A contract is a legally enforceable agreement between two or more persons where the parties to the contract exchange goods, services or currency pursuant to the agreed upon terms.
There are three vital parts of a contract:
- An offer by one party that is accepted by the other party or parties;
- A common mind about the subject matter of the agreement (Latin ad idem)
- Valuable consideration or delivery under seal.
If one of these parts is missing, no contract exists.
A contract can either be spoken (oral contract) or written (verbal contract). Both are equally enforceable in most situations, although under the Statute of Frauds in some jurisdictions, some contracts are only enforcable if they are in writing (such as those that tranfer real property). It is naturally easier to prove the terms of a verbal contract, but an oral contract can be proven through the evidence of witnesses. However, a written contract is unconditionally presumed to contain the entire agreement between the parties and evidence of discussions prior to the contract do not change the terms of the contract, but may be used to resolve ambiguities in the written agreement (the parol evidence rule).
A contract is breached when either of the parties is not in strict compliance with their obligations under the contract. There is a fundamental breach when the breach goes to the heart of the party's obligation under the contract. The remedies available to the innocent party are different depending on the severity of the breach.
A contract will not be enforced, even if all three conditions are met if:
- The contract is unconscionable (i.e. so bad a bargain that no reasonable person would have entered into it); or
- Enforcing the contract would be contrary to public policy, such as a contract that would require a party to commit a crime.
Recission - The court may release the parties from their obligations under a contract in appropriate cases, generally where there has been fundamental breach.
Damages - The innocent party to a breach may claim any monetary damages arising from the breach.
Specific Performance - In situations where damages may not make the innocent party whole, the court may choose to require the party in breach to fulfil their obligations under the contract. However, this remedy is only available when the innocent party has acted in good faith and damages would be an inadequate remedy.
Contractual remedies are only available to the parties of a contract. Third parties who may benefit from a contract are not allowed to pursue remedies against the parties to the contract under contract law, a concept referred to as privity. However, such persons may have remedies in tort. There are also statutory provisions for certain types of contracts, such as insurance contracts, that allow third parties to pursue contractual remedies in place of one of the parties to the contract.
However, benefits under a contract may be assigned to a third party, who may pursue remedies under the contract as if they were a party to the contract. However, obligations under a contract may not be assigned.