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Common Contract Questions & FAQ

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.

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.

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.

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 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.

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 the remedies in the event of a breach of contract?

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 committing 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.

Inside Common Contract Questions & FAQ