Basic Elements of a Contract

Contracts, Contract Law, And Society

Contract Law

Contracts are legally-binding agreements between two or more self-regulating parties for the purpose of furthering their commercial goals (Eisenberg, 1994). The elements of contracts, together with the laws that provide protections for the parties involved, are theoretically straightforward and appeal to common sense principles, but in practice the forging of contracts and their enforcement can at times be complex. The theories and principles that underlie contract law also remain somewhat controversial and refractory to unequivocal definitions (Schwartz & Scott, 2003). To gain a better understanding of why contracts are so important to society this essay will review the essential element of contracts and the theories supporting their use, from a social, economic, and legal perspective.

Elements of a Contract

The four basic elements of a contract are: (1) mutual assent, (2) consideration, (3) capacity, and (4) legality (Legal Information Institute, 2010). Mutual assent implies that both parties are consenting to enter into a contract voluntarily, but objective proof of mutual assent requires proof of an offer by one party and acceptance of that offer by the other party. An example would be sales contract by a tire dealer (promisor) to sell a set of tires at a fixed price to customers, whereas acceptance would constitute payment of the price by the customer (promisee) to the store's owner or salesperson. Consideration, using the above example, would be the cash payment from the customer to the tire store, but consideration can take many forms, such as forbearance, and must have sufficient value. Capacity implies that the parties involved in the contract have the ability to satisfy their respective obligations. If the customer in the tire store tries to write a rubber check to pay for the set of tires then he or she lacks capacity. Legality simply means that the purpose of the contract must be legal. If the tire store had instead advertized heroin for sale, any contract governing its sale would not be enforceable in the U.S.

These elements must be included in a contract and all terms must be clearly stated for a contract to be valid (Legal elements, n.d.). Missing terms may render a contract invalid, but some courts have decided to enforce contracts by inserting missing terms themselves. Missing provisions or provisions left open for future negotiations will render the contract unenforceable.

Information Included in Contracts

The information that should be included in the contract is basically everything, down to the last detail. The California licensing board for contractors warns consumers that everything must be spelled out, including any provisions for cancellation, payment schedules, and down payments (Contractors State License Board, 2012). If a sink is to be installed then the contract should list the manufacturer, model number, and color. A professional organization supporting manufacturers of microelectronics provides a long list of contract elements, including title, purpose, contact information, terms, disclosures, warranty, security, effective and expiration dates, remedies, risk allocation due to unforeseen circumstances, and signatures (SEMI, 2013). For a more complete list see Article 2 of the Uniform Commercial Code (Legal Information Institute, 2002).

Contract Law

Contracts are enforceable under state and federal laws, although state laws dominate (Legal Information Institute, 2010). Contract law can be divided into statutory, common, and private law. Statutory are the laws enacted by legislative bodies and most states adhere to the federal Uniform Commercial Code (Legal Information Institute, 2002). Common law has been established by judicial precedence and generally governs disputes not covered by statutory laws. Private law refers to the binding provisions contained within a contract, which may supersede state law.

When courts are faced with interpreting the original meaning of contracts, one or more parties may offer extrinsic evidence of what they intended (Schwartz, 2003). Most courts will use a 'soft' version of the parol evidence rule, which allows consideration of both the literal wording in the contract and extrinsic evidence. Courts that rely on the 'hard' version of the parol evidence rule will review only the wording in the contract.

The rights of either seller or buyer can be assigned, unless it has a significant impact on the contractual duty of either party (Legal Information Institute, n.d.). Examples of rights that can be assigned include damages for breach of contract. Another example would be prohibiting buyers from displaying a trademark unless permission is first obtained (Meese, 2012). The duties assigned to each party bound by the contract can also be delegated to another person or organization; however, the duty to perform is not relieved through delegation.