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A contract is a legally binding agreement between parties to do or not do something. Consumers enter into contracts everyday, whether buying a house, taking out an insurance policy or making a routine purchase. It is important that before entering into a contract, a person fully understands the terms of the contract that will bind the parties. Most contract disputes occur because of a misunderstanding between the parties or a failure to communicate. If you do not understand the terms of a contract, it is best to consult an attorney before agreeing to it. The law firm of NeJame, LaFay, Jancha, Ahmed, Barker, Joshi and Moreno, P.A. can assist you with the all aspects of contract law
What follows is an overview of the fundamentals of contract law: how a contract is formed, what factors affect the validity of a contract, and what happens when a contract is broken.
The Formation of a Contract
There are three elements that must be present for a contract to exist:
The first step to a contract is an offer. An offer is a written or spoken statement indicating a person's willingness to be held to a certain commitment upon acceptance. For example, "I am willing to sell you my car if you pay me $500." Not all offers, however, are valid. It is important to keep a couple of things in mind:
- Is the person making a serious offer? A person who jokingly says he or she will sell a new house for $100 is not making a serious offer. In determining whether a statement is a serious offer, courts usually look to such factors as the sort of language used, the surrounding circumstances, and the relationship between the parties.
- Does the statement contain definite terms with regard to the subject matter? Is the subject matter identified, are the parties identified, is the price set, are quantities determined, and is time for performance stated? There should be enough information contained in the statement that, if needed, a court can enforce the contract or determine damages if the contract is broken.
The second requirement for a valid contract is acceptance of the offer. In order for the acceptance to be valid, it must be made while the offer is still open. For example, someone might say "I will sell you this computer software for $2,000, but only if you buy it within the next two days." In this case, an acceptance made on the third day would not be good since the offer expired at the end of the second day. Other ways for an offer to no longer be good include withdrawal of the offer, rejection of the offer, no acceptance of the offer after a reasonable period of time, the subject matter of the offer becomes illegal, or the subject matter is destroyed.
Unless the offeror (the person making the offer) specifies otherwise, an offer can be accepted through the mail. However, using the mail system involves a time lag. Someone could receive an offer through the mail, accept it, and then discover later that the offer was withdrawn prior to acceptance. If an offeror wants to revoke or withdraw an offer, that revocation is not effective until it is received by the offeree (the person receiving the offer). Therefore, if the offeree puts an acceptance letter in the mail before he or she receives a revocation letter, the offer has been accepted and a contract is formed. This is important to remember if you are doing business through the mail.
If, in responding to an offer, the offeree changes the terms of an offer, the original offer has been rejected and the changed terms constitute a counteroffer. For example, "I want to buy the software, but I will pay only $1,500, not $2,000." Here, the person making the original offer can respond to the counteroffer by accepting or rejecting it, or proposing yet another offer.
The final element in the formation of a contract is consideration. Unlike the everyday definition, consideration in the legal sense is defined as something of value given in exchange for a promise or the performance of an act. Consideration can be money, goods, or services. It can be the canceling of a debt or an agreement not to do something. All parties to an agreement must give consideration in order to create an enforceable contract. It is this trading of something valuable that distinguishes a contract from a gift. The amount of consideration to be traded is determined by the parties. If you agree to pay $500 for something that you could have gotten for $200 elsewhere, you are out of luck. The $500 agreement is still an enforceable contract. Courts usually do not inquire into the relative value of things exchanged.
Even after you have a valid offer, acceptance, and consideration, you still may not have an enforceable contract. There are defenses to a contract which, in some cases, make the contract unenforceable (void) or give the parties the option of enforcing the contract or not (voidable).
Lack of Mutual Assent
When both parties to a contract are mistaken about a fundamental element in the agreement and the mistake cerates a considerable imbalance in the exchange, the contract is voidable by the party adversely affected. For example, a person makes a contract to purchase a car for $600; later, however, both the buyer and the seller discover that the car was once owned by Elvis Presley, presumably increasing the market value of the car. A court would probably permit the seller to void this contract due to an absence of mutual assent. However, where only one party to the contract makes a mistake, courts will enforce the contract, unless the non-mistaken party had reason to know of the mistaken party's misunderstanding. Courts will not permit the non-mistaken party to take advantage of the mistaken party using deception or artifice.
If either the subject matter or consideration of a contract is illegal, the contract is void as a matter of public policy. For example, a contract for the sale of illegal drugs is a void contract.
Capacity of the Parties
To be bound by a contract, a party must be competent to enter into the legal arrangement. Infants, the mentally ill, and intoxicated people usually are not bound by the contracts they enter.
Coercion and Fraud
Even if a person has the legal capacity to enter into a contract, the use of coercion, fraud or some other form of artifice in gaining a party's consent will likely make the contract voidable. Coercion, also known as duress, is where one party uses force or pressure to get another party's consent to a contract. The force does not have to be physical -- one could be put under mental duress. Fraud is the intentional misrepresentation of the terms or obligations under the contract.
Statute of Frauds
Contracts, in many instances, do not have to be in writing to be legally enforceable. However, a rule known as the Statute of Frauds requires that some contracts must be written and signed to be valid. Under Florida law, contracts involving goods priced at $500 or more, promises to pay the debts of another, promises made in consideration of marriage, and promises that cannot be fulfilled within one year must be written to be valid. Similarly, a personal representative's promise to pay the debts of an estate, a promise to pay a debt barred by the statute of limitations, home solicitation sales, home improvement contracts, contracts concerning an interest in land, health care guarantees, newspaper subscriptions, and credit agreements must be written.
Parol Evidence Rule
Although not a defense to a contract, the parol evidence rule may affect the terms of a contract or how it is enforced. Stated simply, where the terms of a written contract are being argued in a court proceeding, the parol evidence rule prohibits the introduction of any agreements between the parties which conflict with the written contract and which were made prior to the contract. The court will look to the written contract as embodying the full expression of the parties' agreement as of the date written. Thus, when making contracts it is important to incorporate all the terms of your agreement into the written document. The parol evidence rule does not involve agreements made after the written contract is signed. Those agreements can be shown to have altered the original written contract.
Breach of Contract and Damages
A valid contract can conclude in several ways: the parties can fulfill their duties; the parties can mutually decide to rescind the contract; or there can be a breach, i.e., where one or more of the parties does not abide by the terms of the contract. A breach can be minor or material. A minor breach will probably not destroy te contract, though the court may provide some remedy to the party aggrieved by the breach. A material breach, on the other hand, may end the contract. A material breach occurs when one party does not receive the substantial benefit of his or her bargain as a result of another party's inadequate performance or failure to perform. If a court finds a party in material breach, the non-breaching or injured party will be discharged from performing his or her contractual duties and may have an immediate right to damages.
In most cases where an injury results from a contractual breach, the injured party receives money damages. In determining the amount of damages, courts usually seek to place the injured party where he or she would have been had the contract been fulfilled, to the extent money can do this. For example, assume you contract with a roofer to put a new roof on your house for $20,000; the roofer quits in the middle of the job and refuses to finish; and you find another to complete the job for an additional $12,000. Your money damages from the original roofer would be $12,000.
Sometimes a breach can have consequential effects, for instance, the unfinished roof resulting in rain damage to the interior of your house. If you can prove the rain damage was a foreseeable consequence of not finishing the roof, the non-performing roofer may have to pay the cost of fixing the rain damage in addition to the cost of completing the job.
The injured party, however, cannot pile up losses as a result of the breach. He or she has a duty to mitigate damages or, in other words, take reasonable steps to limit the extent of injury. If, after finding that the roofer will not finish the job, you wait three months before hiring a replacement roofer, the non-performing roofer will probably be able to avoid paying for three months worth of rain damage. A reasonable person would probably have had the roof fixed sooner and prevented at least some of the rain damage.
In situations where it would be difficult to determine damages in the event of a breach, parties may sometimes agree in advance to what damages will be paid. This is known as a liquidated damages provision. An example of this type of situation is contracting with a clown to perform at your son or daughter's birthday party. Since it is hard to determine the value of a clown's performance, you and the clown agree on a particular sum as liquidated damages. If the clown does not show up, the contract is breached and you are entitled to the liquidated damages.
There are some situations where money damages are inadequate. In contracts involving the sale of art, for example, awarding damages for breach does not put the buyer in the same position he or she would have been had the contract been fulfilled. Because a piece of art is unique and cannot be replaced like a car or refrigerator, the court may award specific performance (i.e., order the breaching party to fulfill the terms of the contract and sell the piece of art for the agreed-upon price). In actuality, courts rarely order specific performance, and never in cases of personal services, like an employment contract.
Contact our Civil Law Division
For additional information on contracts, please contact the Civil Division of NeJame, LaFay, Jancha, Ahmed, Barker, Joshi and Moreno, P.A.. Our contract lawyers have the skills and experience to handle fragile cases involving contract issues. Contact us by phone at (407) 245-1232. You may also send us an e-mail at Civil@NeJameLaw.com or fill out our online form. We will set up an appointment to talk to you more about how we can assist you with your contract issues.