the other party. If one party makes the other party’s performance impossible, the obligation to perform is discharged. For example, if a contractor refuses to allow his subcontractor access to the property where the subcontractor is to do the work, the contract is discharged as to the subcontractor. The subcontractor would have a cause of action against the contractor, but the contractor would not have a cause of action against the subcontractor.
When does a breach of contract occur?
A breach of contract is a failure to perform the contract in the manner called for by the contract. A party is entitled to contractual remedies if the other party breaches a contract.
What are my remedies in the event there is a breach?
A contracting party is entitled to damages if the other party breaches a contract. Generally, damages are the sum of money necessary to put a party in the same or equivalent financial position as the party would have been had the contract been performed.
A party may recover compensatory damages for any actual loss that the party can prove with reasonable certainty. Compensatory damages include direct damages and consequential damages. An example of direct damages would be in a situation where the plaintiff has paid $10,000.00 for a truck, but the defendant refuses to deliver the truck. The direct damages would be $10,000.00.
Consequential damages would arise in a situation where the failure to deliver the truck harmed the business of the plaintiff since the plaintiff lost a delivery contract. In this situation, the plaintiff could possibly get consequential damages for loss of the delivery contract.
Punitive damages are designed to punish. A Court uses punitive damages to make an example of a defendant in order to keep others from doing a similar wrong. Punitive damages are rare in a breach of contract case except bad faith insurance claims.
An appropriate remedy for a breach may be rescission of the contract. This places the parties in the position they would have been had the contract never been entered into. For example, money is returned to the buyer and the buyer returns the merchandise to the seller. If performance has been involved, the performing party may get the reasonable value of his performance under an unjust enrichment theory.
Specific performance is an action to compel a party who breached a contract to perform the contract as promised. The subject matter of the contract must be unique, or an action for damages would be the proper remedy. Actions for specific performance are usually allowed with regard to:
- A contract involving the sale of particular real estate; and
- A contract for sale of a particular business.
Specific performance is not allowed regarding a contract for the sale of personal property unless the property is unique in some way like an antique, coin collection, or art objects. Generally, a party cannot obtain specific performance of personal service contracts or employment contracts. This is because of the Thirteenth Amendment barring involuntary servitude. However, breach of a service or employment contract can subject the breaching party to a suit for damages.
A contract may state the amount of liquidated damages to be paid if the contract is breached. Upon a party’s breach, the other party will recover this amount of damages whether actual damages are more or less than the liquidated amount. For example, the parties to a construction contract may stipulate that damages are to be paid of $1,000.00 for each day that the construction exceeds its contracted completion date. Another example would be with regard to a contract for the sale of land where the contract provides that the earnest money paid will be the sole remedy upon breach of contract by the buyer.
Courts will honor liquidated damage provisions if:
- Actual damages are hard to determine (e.g., breach of a restrictive covenant); and
- The amount is not excessive when compared with probable damages.
If the agreed-upon liquidated damage amount is unreasonable, the Court will hold the liquidated damage clause to be void as a penalty. In such situations, the plaintiff would have to prove the actual damages.
What is the duty to mitigate damages?
A non-breaching party has a duty to mitigate damages. In other words, a non-breaching party has the duty to take reasonable steps to minimize damages. The failure to mitigate damages may cause the victim to only be allowed to recover damages that would have resulted if mitigated. For example, let’s say that in May, a homeowner made a contract with a roofer to make repairs to her house by July 1. The roofer never came to repair the roof and heavy rains in the fall damaged the interior of the house. The homeowner sued the roofer for breach of contract and claimed damages for the harm done to the interior of the house. Is the homeowner entitled to recover such damages? The homeowner can recover damages for the breach of contract, which ordinarily would be the difference between the contract price specified in the contract with the defendant and the reasonable cost of having another roofer perform the work. It is likely that the homeowner cannot recover for the rain damages unless the homeowner can show that it was not reasonably possible to procure any other roofer to repair the roof. In the absence of such proof, the duty to mitigate damages would bar the homeowner from recovering for the rain damages since the owner could have avoided such damage by hiring another roofer to perform the contract.