A contract is a written or verbal agreement describing certain obligations binding two or more parties.
For a contract to be valid, it must meet the following criteria:
- There must be a meeting of the minds between the parties, meaning that they must have all generally understood what was being agreed. This must take the form of an offer and an acceptance, and the terms of each must precisely match the other.
- There must be consideration given by all the parties, meaning that every party is exchanging something of value and suffering a detriment as part of the transaction.
- Both parties must have the capacity to understand the terms of the contract they are entering into, and the consequences of the promises they make. For example, minors or mentally disabled individuals do not have the capacity to form a contract, and any contracts with them will be considered void or voidable.
- The contract must have a lawful purpose. A contract to commit murder in exchange for money will not be enforced by the courts. It is void ab initio, meaning "from the beginning."
Contrary to common wisdom, an informal exchange of promises can still be binding and legally as valid as a written contract. A spoken contract is often called an "oral contract", not a "verbal contract". A verbal contract is simply a contract that uses words. All oral contracts and written contracts are verbal contracts. Contracts that are created without the use of words are called "non-verbal, non-oral contracts".
Courts in the United States have generally ruled that if the parties have a meeting of the minds and act as though there was a formal, written and signed contract then a contract exists. Most jurisdictions require a signed writing for certain kinds of contracts (like real estate transactions); such requirements are referred to as the Statute of Frauds.
Furthermore, the existence of a written contract does not necessarily ensure its enforcability or validity. A contract can be deemed unenforceable if it requires a party to undertake an illegal act, if it was signed under duress or while intoxicated, if the disparity in knowledge between the parties is extreme and the weaker party was given onerous terms, etc.
There are three classifications of contracts that are not binding. A contract is void if it is based on an illegal purpose or contrary to public policy. It will not be recognized by court or enforceable by either party. A contract is voidable if one of the parties has the option to void the contract. Contracts with minors are examples of voidable contracts. Finally, a contract is unenforceable if it violates the Statute of Frauds. An example of the above is an oral contract for the sale of a motorcycle for $5,000 (any contract for the sale of goods over $500 must be in writing to be enforceable).
Many jurisdictions enforce a difference between unilateral contracts and bilateral contracts. The more common of the two, a bilateral contract, is an agreement between two parties where each makes a promise, such as A will pay $200,000 to B, and B will give A the title to a house. A unilateral contract is a promise made conditional upon the performance of a certain act, such as a reward of $5,000 for the capture of a criminal. In Britain, it was decided in the case of Carhill that a unilateral contract has the same requirements as a bilateral contract but applies to a far wider group of people (whoever is capable of entering in to the contract).
A contract can be either an express contract or an implied contract. An express contract is one in which the terms are expressed verbally, either orally or in writing. An implied contract is one in which some of the terms are not expressed in words.
An implied contract can either be implied in fact or implied in law. A contract which is implied in fact is one in which the terms of the contract are so obvious that they do not need to be expressed verbally. For example, by going to a doctor for a physical, a patient agrees that he will pay a fair price for the service. If he refuses to pay after being examined, he has breached a contract implied in fact.
A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations where one party is not guilty of a breach of contract but has a clear obligation to make a payment or perform a duty.
In the United States the validity of contracts is protected directly in the Constitution. The rules by which contracts are judged are codified by each state in a commercial code, most of which are based on the Uniform Commercial Code (UCC).
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