Contracts, Part 1: Contracts 101

Contracts, Part 1: Contracts 101

| Oct 10, 2020 | Business Law

More than likely, you have probably signed many contracts in your life, even as a young adult. Surprising? Think about it: every time you sign up for the internet, a gym membership, go through a cell phone carrier, etc., you are likely entering into a legally binding contract. At Thooft Law, we get asked contract questions all the time – from business contracts to leases, and more. Here, we lay out the basic foundations of contract law.

Bilateral and Unilateral Contracts

A bilateral contract is between two or more persons with terms and conditions that were negotiated between those parties. A unilateral contract is written by one party who determines all the contract’s terms and conditions.

What Makes a Contract Legally Binding?

What does it mean for a contract to be “legally binding?” A legally binding contract requires the parties to obey the terms in the contract, and is enforceable through the court of law. This means there are legal consequences if you do not uphold your end of the deal, and the other party can sue you for damages or to make you uphold your contractual duties.

Not all contracts are legally binding. In general, most legally binding contracts must have all of the following:

  1. Offer – A: “I will sell you my car for $1,000.”
  2. Acceptance – B: “Sure, I will buy your car for $1,000.”
  3. Consideration – There are many forms of consideration (money, services, personal property, real property, promise to act, promise to refrain from acting) but basically it is anything of value that is promised by one party to the other when making the contract. In this example, B’s consideration is $1,000 (B promises to give A $1,000 for the car), and A’s consideration is the car (A promises to give the car to B for $1,000).

Do Contracts Have to Be in Writing?

Not all contracts are in writing, and not all legally binding contracts need to be in writing, although it is always best to have it so. The Statute of Frauds requires certain contracts to be in writing to be legally enforceable:

  1. Sale or transfer of land;
  2. Sales of goods more than $500;
  3. One person promising to pay another person’s debt;
  4. Contracts lasting more than one year;
  5. Any contract involving the consideration of marriage, such as prenuptial agreements; and
  6. When an executor of an estate agrees to personally pay off the debts of the estate with his own funds

Is a Promise Enforceable?

One common question we get at Thooft Law is in reference to promises someone made to another. This is where contract law can get mucky.

When a Promise is Enforceable

Promises are enforceable when they constitute a contract. Promises constitute a contract when it causes another party to rely on that promise in a way that he is financially injured due to that reliance.

A: “I promise to hire you as a manager if you move to California.”

B: “Okay, I’ll move to California.” B proceeds to quit his job, sell his house, buy a plane ticket, and hire moving trucks.

Because B relied on A’s promise of a new job in California if B moves, B was financially injured through quitting his job, buying a plane ticket, and hiring moving trucks. If A does not give B the job, B has grounds to sue A for damages.

When a Promise is not Enforceable

A promise of a gift is not enforceable. This is because a gift in itself is a voluntary and gratuitous transfer from one party to another without something of value promised in return. Because there is nothing of value promised in return, there is no consideration.

A: “I promise to give you my car someday.”

Since there is no consideration, this promise is not a contract and thus unenforceable.

Force Majeure

Force majeure is a contract clause that frees one or both parties from contractual liability or obligation. A force majeure event is an event that is outside the reasonable control of a party which prevents that party from upholding his end of the contract.

A current example of Force Majeure is the COVID-19 pandemic. Others can be a hurricane, a fire, global shortage of goods, etc.

Conclusion

This blog is meant as a basic introduction to contract law, and briefly discusses the most common principles of contracts. Tune in soon for Contracts, Part 2: So You Signed a Non-Compete.

For excellent contract advice from a knowledgeable attorney, contact Attorney Derek Thooft at [email protected] or 651-364-7725