Contracts are part of everyday life, not just for businesses, but for individuals too. It’s important to understand how contracts work and how the law applies to them.

What Are Contracts?

A contract is an agreement between two parties that is enforceable by law. A contract may exist between two businesses, a business and an individual, or between individuals. It is an agreement by one or more parties to either do something or refrain from doing something.[1]

To be valid and legally enforceable, a contract must contain certain elements:[1]

  1. Mutual Agreement. A contract must begin with an offer from one party to another. This must be followed by mutual assent among all parties involved.
  2. Consideration. Consideration is the reason for a contract. There must be a valid reason, such as an exchange of money or an agreement to provide a service.
  3. Capacity. Also known as legal competency, the parties agreeing to the contract must be considered competent. Someone with a severe mental disability, for instance, may not have the capacity to sign a contract. Minors are often not considered legally competent.

A contract also includes the subject and terms. This outlines the details that each party agrees upon. This is where contracts can be complicated and include a lot of so-called fine print.

How Does the Law Protect Contracts?

Valid contracts are enforced by common law in all states. There can be some variation by state depending on how the courts interpret contracts. The Universal Commercial Code (UCC) enforces contracts for commercial interactions or sales of goods. Most states abide by the UCC in part or completely.

Remedies for a breach of contract include monetary damages. In some cases, the party that broke the contract may be required to carry out the promises agreed upon in the contract. The non-breaching party may also choose to cancel the contract and sue for restitution.

Are Contracts Always Written Documents?

Most contracts are written documents, but this is not a legal requirement in all cases. Requirements for a written contract vary by state. Generally, this includes real estate transactions, long-term contracts, and sales of goods over $500.

It’s always better to have a written contract. An oral contract occurs when two or more parties agree to something verbally, and this can be hard to prove later if someone breaches the agreement. Written contracts also allow for more detail in the terms of the agreement.

Implied vs. Express Contracts

Most contracts are express, with clear statements of intent and agreement. A contract may also be implied. An implied contract occurs when the parties’ actions clearly imply that they intend to enter into a contractual agreement. There are two types of implied contracts:

  • Implied-in-Fact. This is a casual but obvious contract, such as ordering food in a restaurant. Your action implies you agree to pay for the food the restaurant prepares for you. Each side has an obligation.
  • Implied-in-Law. An implied-in-law contract exists in situations in which neither party intended or planned to enter into an agreement. If a doctor saves someone’s life, they have every right to send that person a bill. There was an implied contract that the victim would pay for the unexpected medical service. This is also known as a quasi-contract.[2]

Examples of Contracts

Contracts are routine in business matters, but most people deal with contracts all the time in their personal lives as well. These are important agreements that help manage transactions, sales of goods, services, and other exchanges. Some examples of contracts you may encounter include:

  • Employment contracts
  • Terms for loans, credit cards, and lines of credit
  • Real estate sales and purchase contracts
  • Cell phone service agreements
  • Prenuptial agreements
  • Service agreements for home repairs
  • A rental agreement

How Do I Enforce a Contract?

If you have a legal contract with another party and they breach it, you may take action for remedy. This usually means filing a lawsuit and going through the court system. For amounts of money that are less than about $7,000, you can go to small claims court. For larger damages, you need a contracts lawyer to help you file a lawsuit.

An alternative to suing is to negotiate with the other party. You can have a lawyer represent you to negotiate, or you can work with a mediator. The mediator’s finding is not legally binding, but it can be useful in resolving the dispute without going to court.

How Can I Get out of a Contract?

The type of contract and its specific terms dictate whether you can get out of it or break it. You may not be able to do so legally, or there may be penalties. Some defenses used for breaking a contract include:

  • Inability to perform the obligation. If something has changed, you may no longer be able to fulfill the contract. For instance, if you are a roofer and broke your leg, you cannot physically do the work.
  • Lack of capacity. You may be able to prove a lack of competence at the time of agreeing to the terms.
  • Misrepresentation or duress. If you felt pressured into the contract or that the other party misrepresented the agreement, you may be able to argue for breaking it. A contract may even be fraudulent, for instance, if you agree to buy a serviceable car that turns out to be a lemon.
  • Unfair terms. If the contract is grossly imbalanced, the courts may agree that it should not be enforced.

You may be able to get out of a contract without taking it to the courts. A lawyer can help you negotiate with the other part or find a termination clause in the contract that allows you to exit the agreement.

Contract law covers many situations, from the biggest business deals to a simple purchase. It’s important to understand what contracts are, how you enter into them, what happens when you breach them, and what to do if you need to get out of it. A contracts lawyer can help you in all aspects of creating, agreeing to, and dissolving or disputing these agreements.

  1. Cornell Law School. Legal Information Institute. (n.d.). Contract.
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  2. Cornell Law School. Legal Information Institute. (n.d.). Contract Implied in Law.
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