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Contracts

by Jim Slaughter

Originally published as "Contracts: Getting Essential Elements Together Is Key" in The Business Weekly of the Greensboro News & Record.

The word "contract" derives from Latin words meaning "to draw together."  Essentially, a contract does just that--it draws together the essential elements of an oral or written agreement.  Unlike a gratuitous promise or a non-binding agreement, a valid contract is recognized at law and a party can be sued for not fulfilling the terms of the contract.  As a result, contracts can just as easily draw people together into the courtroom.

The very fact that the word "contract" comes from Latin reflects that people have been negotiating for a very long time.  As a result, the study of contracts is quite detailed. Law students often spend two years studying the principles of contracts. Some lawyers devote their practices to the interpretation, enforcement, and dissolution of contracts.  Although a short article can hardly explore the intricacies of contracts, some generalities about contracts can be outlined.

Essentials of Valid Contracts

In determining whether or not a valid contract exists, courts usually look to three factors:

  1. Was there an offer and an acceptance?
  2. Was there consideration for the contract?
  3. Are there any defenses to the contract?

Offer and Acceptance

An offer from a person reflects a willingness to enter into a contract on the basis of the offered terms (such as, "I will sell you this book for $4.00").  The more definite and certain a statement is, the more likely that a court will consider it an offer, rather than just negotiations that may lead to an offer ("Can I buy this painting for $50" versus "What's the lowest amount you will take for this painting?").

An acceptance is another party's agreement to the terms of the offer.  Like an offer, an acceptance should be definite and can be as simple as the word "yes."  In addition, the method of acceptance must usually be in the same manner of the offer or in an agreed upon manner.  For example, a person offering ties for sale on the street would not expect an acceptance by telegram several days later.

Once a person receives notice that an offer is no longer valid, it is usually too late to accept the offer.  A common example is when an item for sale is sold out.  However, many lawsuits hinge on whether an offer was revoked timely and properly.

Consideration

Consideration simply means that each party to the contract is giving up something in return for obtaining something else.  For example, if a new car part costs $80, one person is giving up $80 while gaining the car part and the other person is giving up the car part to obtain $80.  Consideration is often referred to as a "bargained-for-exchange" and is essential to a valid contract.

Consideration gives a court the terms by which to enforce the agreement as a contract.  When there is no consideration, a court may have to consider the transaction a gratuitous gift, rather than a contract.  Consider the situation in which someone promises to give you a piece of jewelry. If the person changes her mind, a court will not enforce the gift because there was no consideration.  If, however, you had contracted to buy the jewelry for cash (consideration), a court could enforce the terms of the contract.

Defenses

Even is a court finds an offer, acceptance, and consideration in a transaction, no contract exists if there are certain defenses.  A defense simply means that there was a defect regarding the transaction or the parties involved so that no contract was created.  For example, the fact that an item no longer exists is a mutual mistake that prevents a contract from being formed.  Similarly, an agreement that has an illegal purpose, such as hiring someone to kill a person, will not be considered an enforceable contract.

To Write or Not to Write

There's an old saying that "An oral contract isn't worth the paper it's written on."  Even so, an oral contract is valid in most instances.  However, North Carolina has required by statute that certain contracts must be in writing to be enforceable.  If an agreement falls under this "Statute of Frauds," a court will not require a party to fulfill the contract unless there is some type of written document signed by the party to be compelled.

The Statute of Frauds requires many documents to be in writing, including the following:

  • A promise which by its very terms cannot be performed with one year.
  • A promise which creates an interest in land, such as for the sale of real property.
  • A lease with a term of more than one year.
  • A mortgage.
  • In most instances, a promise for the sale of goods of $500 or more.
  • A promise which limits a person's right to do business in the state, such as a covenant not to compete signed by an employee.

Just because an agreement falls under the Statute of Frauds does not mean that a lengthy and complicated contract is required in all situations.  The statute only requires that every "essential term" be in some written form.  This language has usually been interpreted to require at least the following information: (1) the identity of the parties; (2) the subject matter of the contract; (3) the terms and conditions of the agreement; (4) the consideration given and received; and (5) the signature of the parties.  As long as some document, note, or combination of papers contain this essential information, a court will enforce the contract.  A related rule states that if there is a writing no oral agreement will be entertained to contradict the written agreement.

Written Contact Essentials:

  • Names of the parties
  • Subject matter
  • Terms and conditions
  • Consideration, or money, exchanged
  • Signatures of parties

 

Articles are intended to provide general information and are not legal advice or a legal opinion. Specific questions should be directed to an attorney at Black, Slaughter & Black, PA., or to another lawyer.