An Introduction To Basic Contract Law

A contract is generally defined as a promise, or a set of promises, actionable upon breach of the contract. It is a legal relationship which contemplates an agreement enforceable between two or more parties for the doing or not doing of some specific thing.

When performing an analysis of basic contract law, five questions must be asked: 1) Was a contract formed?; 2) If a contract was formed, what type of contract was formed?; 3) Was there a breach of contract?; 4) If the contract was breached, what remedies are available to the non-breaching party?; and, 5) Does the statute of limitations bar an action for breach of contract?

For an enforceable contract to exist there must be an offer, an acceptance, consideration, and sufficient specification of terms so that the obligations involved can be ascertained. This is referred to as the “meeting of the minds.” A promise, no matter how slight, can constitute sufficient consideration so long as a party agrees to do something that they are not obligated to do or agrees to avoid doing something that they are entitled to do.

Generally, courts recognize two types of contracts: express contracts and implied contracts. When an agreement is arrived at by words, oral or written, the contract is “express.” Implied contracts are divided into two groups: implied in fact and implied in law. In an implied in fact contract the “meeting of the minds” is shown by the surrounding circumstances that demonstrate that a contract exists as a matter of tacit understanding. The enforceability of a contract implied in fact is based on an implied agreement and not on whether a party has received something of value.

In contracts implied in law, liability attaches by operation of law upon a person who receives benefits that he is not entitled to retain. Contracts implied in law are not true contracts, but quasi-contracts, that courts impose to prevent unjust enrichment. This article will only apply to express contracts and implied in fact contracts.

A breach of contract exists when there is a failure, without legal excuse, to perform according to the terms of a contract. A breach must be a “material” breach and must not be merely of a minor nature. A failure to perform a minor part of the contract is not considered a material breach.

To amount to a material breach, the non-performance of a contract must be such as to go to the essence of the contract and must be the type of breach that would discharge the injured party from further contractual duty. A material breach by one party amounts to a discharge of the other party’s obligation under the contract.

For example, a brief delay by one party in performance of a contract will not amount to a material breach unless there exists an express stipulation in the contract that time is of the essence and that performance on time was clearly an essential and vital part of the contract.

It is important to remember that a party suffering a breach of contract is obligated to take all reasonable means to mitigate the damages. This is called the duty to mitigate and it means that the party that did not breach the contract can not just sit there and let the situation deteriorate without trying to do anything.

Remedies available against one who has breached a contract are restitution, damages, and specific performance. However, a party may not receive double recovery for the same breach of contract.

Restitution is defined as placing the non-breaching party to a contract in as good a position as if no contract had ever been made. Restitution returns the non-breaching party to their original condition.

An award of damages for breach of contract is intended to place the injured party in the position he or she would have been in had the breach not occurred. Damages consist of both compensatory damages and punitive damages.

Compensatory damages exist to compensate the injured party and make it whole to the extent its injury can be measured in terms of money. Compensatory damages are available in a breach of contract action.

Punitive damages exist not to compensate the injured party but to punish a party or to act as a deterrent. Punitive damages are awarded in addition to compensatory damages. Punitive damages are not available in breach of contract cases unless a legal wrong is proven independent of the breach of contract.

Specific performance occurs when damages would be inadequate compensation for a breach of contract. In such a situation, the breaching party will be forced to perform the contract. Specific performance is only available where the subject of the contract is unique such as with a rare work of art.

A statute of limitations refers to a fixed time period for filing a lawsuit from the time that the claim arose. If the lawsuit is not filed within this time period, the right to sue will expire forever. In some instances, a statute of limitations may be suspended (“tolled”) if the party to be sued can not be located or for certain other reasons which prevented the timely filing of a lawsuit. The purpose of statutes of limitations is to protect against stale lawsuits.

Basic contract law calls for an analysis of five factors: 1) Was a contract formed?; 2) If a contract was formed, what type of contract was formed?; 3) Was there a breach of contract?; 4) If there was a breach of contract, what remedy is appropriate?; and, 5) Does the statute of limitations allow a breach of contract action?

An analysis of these five questions will provide an understanding of basic contract law and will provide guidance for a party contemplating a breach of contract action.