Contract Basics
A contract is a legally enforceable agreement between two or more parties. Contract law is the body of law that governs the formation, performance, and enforcement of contracts. Generally speaking, a contract is a promise made by one party to another in exchange for a return promise, or something of value. For example, a homeowner may promise a check in exchange for the necessary materials to build a garage. In this example, the promise to buy materials is the "consideration" for the garage. In other words, the contract is an agreement to exchange a payment for goods. Contracts come in many forms. Most are written documents, but oral contracts are also legally binding, as long as they contain the essential elements of a contract. Rarely, contracts do not have to be enforced in a court of law. For example, some people agree to perform voluntarily for charities without intending to sue each other if the agreement goes bad or is broken. However, normally, a contract must have a legal remedy if it is broken or its terms are not fulfilled.
While the content of contracts varies widely, all contracts must have six elements:
- Offer. A contract begins with an offer, which is an expression of interest to enter into an agreement.
- Acceptance. The acceptance of an offer is the agreement of the offeree to the offeror’s proposal . Acceptance must be given voluntarily, and in a form indicated by the contract, such as verbally or in writing.
- Consideration. Consideration is the exchange of something of value to keep a promise or performance of an act in exchange for a promise or act.
- Legality. A contract is not legally binding if it is not for a legal purpose. For example, an agreement to sell cocaine is not enforceable under contract law.
- Capacity. Parties entering into an agreement must be able to make and understand the terms of the contract. A minor does not have the same capacity to enter into an agreement, for example.
- Fluency. Parties to an agreement must understand the contract. Parties are expected to understand the basics of the agreement, but not necessarily the legal jargon and the precise language of the contract.
Contracts are constantly made in modern society. Your rental agreement is a contract. Your lease at school is a contract. The terms and conditions you agreed to before downloading a video game is another contract. Contracts encompass everything from verbal agreements to multi-million-dollar business deals. In general, contracts are legally binding as long as the elements are present. However, to enforce a contract, it often helps to have it in writing, as it makes it easy to prove the terms of the agreement in case of a dispute.
Necessary Elements of a Legally Enforceable Contract in Texas
To enter into a valid contract, the following elements must be present:
Offer and Acceptance: An offer is a definite proposal made by one party to another indicating a willingness to enter into a contract. In order for a contract to exist, the offer must be accepted and communicated.
Consideration: Consideration is the value exchanged between parties. It can take the form of money, services or goods that are given in exchange for the promise. While not all contracts in Texas require a promise as consideration, most do.
Mutual Consent: Mutual consent requires that both parties agree to the same terms of the contract. A unilateral contract is where only one party enters into a contract. In Texas, unilateral contracts are binding upon acceptance.
Capacity to Contract: Who Has the Power to Enter into a Contract
Under the common law, in order for a contract to be valid, the parties entering the contract must have the (i) ability, (ii) authority, and (iii) intent to enter the contract. In other words, a party must have the legal capacity to form a contract by being of legal age, of sound mind, and capable of entering into a legal contract.
In Texas, the age of majority is essentially 18 years of age, unless the contracting party is or was married (regardless of whether that marriage is common law), was on active duty in the military at the time of the contract, or could prove to a court that he/she had sufficient mental capacity to understand the contract. If a person is a minor at the time of contract formation, the contract is voidable at the minor’s option at any time during his minority or within one year after the minor becomes an adult. Texas Family Code § 671.001.
Parties who are mentally incompetent at the time of contract formation will lack the requisite capacity to enter the contract. However, once a person is restored to competence and ratifies the contract, the contract is enforceable. Enhancement of a person’s mental deficiency, such as age, illness, and intoxication, does not remove the capacity to consent to a contract. Such a party may avoid the contract, however, if he can show that, at the time of contract formation, he was incapable of understanding the nature and consequences of the transaction involved and that the other party had reason to know of this condition.
Similarly, a party who is intoxicated at the time of contract formation may avoid the contract if he can show that he was unable to understand the nature and consequences of the transaction involved and that the other party had reason to know of this condition. However, intoxication must be "intoxication sufficient to deprive [the person] of the ability to make a rational judgment; mere drunkenness is not enough." Ragsdale v. Packard, 672 S.W.2d 912, 914 (Tex. App – 1984). Alcohol or drug abuse, even if in excess, is not sufficient to prove lack of capacity. Id.
Likewise, partnerships, corporations, associations, and other legal entities must be able to voluntarily enter into contracts. Contracts made with a partnership, corporation, or other entity are voidable at the option of any partner, corporate officer, or member of the entity who has no knowledge of the contract. Texas Uniform Partnership Act § 403(f); Texas Business Corporations Act § 21.40(a). A contracting entity must be of sound mind and acting within its statutory authority to enter a valid contract. Additionally, a partnership, corporation, or other entity may act through agents, rather than by direct action of its partners, members, or stockholders.
The principal-agent relationship is a separate legal relationship in which the principal, possessing the power to control the agent’s conduct, employs the agent to perform some expression of the principal. The agent, operating under this authority, may bind the principal to contracts with third persons that the principal has the legal power to bind himself. The authority to act on another’s behalf must usually be given to the agent in writing. The methods available to a principal to give authority include express authority, implied authority, apparent authority, and authority by ratification.
Express authority is established when the principal manifests approval of the agent’s acts directly in writing or orally. Implied authority is defined either as "incidental authority" or "customary authority." Incidental authority gives the agent the authority to act reasonably towards the accomplishment of his objectives and customary authority gives the agent the authority to perform acts usually accomplished by an agent in similar circumstances. Apparent authority gives the agent the authority to bind the principal to third persons when the third persons reasonably believe the agent has authority, in light of the circumstances. This kind of authority can be found in a written grant, oral statements, or other acts of the principal. Authority by ratification is a legal fiction that allows a principal to adopt a contract that would otherwise be void due to the unauthorized authority of the agent. Any principal, with capacity to form a contract, may expressly or impliedly agree to ratify a contract made during his absence or incapacity from a third person who acted on his behalf in good faith.
Consideration in a Texas Contract
At the heart of all contracts is an agreement to trade something of value. This is a universal truth in contract law. But what constitutes "something of value" is not always so clear cut. The simplest, and most basic, form of this ‘something’ is money. For example, if you provide me with a lawn-care service I am ‘somethinging’ you a lawn-care service and you are ‘somethinging’ me a payment of an agreed-upon amount. These items are sufficient to make a deal. Both of us come away with "something" of value to us, whether that be a few extra bucks in the pocket, or a weed-free front yard.
But what if my business happens to own the house next door and I want to make it seem like it is occupied? In that case, we might enter into a contract where I get to rent out the house for a month or even a few weeks, in exchange for you performing maintenance on the property that costs that same amount. As long as both parties know this is happening, there is no reason that this is an illegal transaction. Instead of money, value is exchanged in the form of another service.
This type of consideration is common in the criminal context, as well. It does not matter if your Texas criminal defense attorney is ultimately paid before the work is done on your case (and it very frequently is not) because the value that is being exchanged is already known to both parties. You will not be required to put that attorney on retainer before he or she files pleas, talks to witnesses on your behalf, or files motions in court. You pay him when it is all said and done.
A less obvious, albeit still valuable, form of consideration is a promise. If I promise to do something, to perform a task, and you promise to pay me, that promise is "something of value" and the contract is valid. When you think about it, there are many circumstances when this arrangement is used. For example, when you schedule a haircut appointment, you are making a promise to be at the barbershop on Tuesday at five o’clock. In return for your promise, the barber promises to reserve that time to cut your hair. If you fail to show up, he loses business. If he should fail to show up, his reputation as a barber would be ruined. Both of these things help to ensure that the appointment is made.
The essential element here is that both parties be aware of what is being offered in the transaction and that both are in agreement. This is the crux of contract law. While it may seem crazy that a promise can be legally binding, if putting your name down on a strip of paper can accomplish the same thing, so too can a simple "I promise."
Mutual Agreement is a Necessity
An essential component of a legally binding contract is mutual assent or agreement. This means that each party involved must have a clear, unmistakable intention of entering into the contract. There must be a meeting of the minds between both parties with regard to the subject matter of the agreement and the essential terms. Simply agreeing about the object of the exchange is not enough. In Texas and the vast majority of courts around the country, this mutual agreement is demonstrated through an offer and acceptance. One party makes an offer to undertake a specific obligation to the other, and this is accepted by the second party in the proper manner – creating a legal "meeting of the minds." In Texas, offer and acceptance forming mutual agreement requires that the terms of the offer be sufficiently definite to enable the performance. If the terms are even ambiguous as to quantity, the court should understand what was meant based upon circumstances of the offer or the intent is not clear. The Texas Supreme Court states: Generally, an offer must provide a reasonably definite basis for determining the existence of a breach and an appropriate remedy. This does not mean that the parties must contemplate in their agreement all contingencies that might arise. Nevertheless, there must be a basis for determining how much both parties are to give and to take. Furthermore, even where the contract leaves open some matter such as price, the court can supply a basis of damages by determining that it is to be fixed according to some standard, such as market value. . . . We think an agreement to agree in the future is unenforceable in Texas. The offeror’s intentions found in his manifestations must have been that the offeree could create a contract by acceptance. Otherwise there would be no mutual assent. [citations omitted]
Legal Purpose: Validity & Texas Contract Law
For a contract to be legally binding, it must be for a legal purpose. Agreements that violate the law or public policy are not enforceable in Texas, as is the case in most other states. The statutory requirement that the subject matter of an agreement not be illegal or against public policy appears in Section 272.001 of the Texas Business and Commerce Code. If the purpose of a contract is illegal or if the subject matter is illegal, then the contract is void and unenforceable – that is: A court will refuse to recognize the contract and will not order specifically performance of the contract or other remedy.
Contracts for illegal purposes include: Contracts cannot be solely for contract violence or intimidation. For example, if your contract requires the payment of a financial penalty if the contract is breached, the penalty must be reasonable. Penalties that are overly harsh or punitive may be deemed unlawful and unenforceable. Courts will usually not get involved in disputes between business competitors and interpret contract provisions as promises intended to protect valid business interests rather than to coerce or scare competitors into abandoning their own businesses.
Under Texas law, even an ancillary or non-essential part of the contract may render the entire contract void if it is illegal. For example , agreements that restrict the sale of certain products or services by specifying a price or other terms may be deemed illegal if the product or service is not subject to regulation. However, a provision restricting only the time, place or manner of the sale is legitimate and enforceable.
In addition, a deed or mortgage that rejects liability for future claims for compensation, damages or injuries of then existing unknown or unanticipated defects is void. Further, gambling contracts (except in limited circumstances) are invalid and may not be enforced in Texas.
Under Texas law, a contract that is against the public policy of the state is also void. Examples of contracts that may be found invalid as a matter of public policy include many employment contracts that contain provisions that are illegal under the Texas Penal Code, such as contracts limiting the employer’s or employee’s rights to engage in strikes or picketing, or restricting the employee’s right to join a lawful union. The Texas Business and Commerce Code provides, as another example, that the contractor’s choice of law between the law of Texas and another jurisdiction, including the United States, is ineffective if it deprives the consumer of a consumer protection afforded by the State whose law would otherwise apply.
Written and Oral Contracts
Written contracts remain preferable in Texas, although oral contracts are often legally binding upon agreement between the parties. Even under a strong, written contract with an executed signature, it still may be possible for an oral contract to supersede a written contract if any contract terms were not reduced to writing and either party was unaware that the other had oral communications with the intent to modify the contract.
Although a valid, enforceable oral contract may arise, it remains wise to contract in writing and not rely on an oral agreement. Written contracts with executed signatures are presumed enforceable; any terms not displayed in writing within the contract itself become problematic for the party seeking to enforce the contract. Furthermore, contracts that may not be fulfilled for at least one year, contracts involving the sale of real estate, contracts involving the lease of real estate for a term greater than one year, contracts for the sale of goods valued at $500 or more, and contracts related to the sale of stocks, bonds, real estate interests or an interest or profits in a company, are required under the Statute of Frauds to be in writing. This is determined by the nature or purpose of the contract. For example, an oral contract to build a house is not enforceable, although a contract to build a fence would be.
Contract terms that are not reduced to writing (a) cannot be included as defenses to a breach of contract claim, (b) may not be enforceable as contract terms, (c) may require an otherwise valid contract to be voided as invalid, and (d) may require a party to remove a necessity. Exceptions exist to show that a contract, even one that may not be in writing, is nevertheless enforceable.
Breach of Contract and Available Remedies in Texas
A breach of contract in Texas is the failure or refusal of a party to perform a duty that is owed under the contract. If a contracting party fails to perform his contractual obligations, the aggrieved party may have various legal remedies available to him or her. The severely injured party may be able to recover damages, which are called "expectation damages" in legal terminology. Expectation damages restore the aggrieved party to the position he or she would have occupied had the contract been performed. Expectation damages compensate the innocent party for any loss of a benefit of the bargain.
However, a party seeking greater damages must be able to show its actual damages resulted from the breach. In Texas, the recoverable damages flow from the competing contractual interests (as discussed above). As such, consequential damages are often recoverable by a party if they stemmed from the breach, and not the contract itself. An example of this principle can be found in Henry S. Miller Co., Inc. v. Ross, 369 S.W.2d 31 (Tex. Civ. App.—Dallas 1963, writ ref’d n.r.e.). Yet, a party cannot recover damages for losses incurred as a result of a breach of contract, where those losses are: (1) unreasonably disproportionate; (2) not foreseeable; and (3) not within the contemplation of the parties when the contract was formed. See City of LaPorte v. Brisk & Young Constructors, 459 S.W.2d 668 (Tex. Civil App.—Houston [14th Dist.] 1970 writ denied).
Other forms of recovery may include: Restitution. Sometimes, a court may choose to order restitution to the aggrieved party following a breach. Restitution tries to restore the benefits unfairly received, rather than merely return the damages. While it may be appropriate to recover restitution when both parties have partially performed the contract, it is also appropriate for "overreaching or fraudulent breaches." See Thatcher v. McGill, 22 Tex. 495 (1885). Specific Performance. A breach may also produce the remedy of specific performance. Instead of ordering damages, a court may order the party in breach to perform as the contract required. Specific performance is available only when money damages would be insufficient. See Hogg v. Blair, 83 S.W. at 2d 513 (Tex. App.—Dallas 1949, writ ref’d n.r.e.)
Helpful Tips for Drafting Legally Enforceable Contracts in Texas
While every business contract must make sense in the context of the unique deal you are entering into, there are a number of best practices that apply to all enforceable contracts. For starters, both parties should draft contracts together. A poorly drafted agreement that seems to be taking advantage of one side over another may be more likely to end up in litigation. Ideally, the negotiating process should continue until the parties have reached an agreement on all relevant terms. Since Texas courts have a history of upholding contracts in most instances in which contracting parties reach a clear agreement, it is essential for both sides to do whatever is possible to ensure clarity and prevent miscommunication. The best way to accomplish this is by ensuring all material terms of an agreement are explicitly stated, as opposed to just assuming common sense will prevail if either side makes a claim that the other failed to fulfill obligations perceived to be present. If a deal is complex , the parties may be better off hiring an experienced business lawyer to help with the drafting of the agreement. A lawyer can help you make sure the document is clear and complete so as to prevent issues with ambiguity or vagueness that could render the contract legally unenforceable. It is also important that the contract is consistent. For example, if you agree to build a swimming pool for $50,000, the provision detailing this obligation should not be in conflict with another provision related to a price of $30,000 for the same item. As long as you document every relevant aspect of an agreement with the utmost attention to detail and precision, it is likely you will be able to avoid potential issues that could make the opposing party feel as if the contract is not legally binding. Above all else, it is crucial that you make sure you have the legal capacity to enter into a contract. In order to be legally bound to the terms of an agreement, you must be at least 18 years old and of sound mind. Any agreement you sign while intoxicated or impaired could be challenged in court.