Monday, February 13, 2017

Understanding The Creation of A Contract

Contracts in general can be created either
  • expressly (by language either oral or written): this is a basic written contract or verbal agreement (remember contracts can be formed verbally).
  • implied in fact (by conduct): this is created when conduct shows that there was a mutual manifestation of assent by the parties to enter into the contract by the parties actions rather than by their words or writings. 
  • Quasi-contract: This is not a contract rather a contract is constructed by the courts to avoid unjust enrichment of one of the parties. This is the case when one party would benefit if no contract existed and it would be to their detriment to not construe a contract.
As to validity of a contact, a contract can be a:
  • void contract: this means the contract has no legal effect.  Not having any legal effect means that neither party can enforce the contract.
  • voidable contract: this means the contract is valid but can be voided by one of the parties due to some defense the party may have against the contract.
  • unenforceable contract: this a contract that would otherwise be enforceable but for a situation external to the contract such as the Statue of Frauds.
When a suit is brought by one party to enforce the contract, the courts must first decide whether a contract was in fact created.  In order for a contract to be created the court will ask the following questions:
  1. Was there mutual assent?  This is meant to mean that there was a "meeting of the minds" or a "bargained for exchange".  This is usually proven by evidence that at some point one party made an offer and the other party accepted the offer.
  2. Was there consideration or some substitute for consideration?  In order for there to be consideration there must be (a) a bargained for exchange and (b) of legal value.  This means that there must be a legal benefit to the promisor or a legal detriment to the promise.  This means that gifts are excluded from the laws pertaining to contracts. 
  3. Are there any defenses to the creation of the contract?  The last question to be answered by the courts is whether or not the contract is not invalidated by a defense.  Defenses can be the absence of mutual assent due to a mutual mistake (where both parties are wrong about the subject matter of the contract).  Valid defenses to contract also include ambiguous language in the contract, misrepresentation of the contract or terms of the contract (which include fraud, concealment or non-disclosure), illegal contracts (such as those that are against the law--like a contract to commit a crime), contract with a minor (where minors are not allowed to contract for certain items or services). 
Note on #1: Note, that in order for there to be a valid offer there must be a promise, undertaking or commitment in clear and definite terms, conveyed (or communicated) to the other party.  Also note that an offer can be revoked prior to acceptance, unless the offer is an option contract.  Generally an offer is effective when received.  Offers can be rejected either expressly or by lapse of time. 

Note on #2: Note that in situations where there is no consideration, a contract may still be construed by the courts.  Promisorry Estoppel is a doctrine that makes legal agreements via the courts to prevent injustice.  A promise is enforceable to prevent injustice if (1) the promisor should reasonable expect to induce action or forbearance; AND (2) such action or forbearance is in fact induced. 

Note on #3: Note that contracts can also be void where the parties contracting do not have the capacity of contracting whether because of their age, the fact that they are intoxicated or incapacitated or under duress or undue influence.  Some contracts may fall under the Statue of Frauds which means that the contract must be in writing.  This is the case for real estate contracts, contract over a 1 year period, contract for goods over the sale of $500 and promises to pay the debt of another (suretyship promises) ...among others.

Hope this was helpful, feel free to comment below,

-Nick Coriano

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About the Author: Nicholas Coriano is a Business Consultant.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and is currently a partner at Cervitude Intelligent Relations, which specializes in Investor Relations for companies valued under $1 Billion USD.

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