Updated: Nov 28
Author: Maria Demetriou
Date of Publication: 04/11/2022
If you think that contracts are only attorneys’ responsibility, then this article will make you change your mind. Surprisingly, you will realize that you create more contracts in your daily life than you have ever imagined. Thus, you should be aware of how to create a valid and legal-binding one.
What is contract law?
Contract law is the legal area, which deals, primarily, with the formation of agreements and, secondly, with their enforcement in court. To put it in another way, it involves rules that guide you to:
Create a clear, valid, legal-binding agreement, which is called a contract, with another person or legal entity.
Govern and facilitate the smooth operation of your contract, after its creation.
Seek redress at court, if there is a breach of contract.
In particular, breach of contract means that one of the contracting parties breach its obligations or the other party’s rights under the contract. Then, the innocent party is able to take legal action. So, it can require enforcement of the contract at court.
Therefore, contract law doesn’t only refer to companies or lawyers. It is, also, an important part of our everyday routine as consumers. Most common examples:
Buy goods from a shop/store or sell goods
Buy/sell services (such as cleaning, constructing, repairing, legal advice or beauty treatments)
Conclude an employment agreement
Rent moveable/immovable property
What is a contract?
A contract is the formal legal-binding agreement between physical or legal persons or both. You can conclude it, either in written or in oral form. It is important to know, though, that written contracts are preferable, because you can prove their content in judicial proceedings more easily. Also, the contract involves express and implied terms, which provide for the mutual rights and obligations of the contracting parties. However, the basic principle of contracts is the ‘freedom of contract.’ That means that contracting parties are able to create their contract in terms they choose themselves, freely. For that reason, the variation of contracts is huge, starting from a simple purchase of groceries to more complex contracts. In addition, you should remember the contrast of a contract to an agreement. Unlike contracts, agreements are informal arrangements, commonly verbal, for a mutual project. However, they aren’t legally binding. Thus, you cannot sue the other contracting party, in case they didn’t comply with their mutual agreed actions. Therefore, you should always create a valid contract instead of an agreement, in order to secure yourself with potential damages awards.
How do you form a valid contract under common law?
Firstly, you should keep in mind that this article refers to the rules governing contract formation in the common-law system. The common-law rules apply to the UK and all the countries which belonged to the British Commonwealth, such as the USA, Canada, Australia and Cyprus. On the other hand, there is the civil-law system, which applies mostly in the continent of Europe, such as in Spain, France and Greece. For matters of clarification, there is one main difference between the two families of law. Particularly, common law is based on case-law and previous binding judicial decisions. On the contrary, civil law is based on comprehensive legal codes and statutes. Therefore, the role of judges is just to apply the legal provisions into specific facts.
So, under that context, there are four elements for the formation of a valid common-law contract:
Offer: One party makes a clear statement containing the essential detailed terms of the proposing transaction. Thus, the other party is able to understand the offer thoroughly and respond to it accordingly.
Acceptance: If the other party agrees with the terms of the offer, then it accepts them. The acceptance needs to be clear, undoubted and precise on the exact same terms of the offer.
On the contrary, if it contains different and new terms, then it is not an acceptance, but a counter-offer. That means that it is up to the former party now to accept or reject it.
Consideration: It is necessary that the two (or all) parties give up on something they have in order to get something they want. This is the exchange they agree to, which, most of the time, is a service/good in exchange for money.
Mutual agreement: All parties must have the free will and intention to commit themselves to the contract in terms they agreed to. For that reason, the aforementioned informal agreements fall into this category, because there is no mutual intent to conclude a binding contract between the parties. However, you don’t always need to express explicitly the intent to commit to the contract. The contract can be implied when there is a personalized offer for an activity in exchange of a reward (eg. a reward for finding a lost dog). Moreover, an appointment to the doctor or a dinner in a restaurant implies that the client/customer has to pay for the services provided.
Extra preconditions for a valid contract:
The purpose of the contract shall be legal. No one can be obliged to perform a contract involving illegal activities, such as criminal actions (selling drugs, stealing, committing arson etc.). So, you cannot enforce this kind of “contract” in court.
The parties must have legal capacity to conclude a contract. Thus, a contract cannot bind minors and persons with mental disabilities.
How can you seek enforcement of your contract?
When a party doesn’t conform to their obligations under the contract, then there is a breach of contract and the innocent party can seek its enforcement in court. In addition, judicial proceedings take place in the jurisdiction of a state agreed by the parties. It is usual in the courts of the state, in which you conclude the contract to have jurisdiction. Because of the contractual freedom principle, courts are bound to decide upon the specific provisions of the contract. Therefore, you should plead in court how the ordinary and reasonable person would objectively perceive either the clear terms of the contract or the implied contract. If the behavior of the wronged party departs from the reasonable one, then there is a breach of contract. Afterwards, when you establish the breach, you must plead about the appropriate remedies.
Compensatory damages: The court can order compensatory damages, when you suffered financial losses because of the breach.
Nominal damages: The court can order the award of a symbolic monetary amount as a matter of justice, in the case you have not suffered any real damage due to the breach.
Punitive damages: In certain cases, the court can order extra damages as a punishment because of the huge misconduct and unacceptable behavior of the wrong party.
Performance of contract: In rare cases, the court can order the wrong party to comply with the terms of the contract as it had to. This usually happens when compensatory damages cannot remedy the damage (eg contract for a sale of an antique).