Elements of a Contract

Published August 30, 2013 by Mayrbear's Lair

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Defining a legal relationship is a complicated issue because of the many facets involved. Scholars like Blum (2011) provide a relatively simple explanation of the complexities of a contract by describing it as an exchange relationship that is established orally or in written form that is made between two or more individuals, contains at least one promise, and is recognized as a legally binding agreement (Blum, 2011). To better comprehend these concepts, the focus of this research examines the elements that must exist for a contract agreement to be considered enforceable by law. The study will examine the following contractual elements including: (a) offers, (b) acceptance, (c) legal consideration, (d) capacity, and (e) legality of purpose. In addition, the research will identify the components that govern the parameters of common law and the Uniform Commercial Code (UCC). For the purpose of this study, a fictitious scenario has been created with respect to an individual that has been hired and offered a two year contract as the head chef of the Fabulous Hotel Company. As a sample to illustrate contractual issues that individuals may encounter, the agreement contains a non-compete clause that will serve to provide a closer analysis of specific contractual obligations and restrictions. The findings of this study will conclude that the courts are not able to successfully arbitrate disputes without an essential contractual agreement to define the terms that make it enforceable by law.

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The Anatomy of Contracts

Elements of Contracts

Without agreements spelled out in contracts, the courts are unable to adjudicate promises between individuals. In today’s business environment, many professionals find themselves dealing with contractual issues in one way or another. Blum (2011) defined a contract as an exchange relationship that is agreed upon and is recognized as enforceable by law. In addition, a contract must consist of the following elements: (a) an oral or written agreement between two or more people, (b) an exchange relationship, (c) at least one clearly defined promise; and (d) the enforcement of the law (Blum, 2011). Undoubtedly, the most significant element of any contract is that it is a voluntary, consensual relationship.  In short, the contract is created because the parties are doing so free of will, with the intent of being bound by an agreement that outlines the parameters of their relationship. Furthermore, Seaquist (2012) contends that for a contract to be considered enforceable, other essentials components must also exist. These include: (a) an offer, (b) acceptance of the offer, (c) consideration of the agreed upon exchange of energy, (d) the mental state or legal ability of the parties entering into the agreement, and (e) that the transfer of goods or services are conducted within the legal framework of the law (Seaquist, 2012). Without these elements, a contract is unenforceable.

Terms

Contract Terms and Conditions

Contracts that are recognized by the law must contain at least one promise. In addition, it is important for people to understand that there are certain laws that govern legal contracts. For example, contract law is either governed by common law or the Uniform Commercial Code (UCC). Seaquist (2012) asserts, that if the agreement involves the sales of goods, it is governed by the UCC regardless of whether the individuals involved are merchants or not. If on the other hand, the contract involves anything other than the sales of goods – like real estate purchases, development, insurance, or professional services – then the contract is governed by common law. There are exceptions, however, like when a company is hired to build a restaurant where materials and services are required to complete the project. In order to determine which law governs this kind of contract, the courts rely on which is greater: the cost of goods or the cost of services. If the answer is the cost of goods, then it falls under UCC laws; if the cost of services is greater, then the contract would fall under the regulations of common law policies.

Contracts are recognized by the law and define the terms of an exchange relationship. Eisenberg (2002) pointed out that there are two kinds of promises that are made: (a) those that are legally enforceable and (b) those that are not. Originally, the term consideration was coined to mean a bargain, or an exchange of energy (Eisenberg, 2002). To illustrate this example, consider the following scenario: Mr. Ed promises to give Tom $200 for landscape services. In order to better determine if that promise has been broken, the individuals need to take into consideration whether or not the broken promise was given as part of the bargain. Eisenberg’s studies suggested the following questions should be taken into consideration for arbitration: (a) was the bargain merely nominal: in other words did the promise have substance; (b) was the bargain based on a promise of surrendering any legal claims; (c) did the bargain contain an illusory promise, or a promise that appeared to be genuine but in fact was not; and (d) does the bargain involve a promise to participate in an action that the other party was already obligated to take. Once these elements have been considered, the parties can determine whether these factors make that promise enforceable. In short, the concept of consideration is a significant element for the enforcement of contracts because contemplation is required to make them legally binding.

competition

Noncompetition Clauses

It is important for people who enter into contracts to comprehend the terms and conditions of them to avoid misunderstandings that may lead to litigation. For example, some contracts contain a noncompetitive clause also known as a covenant not to compete. Depending on the conditions of the agreement, generally these clauses are viewed as enforceable by the courts. Seaquist (2011) contends that whether a contract agreement stands alone or is contained within another contract – like an employee contract – the noncompetitive clause of an agreement can be considered null and void under the following conditions: (a) if the length of time involved is too great – like, for example, the rest of someone’s life, or (b) if the location or distance is too substantial and prohibits, for instance, an individual from engaging in employment on an entire continent (Seaquist, 2012). Employment contracts can affect a person’s career, so it is essential that they comprehend all the elements contained in the agreements they execute to make sure they can accept the parameters that have been outlined.

Case_Study

Contract Case Study

The Fabulous Hotel

For the purpose of this research, a fictitious scenario has been established where an individual has been hired in the head chef position at the Fabulous Hotel Corporation (FHC). In this case study, the person has been offered a two year employment contract. After building an impressive reputation at the FHC, another hotel is interested in hiring the chef for their company and decides to pursue them. The head chef’s employment contract, however, has a provision that prohibits the employee to work as a chef for another hotel in the same metropolitan area for a period of two years after leaving employment with FHC. Seaquist (2011) proposed that if the employee agreed to terms that prohibit them to work as a chef for the entire country, for instance, a court would most likely determine the contract illegal because it falls under the category of enforcing it over too great a distance. The courts consider each case separately with respect to contract law by determining the line between reasonable and unreasonable terms they outline (Seaquist, 2012). In the meantime, it is the responsibility of each individual that enters into a legally binding agreement that they engage the services of an attorney or paralegal to ensure they comprehend the terms of the contract and the language of every clause they sign and agree to. The choices of the chef then, are limited because of the legally binding document that prohibits the individual from working in the same metropolitan area for a two year period. There may be other options available, like for instance, the new company offering FHC a settlement to release the individual from the contract, but those are matters that can be further investigated and determined by an attorney who can make those recommendations in accordance with common law regulations.

Deal-Breakers

Contract Breaches

Contracts are created to define an exchange relationship that is recognized by the law. To avoid litigation it is imperative that anyone that signs a contract knows the details of what they are committing to. For example, if one party intentionally deceives another into signing a contract, that is considered a knowing lie.  In other words, the agreeing party entered into the agreement based on a lie. Seaquist (2011) purported that if the innocent party can provide evidence to support they committed to a contract based on misrepresentation, the innocent party can be released from the contractual obligation in an act called rescission and the agreement becomes void (Seaquist, 2012). In short, when fraud in the execution of a contract is established, it is considered unenforceable by both parties, not just the victim.

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Conclusion

Many experts agree that the most important attribute of a contract is that it is a mutually consensual, voluntary relationship. In fact, Blum (2011) submits that a contract is entered into from parties that are acting on their own accord with the intent to be bound. Because of this element, is in their mutual interest to reach an agreement that outlines in detail the essential terms of their relationship (Blum, 2011). In addition, the element of consent also helps determine contractual obligations for many kinds of legal duty, such as the commitment to compensate for services rendered or to pay taxes.

This research provided many examples of the elements contracts must consist of in order for them to be considered enforceable. Chopra (2013) postulates, that an individual’s capacity to affect others with their energy is both a gift and a responsibility that people should not take lightly. When individuals choose to behave with compassion and unity, they can become a powerful force for positive change to achieve their goals. By doing so, they create opportunities to discover and develop deep and meaningful relationships, both personally and professionally (Chopra, 2013). All of the issues addressed in this study are important components that can serve to empower individuals in the decision-making process when it comes to bargain-making and entering into contractual obligations. The findings of this research conclude that a contract must consist of certain elements for it to be considered an enforceable agreement and that without those essential agreement terms the courts are unable to arbitrate disputes effectively.

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Labor-Day-2013

Personal message from Mayr:

Due to the Labor Day Weekend, there will be no post next Monday. Be on the lookout next Wednesday for my upcoming post on “Securities Laws”. Thanks for being a part of this learning experience with me.

Until next Wednesday … have a great holiday weekend and stay safe my friends!

Mayr

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References

Blum, B. (2011). Contracts: Examples and explanations (Fifth ed.). New York, NY: Aspen Publishers.

Chopra, D. (2013, August 16). 21 day meditation challenge: Miraculous relationships. Retrieved August 16, 2103, from chopracentermeditation.com: https://chopracentermeditation.com

Eisenberg, M. (2002). Gilbert law summaries on contracts (14th ed.). Dallas, TX: The Barbri Group.

Seaquist, G. (2012). Business law for managers. San Diego, CA: Bridgepoint Education, Inc.

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