California Law
California Contract Law
Contract Law
A contract is simply a legally binding agreement between parties to do or not do something. Consumers enter into contracts for many reasons. An agreement to buy a car or buy a home typically involves a contract. If one hires a service to maintain his or her lawn, a contract is created. There are several factors to consider to determine whether a contract has been made. Once a contract has been created, it must be determined if there are any issues that call into question the contract's validity. Finally, if there has been a breach of the contract, there is a question of whether a party has incurred damages.
This chapter summarizes the elements of a contract, factors that may affect the validity of a contract, and damages if a contract is breached. One should always read and understand a document before agreeing to be held to its contents. Before one enters into a contract with major implications, he or she should consult an attorney experienced in the subject matter of the contract.
Contract Components
There are three elements that must be present for a contract to exist: an offer, an acceptance, and consideration.
Offer
The first step to creating a contract is an offer. An offer is a written or spoken statement by a party of his or her intention to be held to a commitment upon the acceptance of the offer. There are a number of factors to look at to determine whether a statement constitutes an offer.
- Is the person making the offer serious? A person who jokingly states that he will sell his or her new house for $100 is not making an offer.
- Does the statement show a willingness of the party to be held to its contents? A person requesting a price quote or opening negotiations is not making an offer. Advertisements usually are seen as invitations to offers.
- Does the statement contain definite terms regarding the subject matter? Is the subject matter identified, are the parties identified, is the price set, are quantities determined, and is time for performance stated? There should be enough information contained in the statement that, if needed, a court would be able to enforce the contract or determine the damages.
Acceptance
In order for an acceptance of an offer to be valid, the acceptance must be made while the offer is still open. In some situations, the person making the offer gives a definite time frame so the offer ends when the time has elapsed: "I will sell you my car for $200 but you must decide whether to buy it within two days." Other ways an offer may end include: the person making the offer withdraws the offer, the person who receives the offer rejects it, a reasonable amount of time passes after the offer is made, or the subject matter of the offer is destroyed before acceptance.
If a person changes the conditions of the offer in responding, the offer is rejected and a counteroffer is made as in "I will buy your car, but I will pay only $150 for it." In this scenario, the person who made the original offer responds to the new offer by accepting it, rejecting it, or proposing yet another offer.
There are two ways a person accepts an offer: by promising to do or not do something, or by performing the desired act. In the first type, a person responds to an offer to sell a car for $150 by promising to pay $150 for the car. This is called a bilateral contract. In the second type of acceptance, a homeowner offers a neighbor $10 to cut his or her grass and the neighbor responds by cutting the grass; the neighbor accepts the offer simply by performing the act requested. This is called a unilateral contract.
Consideration
Consideration is a legal concept meaning something of value that is given in exchange for a performance or a promise to perform. Consideration can be money, goods, a promise to do something there is no legal obligation to do, or a promise to not do something there is a legal right to do. Promises to exchange money, goods, or services are forms of consideration. All parties in an agreement must give consideration in order to create a contract; it is consideration that distinguishes contracts from gifts. Courts typically do not look at the adequacy of consideration unless there is evidence of some type of wrongdoing by the party benefiting most from the contract.
Defenses to Contract
Once it is determined that there is a contract, it must be determined whether there are any defenses that call into question the validity of the contract. There are some defenses that make a contract unenforceable (void) and other defenses that give the parties the option to enforce the contract (voidable).
Legality of the Contract
Although two persons may exchange an offer, an acceptance, and consideration, if the subject matter of the contract is illegal, a valid, enforceable contract does not exist. For example, if a person offers to pay another person money for illegal drugs, and an acceptance is made by a promise to deliver the illegal drugs this is nevertheless a void contract.
Capacity of the Parties
In order to be bound to a contract, the parties must be competent to enter into such a legal arrangement. Underage persons, persons who are mentally ill, and intoxicated persons are usually not held to the contracts they enter. However, a minor may have the option of enforcing a contract.
Mistake, Duress, and Fraud
A mistake by both parties to a contract on an important issue makes the contract unenforceable. However, a mistake by only one party does not necessarily make the contract void.
Duress is the use of physical force or mental pressure by one party to make the other party agree to the contract. The use of duress makes the contract voidable by the party put under duress.
Fraud is the intentional misrepresentation of an important issue of the contract. The presence of fraud in a contractual proceeding makes the contract voidable by the party upon whom the fraud was perpetrated.
Unconscionability
A contract may be unenforceable if it is found by a court to be flagrantly unfair. This defense is usually found in consumer cases, in which a person buys an item under terms so grossly unfair to the customer that the court refuses to enforce the contract.
Statute of Frauds
In many instances, contracts do not have to be in writing to be legally binding. However, a law known as the "statute of frauds" requires that some contracts must be written to be valid. Contracts involving the sale of real estate, contracts concerning the sale of goods worth more than $500, contracts that cannot be performed within one year, contracts to pay someone else's debts, leases for more than one year, and contracts for marriage must be in writing.
Parol Evidence Rule
Although it is not a defense to a contract, the parol evidence rule may affect the contents of a contract and how a contract is enforced. The parol evidence rule applies once parties have come to a final, written contract. Once there is a final, written contract between the parties, the parol evidence rule forbids the introduction in a court proceeding of any previous agreements between the parties on the subject matter of the contract. The parol evidence rule permits the judge or jury in a contract dispute to only look at the written contract and not at any previous discussions or agreements between the parties. The impact of the parol evidence rule is that all factors that are important to the contract and have been decided by the parties should be stated in the final, written contract. The parol evidence rule does not forbid the introduction of subsequent agreements between the parties.
Contract Termination
Once there is a valid contract between parties, it can end in several ways. A contract may have a limited time span and finish at the end of the stated time. If a person is hired to work for two weeks, the contract concludes at the end of two weeks. In many instances in which there is a specific time frame stated in the contract, parties to the contract may have the option to extend the contract for a longer period of time. Contracts also may be project-specific, not time-specific. Goods or services may be contracted for a project and upon the completion of the project, the contract ends. Parties to a contract may mutually agree to rescind the contract, in which case the parties may agree on the duties and responsibilities of each party after the rescission.
A contract also may end because of a breach. A breach occurs when a person does not fulfill his or her responsibilities as promised in the contract. A breach may be minor or major. A minor breach is one that affects small, minor details of the agreement and may not affect the outcome of the contract. A major breach is one that affects the subject matter of the contract and very likely will affect the outcome of the contract. This is also known as a "breach of a material issue." When there has been a breach in a contract, the question of damages is raised.
Damages
The damages due to a party when there is a contract breach depend on many factors, including which party breaches, what damages were incurred, what the contract states with regard to damages, whether the breach material, and the subject matter of the contract. When a person is harmed by a contract breach, courts usually award only foreseeable damages. Foreseeable damages are those damages that the parties anticipated or should have anticipated at the time the contract was formed.
Money Damages
In most cases in which an injury results from a contract breach, the injured party receives money damages. The court places the person in the position he or she would have been in if the contract had been performed. For example, if a homeowner contracts with a person to paint a house, the painter might stop in the middle of the job and refuse to finish painting. If the homeowner finds another painter to finish the job at an additional cost of $150, the damages are $150. Although one basically is entitled to the money difference between what was promised and what it costs to complete the promise, the injured party must mitigate the damages. Mitigation means the injured party takes reasonable steps to limit the extent of the injury and finish the job. In the previous example, the homeowner could not hire a famous painter from Italy to finish painting the house and expect the first painter to pay for the extra expense of plane fare, fees, room, and board.
Specific Performance
There are some situations in which money damages are inadequate. Typically, in a contract involving the sale of land, awarding money damages for a breach does not put the nonbreaching party in the same position he or she would have been in if the contract were fulfilled. Because real estate is unique, one cannot simply go out and buy property that is the same as the subject of the original contract. In a case such as this, the court may order the breaching party to perform the duties required by the contract. This remedy is called specific performance. Courts only order specific performance in rare cases in which the subject matter of the contract is unique, and it is difficult to put a monetary amount on the damage incurred as a result of the breach. Specific performance is not awarded in personal service contracts. In the previous example, the court would not order the original painter to complete the job.
Liquidated Damages
In an attempt to set a monetary damage amount in a case in which it may be difficult to do so, the parties may include a contract provision that specifies the amount of damages in event of a breach. Such predetermined damages are called liquidated damages. An example is when a person puts down earnest money for a house and later changes his or her mind. In a real estate contract with a liquidated damage provision, the buyer may forfeit the earnest money to the seller as a damage award.
Rescission
In most contract disputes, a court puts the nonbreaching party in the position he or she would have been in if the contract had not been breached. However, there are times when the court may place the party in the position he or she was in before the contract was executed. This remedy is known as rescission. In cases in which there was a mutual mistake regarding the subject matter of the contract, the parties may be returned to their positions before the contract. If the parties have exchanged goods or money, those items are returned. This remedy also may be selected in cases in which one party intentionally misrepresents a material fact.