What is contract law?

Formation

• Offer — a definite proposal showing willingness to be bound, not an invitation to negotiate. Advertisements and price lists are usually invitations, not offers.
• Acceptance — agreement to those terms. Changing them is a counteroffer that rejects the original, although for sales of goods between merchants the UCC allows some additional terms.
• Consideration — each side gives up something of value. A bare promise to make a gift is usually unenforceable.
• Capacity and legality — minors and people lacking mental capacity can often void agreements; contracts for illegal purposes are unenforceable.

Courts judge agreement objectively, by what the parties said and did, not by private intentions. Clicking “I agree” online, signing electronically or even starting performance can create a binding contract.

When writing is required

The statute of frauds requires a signed writing for certain contracts: sales of land, agreements that cannot be performed within a year, promises to pay someone else's debt, contracts in consideration of marriage, and sales of goods of $500 or more under the Uniform Commercial Code. Otherwise oral contracts are enforceable — they are simply much harder to prove. Emails and text messages can satisfy the writing requirement under federal and state e-signature laws.

Reading a contract

Courts start with the plain meaning of the words. If the contract is clear, outside evidence of what the parties “really meant” is usually excluded, and a merger clause stating that the document is the entire agreement strengthens that rule. Ambiguous terms are often interpreted against the party that drafted them. Clauses to read before signing: payment and termination terms, automatic renewal, limitation of liability, indemnification, choice of law and venue, and arbitration.

Breach and remedies

A breach is a failure to perform without a legal excuse. A material breach lets the other side stop performing and sue; a minor breach only gives a claim for damages. The normal remedy is expectation damages: enough money to put the injured party where performance would have left them, reduced by what they could reasonably have avoided (the duty to mitigate). Consequential damages, such as lost profits, require that the loss was foreseeable when the contract was made, and many contracts exclude them. Specific performance — an order to actually perform — is reserved for unique subject matter such as real estate. Liquidated damages clauses are enforced if they were a reasonable pre-estimate of loss, and struck down if they operate as a penalty. Punitive damages are generally not available for breach of contract.

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Defenses

Fraud, duress, undue influence, mutual mistake, unconscionability, impossibility or impracticability, frustration of purpose and, where the parties provided for it, force majeure. Each is fact-specific, and the written terms usually decide which are even available — the COVID-19 pandemic produced many disputes over whether force majeure clauses covered it.

Which law applies

Sales of goods fall under Article 2 of the UCC as adopted by each state; services and real estate fall under common law developed by courts. The distinction changes the rules on modification, acceptance, warranties and remedies, so it is settled early in any dispute. Mixed contracts, such as installing equipment, are classified by their main purpose.

Deadlines

Statutes of limitations for breach of contract are commonly four to six years for written contracts and shorter for oral ones; the UCC sets four years for sales of goods. The clock usually starts at the breach.

Practical advice

Put important agreements in writing, even as a short email confirming the terms. Keep signed copies, amendments and correspondence. When a dispute begins, write a clear, polite letter stating what was agreed, what went wrong and what you want. For small amounts, small claims court is fast and inexpensive; for larger business disputes, a contract or business litigation lawyer can assess whether a claim is worth pursuing and whether the contract awards attorney fees to the winner.

Many business contracts also require notice and a chance to fix a problem before the other side may terminate, so check for a “cure” clause first.