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Contract Law Basics: Creation, Interpretation, And Breach

Businesses wouldn’t exist without contracts. Just because you don’t have a stack of signed, written contracts doesn’t mean you’re not contractually bound to pay or perform services for others. Contracts can cover purchases, insurance, subcontracting, employment, and property sales or leasing. Our friends at Focus Law LA will tell you that often, they’re the glue keeping companies connected to each other and their clients.

What Are Contract Requirements?

Though state laws may differ, generally, contracts, or those entering into contracts, must have the following: 

  • Offer and acceptance: There’s a clear offer by one party and an unambiguous acceptance by the other. Vague and ambiguous terms may not be enforceable
  • Intent to create legal relations: Both parties intend for the agreement to be binding
  • Lawful purpose: An agreement to commit a crime or break a law isn’t enforceable
  • Legal capacity: The parties must have the mental capacity to enter into a binding contract. They can’t be minors, or so influenced by substances, or so impaired by a psychological condition that they don’t understand the meanings and effects of the words of the contract
  • Mutual agreement (meeting of the minds): Both parties must understand and agree to the contract’s essential terms. If there’s a misunderstanding or a lack of genuine agreement, the contract may be voidable in part or entirely
  • Consideration: Both parties exchange something of value. It can be money, goods, or services. It can be a promise to do something or refrain from doing something
  • Possibility of performance: The obligations must be possible and practical to perform 
  • Consent and duress: Both parties’ consent must be freely given. It can’t be the result of coercion, fraud, threats, or duress

Contracts can be in writing, verbal, or implied by the parties’ actions.

How Are Contracts Interpreted?

If the parties disagree on their contractual obligations and rights, it can come down to interpreting the contract. 

The parties’ intent is judged by the contract’s language. If it’s unambiguous, the text is the best evidence of the parties’ intentions and is binding. Language may be ambiguous if it’s reasonably susceptible to more than one interpretation. Whether it’s vague is a determination of law that judges make based on a number of legal principles.

The parties’ rights and obligations in an ambiguous contract, or a contract section, is an issue of fact a court can decide. Evidence beyond the contract language can be used to determine intent, including negotiations and correspondence. If one party drafted the contract, ambiguity is typically interpreted against them.

What Is A Contract Breach?

A contract is breached when one or both parties fail to comply with their obligations. But if they’re not significant, seeking redress may not justify the costs of legal action. 

If there’s proof of a material breach (a significant failure in the other party’s contract performance), you would have a right to sue for damages (the harm done) and a court decision stating the other party must comply with the contract, or you need not fulfill your obligations.
Whether the breach is material depends on the particular situation, the contract’s purpose, and the parties’ expectations and goals. The same violation in one instance may be material but not in another. A corporate transaction lawyer will tell you it may depend on whether the breach was intentional, how much of the contract was already performed, and the harm done due to the breach.