WHAT IS A CONTRACT?
A contract is a legally enforceable agreement between two or more parties. The core of most contracts is a set of mutual promises (in legal terminology, “consideration”). The promises made by the parties define the rights and obligations of the parties.
Contracts are enforceable in the courts. If one party meets its contractual obligations and the other party doesn’t (“breaches the contract”), the no breaching party is entitled to receive relief through the courts.
Example: Developer promised to pay Graphic Designer $5000 for creating certain promotional materials for Developer’s multimedia work. Graphic Designer created the materials and delivered them to Developer, as required in the contract. Developer admits that the materials meet the contract specifications. If Developer does not pay Graphic Designer, Graphic Designer can go to court and get a judgment against Developer for breach of contract.
A deal done on a handshake – “You do X for me, and I’ll pay you Y” – is a contract, because it is a legally enforceable agreement involving an exchange of promises. Most contracts are enforceable whether they are oral or written. Nonetheless, you should always have written contracts for all your business relationships.
There are several reasons why written contracts are better than oral contracts:
The process of writing down the contract’s terms and signing the contract forces both parties to think about – and be precise about – the obligations they are undertaking. With an oral contract, it is too easy for both parties to say “yes” and then have second thoughts.
When the terms of a contract are written down, the parties are likely to create a more complete and thorough agreement than they would by oral agreement. A hastily made oral agreement is likely to have gaps that will have to be resolved later – when the relationship may have deteriorated.
With an oral contact, the parties may have different recollections of what they agreed on (just as two witnesses to a car accident will disagree over what happened). A written agreement eliminates disputes over who promised what.
WHO CAN ENTER INTO A CONTRACT?
Minors and the mentally incompetent lack the legal capacity to enter into contracts. All others are generally assumed to have full power to bind them by entering into contracts. In most states, the legal age for entering into contracts is 18. The test for mental capacity is whether the party understood the nature and consequences of the transaction in question.
A corporation has a separate legal existence from its founders, officers, and employees. Generally, the individuals associated with a corporation are not themselves responsible for the corporation’s debts or liabilities, including liability for breach of contract.
OFFER AND ACCEPTANCE:
A contract is formed when one party (the “offeror”) makes an offer which is accepted by the other party (the “offeree”). An offer – a proposal to form a contract – can be as simple as the words, “I’ll wash your car for you for $5.” An acceptance – the offeree’s assent to the terms of the offer – can be as simple as, “You’ve got a deal.” Sometimes acceptance can be shown by conduct rather than by words.
When an offer has been made, no contract is formed until the offeree accepts the offer. When you make an offer, never assume that the offeree will accept the offer. Contractual liability is based on consent.
Example: Developer offered to pay Photographer $500 to use Photographer’s photo in Developer’s multimedia work. Photographer said, “Let me think about it.” Developer, assuming that Photographer would accept the offer, went ahead and used the photo. Photographer then rejected Developer’s offer. Developer has infringed Photographer’s copyright by reproducing the photograph for use in the multimedia work. Developer must now either remove the photo from the multimedia work before distributing the work (or showing the work to others) or reach an agreement with Photographer.
Consideration, in legal terminology, is what one party to a contract will get from the other party in return for performing contract obligations.
Example: Developer promised to pay Artist $500 if Artist would let Developer use one of Artist’s drawings in Developer’s multimedia work. The consideration for Developer’s promise to pay Artist $500 is Artist’s promise to let Developer use the drawing. The consideration for Artist’s promise to let Developer use the drawing is Developer’s promise to pay Artist $500.
TYPICAL CONTRACT PROVISIONS:
Many contracts include special types of provisions. We’ll discuss these common types of provisions in the next subsections.
Duties and Obligations:
The duties and obligations section of a contract is a detailed description of the duties and obligations of the parties and the deadlines for performance. If one party’s obligation is to create a multimedia work, software, or content for a multimedia work, detailed specifications should be stated.
Representations and Warranties:
A warranty is a legal promise that certain facts are true. Typical representations or warranties in contracts concern such matters as ownership of the contract’s subject matter (for example, real estate) and the right to sell or assign the subject matter. In multimedia industry contracts, warranties of ownership of intellectual property rights and noninfringement of third parties’ intellectual property rights are common.
For contracts involving the sale of goods, certain warranties are implied under state law unless specifically disclaimed by the parties.
These clauses ensure that either or both parties have the right to terminate the contract under certain circumstances. Generally, termination clauses describe breach of contract events that trigger the right to terminate the contract (for example, nonpayment of royalties). Termination clauses also describe the methods of giving notice of exercise of the termination right, and whether the breaching party must be given an opportunity to cure the breach before the other party can terminate the contract.
These clauses state what rights the nonbreaching party has if the other party breaches the contract. In contracts for the sale of goods, remedy clauses are usually designed to limit the seller’s liability for damages.
An arbitration clause states that disputes arising under the contract must be settled through arbitration rather than through court litigation. Such clauses generally include the name of the organization that will conduct the arbitration (the American Arbitration Association, for example), the city in which the arbitration will be held, and the method for selecting arbitrators. Arbitration is discussed in “Arbitration” in the U.S. Legal System summary.
Merger clauses state that the written document contains the entire understanding of the parties. The purpose of merger clauses is to ensure that evidence outside the written document will not be admissible in court to contradict or supplement the terms of the written agreement.
TIPS FOR CONTRACTS:-
- Write it down.
- Write it down.
- Make sure you are comfortable with your obligations.
- Remember Murphy’s Law.
- Don’t leave anything out.
- Cover all options.
- Don’t use unclear language or try to sound like a lawyer.
- Define any ambiguous terms.
- Use Terms Consistently.
- Be careful using “terms of art.”
What is Contract Law?
The law of contract is a set of rules governing the relationship, content and validity of an agreement between two or more persons (individuals, companies or other institution) regarding the sale of goods, provision of services or exchange of interests or ownership. While this is a wide definition it does not cover the full ambit of situations in which contract law will apply. The reason for this is due to the vast number of examples in which contracts can arise in everyday life.
Where is Contract Law used today?
- Public Transport
- Buying a house
- Any purchase of goods or services
Contract Law: Duty-Imposing or Power-Conferring?
Some theories of contract law characterize it as a private power-conferring rule, others as a duty-imposing one. Hart suggests contract is a legal power:
Legal rules defining the ways in which valid contracts or wills or marriages are made . . . provide individuals with facilities for realizing their wishes, by conferring legal powers upon them to create, by certain specified procedures and subject to certain conditions, structures of rights and duties within the coercive framework of the law.
Consider power-conferring rules:- A rule can give legal actors the ability to effect normative change, when they wish, only if it is structured such that those actors commonly satisfy the rule’s requirements because they want the resulting change. More precisely, the distinctive function of laws that create powers entails two features that together distinguish them from laws that impose duties. First, a law that creates powers must be designed in a way that underwrites an expectation of its purposive use—an expectation that persons will satisfy the law for the sake of the legal consequences. Second, that expectation must be the law’s reason for attaching those legal consequences to acts of that type. Evidence of this second feature can be found in rules that facilitate or enable the law’s purposive use. To identify whether any given law is power creating, we can look to see whether it exhibits these characteristic features.
Breach of Contract:
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party’s performance. If the party does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract, he is said to breach the contract.
Breach of contract is a type of civil wrong.
In a “minor” breach (a partial breach or immaterial breach or where there has been substantial performance), the non-breaching party cannot sue for specific performance, and can only sue for actual damages.
Suppose a homeowner hires a contractor to install new plumbing and insists that the pipes, which will ultimately be hidden behind the walls, must be red. The contractor instead uses blue pipes that function just as well. Although the contractor breached the literal terms of the contract, the homeowner cannot ask a court to order the contractor to replace the blue pipes with red pipes. The homeowner can only recover the amount of his or her actual damages. In this instance, this is the difference in value between red pipe and blue pipe. Since the color of a pipe does not affect its function, the difference in value is zero. Therefore, no damages have been incurred and the homeowner would receive nothing.
A material breach is any failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach. If the contractor in the above example had been instructed to use copper pipes, and instead used iron pipes that would not last as long as the copper pipes would have lasted, the homeowner can recover the cost of actually correcting the breach – taking out the iron pipes and replacing them with copper pipes.
As with nearly everything in the law, there are exceptions to this. Legal scholars and courts often state that the owner of a house whose pipes are not the specified grade or quality (a typical hypothetical example) cannot recover the cost of replacing the pipes for the following reasons:
1. Economic waste. The law does not favor tearing down or destroying something that is valuable (almost anything with value is “valuable”). In this case, significant destruction of the house would be required to completely replace the pipes, and so the law is hesitant to enforce damages of that nature.
2. Pricing in. In most cases of breach, a party to the contract simply fails to perform one or more terms. In those cases, the breaching party should have already considered the cost to perform those terms and thus “keeps” that cost when they do not perform. That party should not be entitled to keep that savings. However, in the pipe example the contractor never considered the cost of tearing down a house to fix the pipes, and so it is not reasonable to expect them to pay damages of that nature.
A fundamental breach (or repudiators breach) is a breach so fundamental that it permits the aggrieved party to terminate performance of the contract. In addition that party is entitled to sue for damages.
A breach by anticipatory repudiation (or simply anticipatory breach) is an unequivocal indication that the party will not perform when performance is due, or a situation in which future non-performance is inevitable. An anticipatory breach gives the non-breaching party the option to treat such a breach as immediate, and, if repudiatory, to terminate the contract and sue for damages (without waiting for the breach to actually take place). For example, A contracts with B on January 1st to sell 500 quintals of wheat and to deliver it on May 1st. Subsequently, on April 15th A writes to B and says that he will not deliver the wheat. B may immediately consider the breach to have occurred and file a suit for damages without waiting until after May 1st for the scheduled performance, even though A has until May 1st to perform.
The compound picture does explain, however, why the duty-power distinction deserves a place at the center of contract theory. Contractual relationships coincide with a constellation of similarly structured extralegal practices, such as agreement, exchange, cooperation, and promise. With the decline of the seal, contracts are not marked out by formal or other conditions of validity that unequivocally sort for a legal purpose, rules that would clearly identify contract law as power conferring. Yet there is no doubt that many parties expect and want legal enforcement and that the law is designed to facilitate such uses—characteristics that distinguish contract law from other, purely duty-imposing rules. Together, these distinctive features render both pure power-conferring and pure duty-imposing theories of contract law inherently contestable. They provide support for the idea that contract law partakes in characteristics of both and for the picture of contract law as a compound rule.