What is a Contract?
Contracts are agreements that the law will enforce. Contracts are individual, or private, rights and duties created by oral or written agreement and consent of the parties. Contracts may include obligations imposed by law even if the parties are not aware of those obligations.
What are the Different Types of Contracts?
Express Contract: The promises are communicated by language, either oral or written. Example: John promises to paint Dan’s car in return for Dan’s promise to pay him $100.
Implied Contract: The conduct of the parties indicates that they consented to be bound. Example: Toni fills her car with gas at Tina’s gas station. There is a contract for the purchase and sale of gas.
Unilateral Contract: A person accepts an offer by performing a requested act. The terms of the offer must clearly indicate that an act is required for acceptance. Example: John tells Dan that he will pay Dan $100 if Dan paints his car and that Dan should show acceptance of the offer by the act of painting the car. Dan accepts by painting the car.
Bilateral Contract: A person accepts an offer by promising to do the requested act. Example: Red Company offers to buy 100 widgets from Green Company for $100. Green Company promises to deliver the 100 widgets to Red Company.
Five Essential Elements
The essential elements of a contract in Missouri are: “(1) competency of the parties to contract; (2) subject matter; (3) legal consideration; (4) mutuality of agreement; and (5) mutuality of obligation.” Hyatt v. Trans World Airlines, Inc.,943 S.W.2d 292, 296 (Mo.App.1997); Shapiro v. Butterfield, 921 S.W.2d 649, 652 (Mo.App.1996); Cash v. Benward, 873 S.W.2d 913, 916 (Mo.App.1994).
A valid contract must include an offer, an acceptance, and consideration. Johnson v. McDonnell Douglas Corp., 745 S.W.2d 661, 662 (Mo. banc 1988). "[A] promise to do that which one is already legally obligated to do cannot serve as consideration for a contract." Wilson v. Midstate Industries, Inc., 777 S.W.2d 310, 314 (Mo.App.1989)(quoting City of Bellefontaine Neighbors v. J.J. Kelley R. & B. Co., 460 S.W.2d 298, 301 (Mo.App. 1970)).
An agreement must contain five essential elements to be regarded as a contract. If any one of them is missing, the agreement will not be legally binding.
Competency of the Parties
Who Can Enter into a Contract? Minors (individuals under age 18) and people who are mentally incompetent do not have the legal capacity to enter into contracts. All other people are considered to have the legal capacity to enter into contracts. In Missouri and most states, the legal age for entering into contracts is 18 (see ). A contract between a minor and an adult may be canceled upon request of the minor, but is binding on the adult. The test for mental capacity to enter into a contract is whether the person had the ability to understand the nature and consequences of the agreement.
Corporations have the power to enter into contracts through the acts of their agents, officers, and authorized employees. Generally, individuals associated with the corporation are not held personally responsible for the corporation’s debts and liabilities, including liability for breach of contract, although there are some exceptions.
The "subject matter" of a contract is the goods or services for which
the parties have bargained, one party providing the goods or services in exchange for something else. A contract is legally binding only if its terms are sufficiently defined to enable a court to understand the parties’ obligations.
There must be a definite, clearly stated offer to do something. For example, A quotation by sub-contractor to the main contractor and an offer to lease.
An offer does not include ballpark estimates, requests for proposals, expressions of interest, or letters of intent.
An offer will lapse:
- when the time for acceptance expires;
- if the offer is withdrawn before it is accepted; or
- after a reasonable time in the circumstances (generally, the greater the value of the contract, the longer the life of the offer).
Invitation to treat
An invitation to treat is a mere declaration of willingness to enter into negotiations; it is not an offer, and cannot be accepted so as to form a binding contract. An agreement is not created if there is an acceptance of the invitation to treat.
An invitation to treat is part of the preliminaries of negotiation, whereas an offer is legally binding once accepted, subject to compliance with the terms of the offer. For example, Invitations to treat are advertisements, price lists, circulars, and catalogs.
Only what is offered can be accepted. This means that the offer must be accepted exactly as offered without conditions. If any new terms are suggested this is regarded as a counter offer which can be accepted or rejected.
There can be many offers and counteroffers before there is an agreement. It is not important who makes the final offer, it is the acceptance of that offer that brings the negotiations to an end by establishing the terms and conditions of the contract.
Acceptance can be given verbally, in writing, or inferred by action which clearly indicates acceptance (performance of the contract). In any case, the acceptance must conform with the method prescribed by the offerer for it to be effective.
“Mutuality of agreement is determined by looking to the intentions of the parties as expressed or manifested in their words or acts.” Ketcherside v. McLane, 118 S.W.3d 631, 636 (Mo.App. S.D.2003) The contracting parties had “a meeting of the minds” regarding the agreement. This means the parties understood and agreed to the basic substance and terms of the contract. A contract requires that the parties intend to enter into a legally binding agreement. That is, the parties entering into the contract must intend to create legal relations and must understand that the agreement can be enforced by law.
The intention to create legal relations is presumed, so the contract doesn't have to expressly state that you understand and intend legal consequences to follow.
If the parties to a contract decide not to be legally bound, this must be clearly stated in the contract for it not to be legally enforceable.
In order for a contract to be binding it must be supported by valuable consideration. That is to say, one party promises to do something in return for a promise from the other party to provide a benefit of value (the consideration)
Consideration is what each party gives to the other as the agreed price for the other's promises. Usually, the consideration is the payment of money but it need not be; it can be anything of value including the promise not to do something, or to refrain from exercising some right.
The payment doesn't need to be a fair payment. The courts will not intervene where one party has made a hard bargain unless fraud, duress or unconscionable conduct is involved.
The existence of consideration distinguishes a contract from a gift. A gift is a voluntary and gratuitous transfer of property from one person to another, without something of value promised in return. Failure to follow through on a promise to make a gift is not enforceable as a breach of contract because there is no consideration for the promise.
Does a Contract Have to be Written?
In general, there is no requirement that a contract must be in writing. Although the Statute of Frauds requires certain types of contracts to be in writing (See RSMO 432 and RSMO 400.2-201), Missouri recognizes and enforces oral contracts in some situations where the Statute of Frauds does not apply.
How Is a Contract Interpreted?
The court reads the contract as a whole and according to the ordinary meaning of the words. Generally, the meaning of a contract is determined by looking at the intentions of the parties at the time of the contract’s creation. When the intention of the parties is unclear, courts look to any custom and usage in a particular business and in a particular locale that might help determine the intention. For oral contracts, courts may determine the intention of the parties by considering the circumstances of the contract’s formation, as well as the course of dealing between the parties.
In interpreting a contract, we look first to the language in the contract to ascertain the intent of the parties. Finova Cap. Corp. v. Ream, 230 S.W.3d 35, 42 (Mo.App.2007).
BREACH OF CONTRACT
What Constitutes a Breach of Contract?
A contract case usually comes before a judge because one or both parties claim that the contract was breached. A breach of contract is a failure, without legal excuse, to perform any promise that forms all or part of the contract. This includes failure to perform in a manner that meets the standards of the industry or the requirements of any express warranty or implied warranty, including the implied warranty of merchantability.
A breach of contract action includes the following essential elements: (1) the existence and terms of a contract; (2) that plaintiff performed or tendered performance pursuant to the contract; (3) breach of the contract by the defendant; and (4) damages suffered by the plaintiff. Howe v. ALD Servs., Inc., 941 S.W.2d 645, 650 (Mo.App.1997).
When a party claims a breach of contract, the judge must answer the following questions:
1. Did a contract exist?
2. If so, what did the contract require of each of the parties?
3. Was the contract modified at any point?
4. Did the claimed breach of contract occur?
5. If so, was the breach material to the contract?
6. Does the breaching party have a legal defense to enforcement of the contract?
7. What damages were caused by the breach?
What is the Difference Between a Material and Minor Breach of Contract?
A breach of contract can be material or minor. The parties’ obligations and remedies depend on which type of breach occurred.
A breach is material if, as a result of the breaching party’s failure to perform some aspect of the contract, the other party receives something substantially different from what the contract specified. For example, if the contract specifies the sale of a box of tennis balls and the buyer receives a box of footballs, the breach is material. When a breach is material, the non-breaching party is no longer required to perform under the contract and has the immediate right to all remedies for breach of the entire contract.
Factors that the courts consider in determining materiality include:
1. The amount of benefit received by the non-breaching party;
2. Whether the non-breaching party can be adequately compensated for the damages;
3. The extent of performance by the breaching party;
4. Hardship to the breaching party;
5. Negligent or willful behavior of the breaching party; and
6. The likelihood that the breaching party will perform the remainder of the contract.
A breach is minor if, even though the breaching party failed to perform some aspect of the contract, the other party still receives the item or service specified in the contract. For example, unless the contract specifically provides that “time is of the essence” (i.e. deadlines are firm) or gives a specific delivery date of goods, a reasonable delay by one of the parties may be considered only a minor breach of the contract. When a breach is minor, the non-breaching party is still required to perform under the contract, but may recover damages resulting from the breach. For example, when a seller’s delay in delivering goods is a minor breach of contract, the buyer must still pay for the goods but may recover any damages caused by the delay.
DEFENSES TO BREACH OF CONTRACT
What Are Valid Defenses Against a Breach of Contract Claim?
The most common defenses to enforcement of a contract or liability for damages are:
• Enforcement of the contract would violate public policy.
Example: A contract to lease part of a liquor license will not be enforced because splitting a liquor license between two parties and two locations violates the public policy of the state. See Digesu v. Weingardt, 91 N.M. 441, 575 P.2d 950 (1978).
• The performance of the contract has become impossible or the purpose of the contract has become frustrated.
Example: Dan hires Tom to paint his house, but the house burns down before the contract can be performed.
• The contract is illegal.
Example: The contract is for the commission of murder.
• The contract lacks consideration.
Example: Tom promises to give $20 to Dan, but Dan does not have to do or give anything in return.
• The contract was obtained by fraud.
Example: Blue Company refuses to sell to Red Company, so Red Company sends Pink Company to buy goods from Blue Company and turn them over to Red Company.
• The contract limits the amount of damages that can be recovered.
Example: The contract states that in the event of a minor breach, the damages will be $100 regardless of the actual loss.
• The contract contains a mutual mistake, stating something different from what either party intended.
Example: Both parties intended a delivery date of March 15, but the contract says April 15.
• The contract contains a unilateral mistake that was material to the agreement and the other party knew or should have known of the mistake.
Example: Maria paid Tom a lot of money for a painting signed “Picasso.” Tom knew that Maria thought Pablo Picasso painted it when really Arnold Picasso was the painter, but Tom did not correct the misunderstanding.
• The parties have accepted the contract performance, or a substitution for the performance, as adequate. This is called accord and satisfaction.
Example: Tim owes Frank $100 on a contract debt. Frank agrees to accept a radio worth $50 in exchange for discharging the debt. When Frank changes his mind and sues for the additional $50.00, the Court will not enforce the original contract because Frank has accepted the radio as the performance of the contract.
• One (or both) of the parties lacked the capacity to make the contract.
Example: A party to the contract is 16 years old or is mentally incompetent.
REMEDIES FOR BREACH OF CONTRACT
What are the Remedies for Breach of Contract?
There are several remedies for breach of contract, such as an award of damages, specific performance, rescission, and restitution. In courts of limited jurisdiction, the main remedy is an award of damages.
What Damages Can Be Awarded?
There are two general categories of damages that may be awarded if a breach of contract claim is proved. They are:
1. Compensatory Damages. Compensatory damages (also called “actual damages”) cover the loss the nonbreaching party incurred as a result of the breach of contract. The amount awarded is intended to make good or replace the loss caused by the breach.
There are two kinds of compensatory damages that the nonbreaching party may be entitled to recover:
A. General Damages. General damages cover the loss directly and necessarily incurred by the breach of contract. General damages are the most common type of damages awarded for breaches of contract.
Example: Company A delivered the wrong kind of furniture to Company B. After discovering the mistake later in the day, Company B insisted that Company A picks up the wrong furniture and deliver the right furniture. Company A refused to pick up the furniture and said that it could not supply the right furniture because it was not in stock. Company B successfully sued for breach of contract. The general damages for this breach could include:
• refund of any amount Company B had prepaid for the furniture; plus
• reimbursement of any expense Company B incurred in sending the furniture back to Company A; plus
• payment for any increase in the cost Company B incurred in buying the right furniture, or its nearest equivalent, from another seller.
B. Special Damages. Special damages (also called “consequential damages”) cover any loss incurred by the breach of contract because of special circumstances or conditions that are not ordinarily predictable. These are actual losses caused by the breach, but not in a direct and immediate way. To obtain damages for this type of loss, the non-breaching party must prove that the breaching party knew of the special circumstances or requirements at the time the contract was made.
Example: In the scenario above, if Company A knew that Company B needed the new furniture on a particular day because its old furniture was going to be carted away the night before, the damages for breach of contract could include all of the damages awarded in the scenario above, plus:
• payment for Company B’s expense in renting furniture until the right furniture arrived.
2. Punitive Damages. Punitive damages (also called “exemplary damages”) are awarded to punish or make an example of a wrongdoer who has acted willfully, maliciously or fraudulently. Unlike compensatory damages that are intended to cover actual loss, punitive damages are intended to punish the wrongdoer for egregious behavior and to deter others from acting in a similar manner. Punitive damages are awarded in addition to compensatory damages.
Punitive damages are rarely awarded for breach of contract. They arise more often in tort cases, to punish deliberate or reckless misconduct that results in personal harm.
How are Compensatory Damages Calculated?
The calculation of compensatory damages depends on the type of contract that was breached and the type of loss that was incurred. Some general guidelines are:
Standard Measure. The standard measure of damages is an amount that would allow the nonbreaching party to buy a substitute for the benefit that would have been received if the contract had been performed. In cases where the cost of the substitute is speculative, the nonbreaching party may recover damages in the amount of the cost incurred in performing that party’s obligations under the contract.
Contracts for the Sale of Goods. The damages are measured by the difference between the contract price and the market price when the seller provides the goods, or when the buyer learns of the breach.
Are There Any Limitations on the Award of Compensatory Damages?
An important limitation on the award of damages is the duty to mitigate. The nonbreaching party is obligated to mitigate, or minimize, the amount of damages to the extent reasonable. Damages cannot be recovered for losses that could have been reasonably avoided or substantially ameliorated after the breach occurred. The non-breaching party’s failure to use reasonable diligence in mitigating the damages means that any award of damages will be reduced by the amount that could have been reasonably avoided.
THE PAROL EVIDENCE RULE
What is the Parol Evidence Rule?
In general, the parol evidence rule prevents the introduction of evidence of prior or contemporaneous negotiations and agreements that contradict, modify, or vary the contractual terms of a written contract when the written contract is intended to be a complete and final expression of the parties’ agreement. A merger clause strengthens the presumption that the written document is complete and final by expressly stating that the written document is the final and full expression of the parties’ agreement. Thus, even if the parties later agree that they had a conversation creating, for example, a “side agreement” that was not included in the original written contract, and the side agreement contradicts the written contract (e.g., by changing the delivery date or price of a purchase), the additional or different terms included in the side agreement may not be enforced by the court when there is a merger clause in the written contract. (See: RSMO 400.2-202)
There are some exceptions to the parol evidence rule. Evidence of the following is admissible:
1. Defects in the formation of the contract (such as fraud, duress, mistake or illegality).
2. The parties’ intent regarding ambiguous terms in the contract.
3. Problems with the consideration (e.g., the consideration was never paid).
4. A prior valid agreement that is incorrectly reflected in the written instrument in question.
5. A related agreement, if it does not contradict or change the main contract.
6. A condition that had to occur before contract performance was due.
7. Subsequent modification of the contract.
For additional information about contracts, check out our free online business law course that contains muliple chapters about contracts.