CONTRACTS: BASIC PRINCIPLES
Contract: An agreement between two or more parties to perform or to refrain from some act now or in the future. A legally enforceable agreement.
Requisites for Contract Formation (Elements)
- Agreement: One party must offer to enter into an agreement, and the other party must accept the terms of the offer
- Consideration: Something of value received or promised, to convince a party to agree to the deal;
- Contractual Capacity/ competent parties: Both parties must be competent to enter into the agreement;
- Legality: The contracts purpose must be to accomplish some goal that is legal and not against public policy;
- Genuineness of Assent (Arguably part of agreement): The apparent consent of both parties must be genuine; and
- Form: The agreement must be in whatever form (e.g., written, under seal, etc.) the law requires.
UNILATERAL AND BILATERAL CONTRACTS
Every contract involves at least two parties — The offeror/promisor, who makes the offer/promise to perform, and the offeree/promisee, to whom the offer/promise is made.
Unilateral Contract: A unilateral contract arises when an offer can be accepted only by the offerees performance (e.g., X offers Y $15 to mow X�s yard).
Bilateral Contract: A bilateral contract arises when a promise is given in exchange for a promise in return (e.g., X promises to deliver a car to Y, and Y promises to pay X an agreed price).
Express Contract: A contract in which the terms of the agreement are fully and explicitly stated orally or in writing.
Implied-in-Fact Contract: A contract formed in whole or in part by the conduct (as opposed to the words) of the parties. In order to establish an implied-in-fact contract,
- The plaintiff must have furnished some service or property to the defendant,
- The plaintiff must have reasonably expected to be paid and the defendant knew or should have known that a reasonable person in the plaintiffs shoes would have expected to be paid for the service or property rendered by the plaintiff, and
- The defendant must have had the opportunity to reject the services or property and failed to do so.
Quasi or Implied-in-Law Contract: A fictional contract imposed on parties by a court in the interests of fairness and justice, typically to prevent the unjust enrichment of one party at the expense of the other.
FORMAL AND INFORMAL CONTRACTS
- Formal Contract: A contract that requires a special form or method of formation (creation) in order to be enforceable.
- Contract Under Seal: A formalized writing with a special seal attached.
- Recognizance: An acknowledgment in court by a person that he or she will perform some specified obligation or pay a certain sum if he or she fails to perform (e.g., personal recognizance bond).
- Negotiable Instrument: A check, note, draft, or certificate of deposit — each of which requires certain formalities (to be discussed later).
- Letter of Credit: An agreement to pay that is contingent upon the receipt of documents (e.g., invoices and bills of lading) evidencing receipt of and title to goods shipped.
- Informal Contract: A contract that does not require a specified form or method of formation in order to be valid.
- The vast majority of contracts are informal (without a seal).
EXECUTION AND VALIDITY OF CONTRACTS
- Executed Contract: A contract that has been completely performed by both (or all) parties. By contrast,
- An executory contract is a contract that has not yet been fully performed by one or more parties.
- Valid Contract: A contract satisfying all of the requisites discussed earlier — agreement, consideration, capacity, legal purpose, assent, and form. By contrast,
- A void contract [4302.14]is a contract having no legal force or binding effect (e.g., a contract entered into for an illegal purpose);
- A voidable contract [4302.15] is an otherwise valid contract that may be legally avoided, cancelled, or annulled at the option of one of the parties (e.g., a contract entered into under duress or under false pretenses); and,
- An unenforceable contract is an otherwise valid contract rendered unenforceable by some statute or law (e.g., an oral contract that, due to the passage of time, must be in writing to be enforceable).
The key to contract interpretation is to give effect to the intent of the parties as expressed in their agreement.
Intent is generally to be ascertained objectively — by looking at:
- The words used by the parties in the agreement,
- The actions of the parties pursuant to the agreement, and
- The circumstances surrounding the agreement as they would be interpreted by a reasonable person — rather than the parties subjective intentions (usually expressed after the fact).
The Plain Meaning Rule: When a contract is clear and unequivocal, a court will enforce it according to its plain terms, set forth on the face of the instrument, and there is no need for the court either to consider extrinsic evidence or to interpret the language of the contract.
RULES OF INTERPRETATION
- When a contract contains ambiguous or unclear terms, a court will resort to one or more of the following rules in order to determine and give effect to the parties intent.
- Insofar as possible, the contracts terms will be given a reasonable, lawful, and effective meaning.
- The contract will be interpreted as a whole various and its various provisions will be harmonized to yield consistent expression of intent.
- Negotiated terms will be given greater consideration than standard-form, or boiler-plate, terms.
- A non-technical term will be given its ordinary, commonly-accepted meaning, and a technical term will be given its technical meaning, unless the parties clearly intended something else.
- Specific terms will prevail over general terms.
- Handwritten terms prevail over typewritten terms, which, in turn, prevail over printed terms.
- When the language used in a contract has more than one meaning, any ambiguity is construed against the drafting party.
- An ambiguous contract should be interpreted in light of pertinent usages of trade in the locale and/or industry, the course of prior dealing between the parties, and the parties course of prior performance of the contract.
- Express terms are given preference over course of prior performance, which is given preference over course of dealing, which is given preference over usage of trade.
- Words are given preference over numbers or symbols.