Contract Formation

• The three primary elements of contract formation are offer, acceptance and consideration. One party makes an offer, and the other party accepts the offer with the intent to be legally bound. Consideration, a legal term of art, exists only when something of value is given by both parties under the terms of the contract, even if only a promise. A contract to give a gift is generally unenforceable due to lack of consideration. If the terms of the contract are incomplete or unclear, a court may supply them if the contract is being litigated. Certain types of contracts have special requirements; a purchase contract, for example, must contain a price term in order to be enforced.
  
  

Legal Defenses

• A legal defense to the formation of a contract is a circumstance that entitles one or both parties to deny that a binding legal contract was ever formed in the first place. Many legal defenses exist. Among the most common are fraud, illegal subject matter (such as a contract for prostitution), incapacity (if the contract is signed by a business that does not legally exist, for example) and mutual mistake of fact. The Statute of Frauds, enacted in every U.S. state, requires certain types of contracts, such as real estate purchase contracts and contracts for the sale of more than $500 worth of goods, to be in writing. A successful defense results in rescission of the contract--the purchaser returns his purchase, for example, and the seller refunds the sales price.
  
  

Termination

• There are three primary ways that a contract can be terminated. The terms of the contract may specify that it expires on a certain date or upon the performance of a particular act. The parties may mutually agree to early termination of the contract. Finally, one party may commit a material breach (a serious violation) of the terms of the contract, permitting the other party to unilaterally terminate the contract and sue for damages.
  
  

Remedies

• Three primary types of remedies may be granted by a court in compensation for material breach of a contract. A court may compensate a plaintiff by granting monetary damages in an amount sufficient to put the plaintiff in the same financial position that he would have enjoyed if the defendant had fully performed the contract (including any profits he might have made). If contract term specifies a particular amount of damages to be awarded in the event of material breach, known as liquidated damages, the court will enforce the term if it is fair. Otherwise, a court may simply order the defendant to perform his duties under the contract, if the circumstances are such that money damages would be insufficient--transfer of title to a unique parcel of real estate, for example.
  
  

Agency Law

• Since many business contracts are entered into by legal entities rather than individuals, yet only individuals can physically sign contracts, it is important to determine if the contract was signed by an individual authorized to represent the organization identified as a party to the contract (the "agent"). Usually, an unauthorized agent cannot bind the organization he purports to represent--the contract will simply be rescinded due to incapacity. Nevertheless, an unauthorized agent can bind an organization if the other party had reasonable cause to believe that the agent's authority was legitimate.