Contract Law
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Contracts affect literally everyone and play a role in virtually every aspect of everyday life. If you own a house, you entered a contract to purchase it. If you rent an apartment, your lease is a contract. If you’ve ever borrowed money to buy a home or a car, those loan agreements are contracts. If you have a cellphone or a credit card, you have typically entered into a contract with the phone company or the credit card company. If you have a job, you may have entered into an employment agreement, a confidentiality agreement, a non-compete agreement or an arbitration agreement with your employer. These are all contracts. If you own or run a business, you have probably entered countless contracts with vendors, suppliers, investors or customers.
Contracts are unavoidable. One purpose of a contract is to define the obligations and duties of each party to the contract. Another purpose is to define what should happen in certain foreseeable situations that may arise. But whether a contract was highly negotiated or presented on a “take-it-or-leave-it” basis, no contract can anticipate and address all the different circumstances and situations that arise in the real world. Disputes frequently arise between contracting parties despite every effort to avoid them. Contract law is one of the oldest areas of the law and exists to help parties solve these problems when they are unable to do so on their own.
A contract is an agreement or obligation, whether verbal or written, in which one party becomes bound to another to pay a sum of money or to perform or omit to do a certain act or acts. It is not necessary that the parties use any particular words, perform any particular acts, or use any particular form of agreement in order to create a contract.
In order to form a contract the parties must mutually consent to the agreement or obligations undertaken by them. Mutual consent arises out of the intent of the parties as shown by the reasonable meaning of their words and conduct, and not from any secret or unexpressed intention or understanding of either party. In deciding whether there was mutual consent, the law takes into consideration not only the words and conduct of the parties, but also the circumstances under which the words were used and the conduct occurred. Nevertheless, a contract may be express or implied. An express contract is created by the words or writings of the parties. An implied contract arises from the parties’ acts or conduct.
The concept of mutual consent sometimes occurs through a process known as offer and acceptance. An offer is something in words or conduct that indicates a willingness to enter into a bargain so that a reasonable person would understand that their consent to that bargain is invited and will conclude it. Acceptance can be a word, sign, writing or act. Unless an offer itself indicates that a particular manner of acceptance is required, an offer can be accepted in any manner that is reasonable under the circumstances. However, where a particular manner of acceptance is required by the offer, an acceptance made in some other manner is not effective to establish mutual consent and thereby form a contract. To be effective, the acceptance of an offer must have been communicated to the person making the offer or to someone authorized to receive the acceptance on behalf of the person making the offer. If an offer is withdrawn before it is accepted, then no contract will be formed. Revocation of an offer occurs when an offer is withdrawn and is only effective when communicated to the person to whom the offer was made.
It is often said that a contract requires consideration. Consideration is a somewhat vague concept but typically refers to there being some mutuality of obligation as between the parties to a contract. If one party benefits from another party’s undertaking, but has no obligation of any kind to that party, then it is possible that such a contract would be unenforceable for lack of consideration. Consideration is not required to be equal and can in fact be something that is almost worthless. In many contracts concerning the transfer of property or rights in property, for example, it is common for parties to recite that the exchange is for a single dollar, which the parties then agree is sufficient consideration so that the transaction reflected in the document will be legally enforceable.
A contract can usually be modified or changed if the parties mutually agree to modify or change it. Modification of a contract can occur through words or conduct. In some cases, a contract cannot be modified without additional consideration.
If one party “breaches” a contract, or breaks a contract, or fails in some way to perform obligations required under the contract, the law may provide a remedy. A contract is breached or broken when one party fails or refuses, without excuse, to perform duties required by the contract. Some breaches, however, are considered so unimportant that the law will essentially ignore them. To obtain relief for breach of contract a breach must usually be considered to be “material.” A material breach means that a breach violates a term that is essential to the purpose of the contract. Mere nominal, trifling, slight or technical departures from the contract terms are not material breaches so long as they occur in good faith. In assessing whether a breach is material, the law may take into account: (1) the extent to which the injured party will be deprived of the benefit which he or she reasonably expected; (2) the extent to which the injured party can be adequately compensated for the part of the benefit of which he or she will be deprived; (3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (4) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
Many times, a contract dispute is resolved when a court or arbitrator interprets the parties’ agreement to ascertain how the terms of the agreement apply to the particular situation at issue. There are many rules that dictate how a contract is to be interpreted, but in general, the goal of contract interpretation is to ascertain what the parties intended. The intent of the parties is to be decided by viewing the contract as a whole, considering the subject matter and apparent purpose of the contract, all of the facts and circumstances surrounding the contract, and the reasonableness of the respective interpretations offered by the parties. Words used in a contract are ordinarily to be given their plain, ordinary and reasonable meaning, unless particular facts and circumstances indicate that the parties intended a different meaning, such as when the contract relates to a particular industry, trade or profession in which certain words have special meanings.
Sometimes, people try to get out of a contract by claiming that they were mistaken about what they thought their obligation was or what was involved in performing the contract. If both parties were mistaken about a material fact, this concept can result in a breach being forgiven in the eyes of the law. This type of defense to a breach of contract claim, known as “mutual mistake,” will only work if the party can prove that both parties were mistaken as to a fact that was material to the contract and the party seeking to avoid liability for breach can prove that he or she was not negligent in failing to discovery the mistake. If the breaching party can prove a mistake that he or she was not negligent in failing to discovery and also prove that the other party knew or had reason to know of the mistake, or caused the mistake, then a breach can also be excused under the doctrine known as “unilateral mistake.” A mistake is deemed to be material to a contract when it is a mistake as to a basic assumption on which the contract was made and that has a substantial effect on the agreed exchange of performances.
Another way that a breach of contract can be excused is if the essential purpose of the contract has been frustrated. Frustration of purpose occurs when the breaching party’s principal purpose for making the contract was frustrated by some external event or circumstance, the frustration is substantial, rather than trifling or inconvenient, it was a basic assumption of the parties at the time they entered into the contract that the frustrating event or circumstance would not occur and the event or circumstances was not caused by the fault of the breaching party. The principal purpose of a contract is considered to be something that is so fundamental and basic to the contract that without it, the contract makes little sense. If you contract with someone to paint your car, but before the painting could begin the car was totaled in a crash, the contract no longer makes sense and there should be no liability for breach by either party.
If the essential or principal purpose of a contract is not threatened by an event or circumstance that arises, it may still be possible for a breaching party to be excused from performance if something happens that causes the party’s performance to become extremely or unreasonably difficult, expensive or risky. Impracticability of contract performance occurs when performance of the contract has become impracticable due to some event or circumstance and it was a basic assumption of the parties at the time they entered into the contract that such an event or circumstance would not occur. Obviously, the impracticability of contract performance cannot be something that was caused by fault of the breaching party. The law defines impracticable to mean that the contract could not be performed, or could only be performed with extreme and unreasonable difficulty, expense, or risk of injury. The mere fact that performance became more difficult or expensive than originally anticipated will not justify a finding that performance was impracticable.
Yet another circumstance that can excuse a breach of contract is if the other contracting party somehow prevents or interferes with performance. Prevention of performance occurs when the non-breaching party prevented the breaching party from fulfilling its obligations under the contract and the breaching party can prove that he or she would have performed but for the other party’s interference.
It is possible that a party’s contractual rights were affected by someone who is not a party to the contract at all. In some situations, it may be possible to hold that third party liable for interference with a contract or potential contract. This is known as tortious interference with contract, or tortious interference with contractual relations. If the party accused of interference knew of the existence of the contract and interfered with it without having some legal privilege or right to do so, and that interference caused damage, such a claim can succeed. Determining whether interference was privileged can be a complicated undertaking that involves many different factual and legal considerations.
Contracts involving loans, mortgages, the sale of goods, leases of property or equipment, all have special rules that apply to them. Cohen Rosenthal & Kramer LLP has extensive experience in analyzing, drafting and litigating contracts. Call us if you have a question or to learn more about contract law.