Business Basics: Contracts
Contracts are the basic building blocks of commerce. Every successful commercial enterprise relies on solid, enforceable contracts in order to conduct business. Most contractual agreements are governed by state law, both by the common law of contracts — the law made by judges — and by state statutes enacted by legislatures. Many legislatively enacted contract laws are based on the Uniform Commercial Code (UCC), a comprehensive set of business laws adopted in some form by every state.
A skilled business attorney knowledgeable in contract law and experienced in commercial agreements can assist you with contract formation in your business dealings.
Contract Defined
In very basic terms, a contract is an exchange of enforceable promises by two or more parties. A valid contract imposes legal duties upon the parties to perform their respective promises in the manner prescribed by the terms of the agreement. If a contractual duty is not performed, the breaching party may be liable for resulting damage to the nonbreaching party who relied on the broken promise to his or her detriment.
Creation of a Contract
The traditional elements of a contract are:
- Offer — a proposal to do something in exchange for another party's promise to do something in exchange
- Acceptance — an agreement by the recipient of an offer to its terms
- Consideration — the value received by each party to a contract
Breach of Contract
A breach is material if the party to whom the duty is owed does not receive the substantial benefit of the bargain because of the other party's nonperformance. Consequences of a material breach are severe and may include discharge of any duty to counter perform.
On the other hand, a breach is immaterial if the party to whom the duty is owed has already received a substantial benefit of the bargain, despite partial or deficient performance of the other party. In this case, the injured party is probably not relieved of the duty to counter perform under the contract but may have a legal remedy for the minor breach.
Defenses
Several defenses to breach of contract exist, including these common examples:
- Fraud
- Impossibility of performance
- Waiver
- Estoppel
- Modification
- Unconscionability
Remedies for a Breach of Contract
When there is no valid defense to breaching a contract, the breaching party normally becomes liable to the injured party. The main legal remedies for breach of contract are:
- Compensatory damages — usually payment of money to put the injured party in the position he or she would have been in absent the breach
- Liquidated damages — payment of an amount of money agreed to by the parties in the contract in anticipation of possible future breach
- Specific performance — court-ordered performance of the contract, usually when the subject matter of the contract is so unique that money cannot replace actual performance
Conclusion
This article barely scratches the surface of contract law. Be sure to consult an experienced business lawyer to answer your contract questions and guide your contract negotiation, drafting, performance and enforcement.
