Basic Information on Business Contract Law
Contracts are fundamental business tools---without them, the economy would come to a standstill. Although business contract law is governed by the same general principles as general contract law, it does have some special features, primarily because many business contracts are entered into by business entities rather than by individual business people.
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Formation
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A binding contract is formed when one party offers to enter into a contract, the other party accepts the offer with the intent to be legally bound and the terms of the contract require that value be given on both sides. In the business context, contracts are often made through the exchange of emails or forms such as purchase orders. When the terms of these documents conflict with each other, the question of what the terms of the contract actually are becomes important. Article 2-207 of the Uniform Commercial Code (enacted in every state and applicable to the sale of goods) resolves this question by use of a complex legal formula.
Defenses
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Defenses to the formation of a contract include illegal subject matter (a contract to purchase illegal drugs, for example), fraud, mutual mistake of fact and incapacity (the business organization that signed does not legally exist, for example). Further, the Statute of Frauds (enacted in every state) requires that certain contracts, including for the sale of real estate and for goods worth more than $500 be in writing. When a defense to formation is successful, the contract is normally rescinded--the court cancels the contract and puts the parties back into the same position they were in before the contract was entered into--a seller gets his goods back, for example, but is not entitled to profit from the deal.
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Termination
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There are three main ways that a contractual relationship can be terminated: expiration, mutual agreement and material breach. A contract ends by expiration when it ends according to its own terms: a lease expires, a project is completed or goods are delivered, for example. It ends by mutual agreement when all parties freely agree to end the relationship. A contract ends by material breach when one party commits a violation of his contractual duties serious enough to justify unilateral termination of the contract by the other party. A minor breach does not give the other party the right to terminate the contract, although it does give rise to an obligation for the breaching party to pay any damages suffered by the other party.
Remedies
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There are three main remedies for breach of contract--money damages, specific performance, and liquidated damages. Money damages are favored by courts when it is possible to determine the plaintiff's losses. Specific performance (ordering to defendant to comply with the terms of the contract) is used in cases when money damages would be insufficient; ordering a defendant to transfer title to real estate, for example. Some contracts contain liquidated damages clauses that specify the exact amount of damages in advance and these clauses will be enforced as long as they are reasonable.
Agency
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Many business contracts are unique because the parties to the contract are not individuals but business organizations. This raises the issue of who is authorized to sign the contract on behalf of the organization (the "agent"). Generally speaking, if an unauthorized representative signs on behalf of a business entity such as a corporation, the contract is not binding on either party. An exception is when the other party has good reason to belief that the person signing possesses authority to bind the party he represents. An example of such a case would be when a legitimate representative of Company A produces written authorization from the company, is fired without the knowledge of Company B, and signs a contract with Company B anyway. In this case, both parties would be bound by the contract notwithstanding the representative's lack of authorization.
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References
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- Photo Credit real estate contract image by Keith Frith from Fotolia.com
