Contracts, Warranties, Buying Tips Article

What is a Contract?

Have you ever wondered what makes an agreement a legally binding contract, which a court of law will enforce if one of the parties to the contract sues the other? This article provides a basic introduction to the law of contract formation. (Breach of contract is a whole other subject.) If you entered into a contract and believe that something you read in this article may apply to your situation and potentially make your contract unenforceable, you should speak with an attorney.

What is a contract?

A contract is a legally enforceable mutual exchange of promises.

What are the main types of contract?

The main types of contract are:

1. express contract

An express contract is a contract created by the contracting parties’ words.

It does not matter if the words were written down or merely spoken. This is important: verbal agreements are contracts. A residential rental agreement is an example of an express contract.

2. implied-in-fact contract

An implied-in-fact contract is a contract created by the contracting parties’ conduct.

For example, if a person enters a barbershop or a hair salon and sits down in the hairstylist’s chair for a haircut, a contract is created between the customer and the hairstylist, which means that, even though the hairstylist never asked for any money in exchange for a haircut and the customer never promised to pay any money in exchange for the haircut, once the customer’s hair has been cut the customer owes the hairstylist money.

3. quasi (implied-in-law) contract

A quasi (or implied-in-law) contract is not actually a contract. It is an equitable remedy. An equitable remedy is something a court may impose in order to provide restitution to a party that did not receive the benefit of the agreed-upon bargain. If one party is unjustly enriched by a contract, a court may help even things out.

How is a contract formed?

A contract is formed when there is:

1. mutual assent

a. an offer to do or not do something containing definite and certain terms
b. the acceptance of that offer

An offer is the expression of a promise, undertaking, or commitment to enter into a binding contract that demonstrates the offering party’s intention to be legally bound. It must be more than merely an invitation to negotiate.

The acceptance of an offer is a promise or act that demonstrates the accepting party’s willingness to be bound by the terms and conditions contained in the offer. A person may not accept an offer after the offer has been revoked or after the offer has already been rejected (unless it is offered again).

A bilateral contract is formed when a person accepts an offer by promising to do the requested act. A common example is when the buyer of a home promises to pay the seller of the home a specific amount of money within a certain period of time in exchange for the seller’s promise to deliver title to the property to the buyer.

A unilateral contract is formed when a person accepts an offer by actually performing the requested act. A common example is when, after the owner of a lost dog posts a financial reward for the dog’s return, someone finds the dog and then returns it to its owner. Even though the person who found the dog never promised to do so, the owner of the dog still owes the promised financial reward.

2. consideration

Consideration is the bargained-for exchange of something of legal value. A contract must contain a benefit or detriment to the offering party and a benefit or detriment to the accepting party that the parties otherwise would not be entitled to demand or expect. A unilateral promise to do or not do something will not be binding unless both parties get or give up something.

3. no contract formation problem

Not all contracts in which there is an offer and acceptance and consideration are valid contracts. If a contract is formed in a way that the law does not permit, then neither party to the contract will be bound by it.

Are all contracts legally enforceable?

No. Not all contracts are legally enforceable.

What kinds of contracts are not legally enforceable?

1. void contract

A void contract is a contract that is without any legal effect and therefore cannot be enforced by either party. It is invalid from the start.

Examples of void contracts under Arizona law are contracts for unlawful acts and contracts for impossible acts. A lack of capacity by one or both of the parties and/or an absence of consideration also may make a contract void.

2. voidable contract

A voidable contract is a contract that may be voided by either party. A party may choose to perform it or have it voided by a court.

Examples of voidable contracts under Arizona law are contracts which one of the parties was forced or tricked to enter into. Misrepresentation, duress, and/or undue influence may make a contract voidable.

3. unenforceable contract

An unenforceable contract is a contract that neither party may enforce due to a contract defense that is not directly related to contract formation (see below).

An example of an unenforceable contract under Arizona law is a contract for the sale of real estate (a house or land) that is not made in writing. A contract for the sale of real estate that is not made in writing may violate the Statute of Frauds.

What is the Statute of Frauds?

The Statute of Frauds is the legal requirement that certain kinds of contracts be memorialized in a writing (written document) that contains enough information to establish that an actual contract was formed and that is signed by the party to be bound by the contract. The original Statute of Frauds was enacted by the Parliament of England in 1677. Today, every American state has its own version.

What must a written contract contain in order to comply with the Statute of Frauds?

In order to comply with the Statute of Frauds, and thereby be legally enforceable, a written contract must contain sufficient information to establish:

1. the identity of the parties to the contract
2. the subject matter of the contract; and
3. the essential terms and conditions of the contract

It also must contain the signature of the party to be bound (that is, the party being sued).

What are some of the kinds of contracts which must be memorialized in a detailed signed writing?

A.R.S. § 44-101 states that “No action shall be brought in any court in the following cases unless the promise or agreement upon which the action is brought, or some memorandum thereof, is in writing and signed by the party to be charged, or by some person by him thereunto lawfully authorized”:

1. a contract for interests in real property

A contract for real property must be memorialized in a detailed signed writing if it involves any of the following:

1. the sale of land
2. a residential lease for a term of more than one year
3. an easement for a term of more than one year
4. a mortgage or other security lien

***  IF YOU INTEND TO PURCHASE REAL PROPERTY (LAND OR A HOME), YOU SHOULD INSIST ON OBTAINING A DETAILED AND SIGNED WRITTEN DOCUMENT  ***

There is an exception to this rule that contracts for the sale of land must be in writing. Under what is called the doctrine of part performance, if the seller of the property conveys the property the buyer and the buyer in turn does two of the following three things – (1) pay the seller; (2) take possession of the property; and (3) make valuable improvements to the property – then a contract will be recognized even if it was not memorialized in a detailed signed writing.

Other kinds of contracts which must be memorialized in a detailed signed writing include:

2. a contract for the sale of goods for $500 or more
   
3. a promise that is impossible to fully perform within one year
   
4. a promise that is impossible to fully perform within the lifetime of the promising party

5. a promise to pay the debt of another

6. a promise made in consideration of marriage

7. a promise by the executor or administrator of an estate to personally pay the debts of the estate
   
What are some other contract formation problems which may render a contract invalid?

Other contract formation problems which may render a contract either void or voidable include:

1. lack of capacity

A person lacks the capacity to contract if they are:

a. a minor child (under age 18) unless (1) the child does not disaffirm the contract before they reach age 18 or (2) the contract was for necessaries related to the minor’s subsistence, shelter, health, or education (in which case the minor is liable in restitution for any benefits received)
       
Under Arizona law, a person who is under age 18 but is married to a person who is age 18 or older has the capacity the contract.

A.R.S. § 44-131(B) states that “A person who is married to an adult is not under legal disability because of that person’s minority to make a contract and a contract made by that person is not invalid or voidable because of that person’s minority.”
   
b. mentally incapable at the time the contract is formed unless the person affirms the contract during a lucid interval or upon complete recovery

2. misrepresentation

A misrepresentation is a false or misleading statement of fact made by one party in order to get another party to agree to enter into a contract. If a material fact was misrepresented and the party that received the misleading statement relied on the statement and would not have entered into the contract if the statement had not been made, then the contract may be voidable.

3. duress

Duress is a threat of harm that is made to compel a person to do something against their will. In order to make a contract voidable, the duress at the time the contract was formed must have been substantial. In addition, although exceptions exist, usually the threat of harm must be physical rather than merely financial.

4. undue influence

Undue influence exists when a person takes advantage of their position of power over another which exists through some sort of special relationship (such as a parent-child or lawyer-client or accountant-client or medical professional-patient relationship) which causes the second person to place their trust and confidence in the first. A person who is unduly influenced may be unable to freely exercise their will, and any contract they enter into while lacking free will may be voidable.

5. mistake

A mistake is an incorrect understanding by one or more of the parties to a contract. A mistake may take one of several forms which are often described somewhat differently:

a. mutual mistake

A mutual mistake about a contract term is a mistake made by both (all) of the parties to a contract. This is when each of the parties believed that they were agreeing to something different. It may make a contract voidable if:

1. the mistake concerned a basic assumption on which the contract was made
2. the mistake had a material effect on the agreed-upon exchange; and
3. the party seeking to void the contract did not assume the risk of the mistake

b. unilateral mistake

A unilateral mistake about a contract term is a mistake made by one of the parties to a contract. It may make a contract voidable if:

1. the mistake concerned a basic assumption on which the contract was made
2. the mistake had a material effect on the agreed-upon exchange; and
3. the party seeking to enforce the contract was aware of the mistake and sought to take advantage of it

c. mistake about material fact

A mistake about a material fact – for example, the inclusion of an incorrect monetary figure (e.g., $5,000 instead of $50,000) – may make a contract voidable if one or both of the parties knew or had reason to know of the mistake and:

1. the mistake concerned a basic assumption on which the contract was made
2. the mistake had a material effect on agreed-upon exchange; and
3. the party seeking to void the contract did not assume the risk of the mistake

5. public policy

Any contract in which the subject matter of the contract is illegal as defined by state or federal law may be held to be invalid. For example, an agreement to commit a crime is not a valid contract.