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Information About Business Contracts

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Business transactions refer to any transfer of goods or services, made legal by an agreed upon contract between two or more parties. Goods and services can come in the form of many things, ranging from wholesale materials to stocks, and from commercial transportation to cleaning services. Because most business transaction law is not federally regulated, most states have adopted the Uniform Commercial Code, which regulates almost all facets of business transactions, including contracts. It is very important for large-scale entrepreneurs and small business owners alike to understand the law that governs business transactions.

Uniform Commercial Code

The Uniform Commercial Code is a uniform act that simplifies, clarifies, and modernizes the law of sales and commercial transactions. Almost every state has adopted the UCC. The UCC governs a large range of business transactions, including leasing, buying, selling, borrowing, investment securities, and transferring funds. Furthermore, the Code standardizes contracts that are made for the purpose of business transactions.

Contracts

In general, it is important to create a written contract when conducting business transactions, although a written contract isn’t necessary for an agreement to be legally enforceable. An agreement exists when two or more parties agree on fundamental terms, with the intention of entering a legally binding contract. However, many problems may arise from an oral contract, so it is a good idea to put the agreement in writing. The contract should state that there is an agreement of exchange, what the exchange entails, and important provisions that relate to the transaction such as duration and termination.

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Offer and Acceptance

When parties agree on fundamental terms with the intention of forming a contract, they have, in legal terms, completed an “offer and acceptance.” Offer and Acceptance is the primary principle used by the court system to determine whether or not a contract exists. An offer is made from one party, the “offeror,” to another, the “offeree,” and the second party has the option of accepting the offer or declining. The offeror makes the offer with the intention of creating a binding contract upon acceptance by the offeree.

Once the offer is made, the offeree has the option to accept or decline it. A common way an offer can be accepted is by signing a contract. Another is by recognizing the performance of the requested act by the offeror. An example of this would be a monetary offer to mow one’s lawn. Once the lawnmower accepts the money, the offer is accepted, and the offeree is contractually bound to mow the lawn.

There are certain rules that deal with acceptance that must be followed. The only person who can accept the offer is the offeree, and the offeree is not bound by the contract if an unauthorized agent accepts on the offeree’s behalf. If the offeror specifies that there must be a certain way to accept the offer, such as by signing a contract in person, than it must be accepted that way in order to be valid. Lastly, silence can never be a form of acceptance. For example, even if someone makes an offer and states that the offeree’s silence, or non-response, to the offer will qualify acceptance, a contract does not exist.

Furthermore, if an offer is made and the offeree modifies that offer, the original offer no longer exists. The modification creates a counter-offer, and the original offeree now becomes the offeror.

Unless otherwise stated in the offer, an offeree has “reasonable time” time to consider the offer and either accept or reject. Legally, reasonable time is the perceived amount of time that an ordinary person would deem rational. For example, if an offer of perishable goods for sale such as fruit is made, a reasonable time to accept would be within a few days or week. However, if the offer is for a condominium, reasonable time might be a few weeks or even months. Because the concept of reasonable time is vague, it is important to include a time period in which one can accept when making an offer.

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Elements of a "Good" Contract

There are certain elements of a contract that are required in order to make that contract enforceable. They are as follows:

1. Identifying the parties involved:

The contract must state who is agreeing to the terms of the contract. This includes the names of the people involved, as well as the business’ names if applicable.

2. Identifying and explaining the agreement:

The contract must state the fact that there is an agreement to exchange promises, such as goods or services, and what this exchange entails. It should be specific, stating all material information relating to the transaction and be very clear. The consideration, which refers to what is done or promised to be done in return for the other party’s promise, must exist and have value.

3. Stating all key conditions and logistics:

All conditions, clauses, and certain logistics regarding the exchange should be indicated in the contract. This is an extension of the previous element, and is very important because courts will look at this to determine what is and what isn’t enforceable in a contract dispute. Certain elements such as quantity, price, transportation, dates of sale and delivery, dates of termination, and future options should be clearly stated.

4. Signatures of parties (in a written contract):

The contract must be signed and dated by the parties involved.

There are other elements that should be included in a contract in order to make it a “good” contract. These items should be included in order to provide protection for the parties involved and sometimes are considered key conditions and logistics, as mentioned above. They are as follows:

1. Dispute Provisions:

These provisions should be included in order to determine what will be done if a dispute arises. This can include ways to resolve the conflict, such as by mediation or arbitration, instead of business litigation, which can be very expensive and time-consuming. Settlement possibilities can also be stated.

2. Severability Clause:

When a court finds any part of a contract illegal, ineffective, or unenforceable, the default rule is to deem the entire contract void. A severability clause states that the rest of the contract is enforceable when any part of that contract is illegal, ineffective, or unenforceable. This protects the contracts’ parties from premature termination of the contract, and helps maintain the spirit of the contract.

3. Integration Clause:

An integration clause declares that the contract is the complete and final agreement between the parties. Thus, when included, any oral agreements made between parties will not be enforced. This prevents problems that can often arise when oral agreements are disputed.

4. Choice of Law Clause:

Because business transactions often occur between parties of different states, it is often important to declare what state’s laws to use in the event of a dispute. Different jurisdictions have different statutes regarding business transactions, so this clause will make it clear to all parties under which jurisdiction the contract falls.

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Breach of Contract

A breach of contract occurs when any part of a contract is not honored by a party to that contract. Typically, breaches arise from nonperformance, or when a party does not carry out their end of the agreement. There are different types of breaches, ranging from simple breaches that can have no compensation as a remedy to major breaches that can result in great monetary consequences. However, a breach of contract does not occur when the parties agree to a change in the contract’s terms or when the non-deviating party implicitly accepts the breach. A party has different options when a contract is breached and there are varying remedies that a party can receive.

Types of Breaches:

1. Minor Breach:

A minor breach of contract is an immaterial breach in which the non-breaching party can only receive compensation for damages. For example, if a home contractor used a different brand of wood to build a house than stated in the contract and the wood functions perfectly, than the homeowner can recover for damages of that breach of contract. However, since there are no damages in this situation, there would be no basis for a lawsuit and thus, no monetary compensation.

Another example would be if a seller’s delivery of goods to a buyer is delayed, and no “time” or “date” clauses are stated in the contract. The buyer can sue for breach of contract, and receive compensation for damages as a result of lost business.

When a minor breach occurs, the non-breaching party must still carry out their end of the agreement.

2. Material Breach:

A breach is material when it is considered serious enough that it harms the other party and the party can clearly demand compensation for damages and can sue the breaching party. A material breach can sometimes lead to the termination of the contract. Courts often look at the extent to which the injured party is deprived of their benefit they expected to determine whether the breach is minor or material.

Using the first example above, the breach could be considered material if the different brand of wood was proven to last less as long as the brand mentioned in the contract. The non-breaching party can sue for the cost of replacing the wood, and any damages that may have already incurred.

3. Fundamental Breach:

A fundamental breach is a material breach of something in the contract that is so essential that it caused the non-breaching party to stop performing their end of the agreement. This party can then sue for damages.

4. Anticipatory Breach:

An anticipatory breach occurs when a party indicates or states to the other party that they will not be performing that to which they have agreed. Although the actual breach may have not taken place yet, they non-breaching party can terminate the contract and sue for damages.

Page 5 of 5

Substantial Performance

When a party stops payment to another party, often times it is due to dissatisfaction of the goods or service provided. It is often challenging for courts to decide whether or not the contract was breached by the seller, so the doctrine of substantial performance was adopted. Substantial performance allows sellers to avoid major losses when they have performed most of their duties stated in the contract but have unintentional, minor imperfections in their obligations. Courts will not deem their actions (or non-actions) a breach of contract, and the buyer will be obligated to pay for the goods or services rendered. The dissatisfied party, however, may be able to owe a lesser amount as a result of the seller’s shortcomings.

Defenses Against Contract Formation

There are different defenses one might use when trying to prove that they are not legally bound by a contract. One may have not had the legal capacity or competence to enter into the contract, so the contract may become void. Capacity refers to the legal ability or authority one has, such as age or mental state (competence).

A contract is also voidable if one of the parties enters into the contract under duress. Duress is the state in which one is forced into doing something against their own will by the threat of harm. Duress can be physical, and when established the burden of proof shifts to party that made the threat. Duress can also be economic, such as when a contract is signed as a result of the other party threatening to breach another existing contract. The threatened party must prove that they had no other practical choice but to agree to the contract.

Another defense used refers to the “statute of frauds.” The statute of frauds refers to contracts that must be made in writing. There are six situations to which the statute of frauds refers:

 

  1. Marriage Contracts.
  2. Contracts to be performed after 1 year.
  3. Contracts regarding the transfer of land.
  4. Contracts by an executor of a will.
  5. Contracts of a sale of goods above a certain value ($500.00).
  6. Contracts in which one agrees to pay the debt of another.

“Non est factum” is another defense that one can claim. This means that the contract was signed by mistake, without knowing what the contract meant. Non est factum is difficult to prove, and one must prove that negligence did not exist, such as not reading the contract. An example of this would be if someone who is illiterate is tricked into signing a contract or doesn’t understand the real meaning of the contract. Another example would be to include fine print that is illegible by most people.

Lastly, one can prove “undue influence” exists as a defense. Undue influence is when one party involved in the contract uses their advantage of power over the other party involved in the contract, thus making the disadvantaged party’s full ability to bargain impossible. As a result, the less-powerful party agrees to a contract that they otherwise would not have. Undue influence usually appears in cases of estate and wills.

Because business transaction and contract law can be very complex, often confusing, and varying from state to state, a business attorney can be very useful from both a legal and financial standpoint. Business attorneys can adopt and review contracts, making sure they provide you with ample protection, are in the best interests of your venture, and comply with the Uniform Commercial Code guidelines adopted by the state in which the contract or transaction applies. Business attorneys can also be very critical in cases of substantial performance, and guide you through other types of breach of contract cases.

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