Contract formation, breach and remedies

A contract is a legally binding agreement that forms the basis of almost all transactions among businesses and between businesses and their customers. All businesses need to enter a contract at some point, such as a contract to purchase goods, services or real estate. Unfortunately, no matter how clear a contract may seem, disputes about the meaning or enforceability of a contract often occur.

Formation of a contract

In order for a contract to be valid and binding on each of the parties, certain requirements must be met. The actual contract itself must satisfy two requirements: there must be an agreement and there must be consideration for the agreement.

First, the parties must have an agreement. An agreement is reached when one party makes an offer, and the other party accepts it. Although it sounds simple, determining when an offer and acceptance has occurred according to the law can be a complicated issue.

Second, the agreement must be supported by consideration, meaning that the parties must exchange things of value with each other. The consideration can be goods, services, cash or even a promise to exchange these items. For example, if Person A offers to sell Person B a shirt for $10, and Person B accepts the offer, there is consideration: person A is providing goods, an d person B is providing cash.

A contract can be either express or implied. An express contract is formed by words that are either spoken or in writing. An implied contract is formed by the conduct of the parties.

In addition, some state laws require particular contracts to be in writing, such as contracts for the sale of real estate.

Breach of a contract

Generally speaking, a contract is breached when one party does not live up to his or her end of the bargain. Although many businessmen can recognize when a party isn't doing what he or she promised, determining when a person is entitled to damages for a breach according to the law is a more complicated matter. For example, according to the law, contracts regarding the sale of goods are breached is a party doesn't provide perfect tender, or comply with the exact terms of the contract. In contrast, for other types of contracts, a party may be able to meet his or her obligation under the terms of a contract by providing substantial performance, meaning that he or she doesn't have to comply perfectly with the terms of a contract if the basic purpose of it is fulfilled.

The law also distinguishes between breaches that it calls material and immaterial. If the breach is immaterial, the non-breaching party is not entitled to remedies.

What are the available remedies for a breach?

Legal remedies are available to help business organizations when one party breaches a contract. The available damages could include any of the following depending on the circumstances:

  • General damages : Generally, a non-breaching party is entitled to a monetary award that put the non-breaching party in a position if the contract had been performed.
  • Liquidated damages: Parties of a contract can agree on the amount of damages ahead of time before any breach occurs.
  • Specific performance: A non-breaching party may force the other party to perform as contracted. For example, when a seller of a real estate property breaches a contract, the buyer may be entitled to force the other party to sell the property instead of receiving monetary damages.
  • Injunctive relief: Injunctive relief could prohibit the breaching party from doing certain activity.

Disputes regarding the validity, interpretation and enforceability of contracts commonly arise. The laws surrounding these issues are incredibly complex and may be difficult for even sophisticated business people to sort out on their own. Business owners who want more information should consult with an attorney who has experience litigating business contract disputes.