A contract refers to a valid agreement of two business entities or individuals whereby each of the parties involved is supposed to or not to do a specific thing. The agreement does not include what the parties involved believed or understood about the meaning rather than the meaning documented in a language of a contract. The actions and words of each party that establish an agreement create a contract. When the parties assuredly manifest their intent to get into a contract and given the terms, the contract, whether oral or written, is legally binding. Oral contracts are, however, associated with issues as one party can deny the terms.
Description of an Example of a Contract
It is always unpleasant when a client’s relationship results in amicable terms, especially when its collapse results in mitigation. Recently, a contract dispute encountered legal action in a bankruptcy court. John was the sole business owner of a business that worked for utility companies. He decided to seek advice from an accounting firm that he had known before. His wife was the bookkeeper, and he was concerned that they might divorce. However, John was not billed by the CPA, and neither did they enter into any written contract (Rendleman & Roberts, 2018). Later on, the couple separated, and John realized that the wife was not filing returns and never paid taxes for many years. Therefore, John was required to recreate the business’s financial records and file the firm’s returns for the last six years.
The firm took the challenging assignment of John’s business situation despite them not having a written agreement. However, after some time, John entered into a contract with the firm to resolve the challenging issues in his business. Contracts cannot be enforced without the parties’ capacity to consent. It means that the parties are over 18 years old and can understand the contract’s significance and terms. If one party lacks the mental capacity to understand the terms, the contract is considered voidable.
A contract is also void if one of the parties concerned knows the other is unable to consent. In John’s contract with the CPA firm, both party parties were over eighteen years and could understand the contract’s terms. The party that receives a contractual offer is the only one that accepts it. The effectiveness of the offer starts immediately it is en route to a benefactor. John accepted and executed a contract with the CPA firm.
Essential Elements of an Enforceable Contract
There are five elements of an enforceable contract: offer, acceptance, mutuality of obligation, consideration, capacity, and competency. An offer is a written or verbal promise to act or desist an action in exchange for agreed terms. Verbal offers are difficult to prove in case of the emergence of a court case. Verbal offer method of contracting needs, therefore, to be avoided where possible (Werbach & Cornell, 2017). At first, John’s business had a verbal agreement with the firm but later had a written formal agreement.
Acceptance can also be either verbal or written though the verbal one is not recommended. To ensure that the two parties understand the terms, points that concern acceptance is constructed. These points include rights of revocation, proper forms of acceptance, and expiration dates. Consideration refers to the importance of every party to a contract. The value may be a promise to do a specific task or monetary. The firm was valuable to the business as it provided both nonfinancial and financial information and proper documentation.
Mutuality of obligation is another element of a contract which is a binding agreement for the parties involved to consider terms. When a party has more leverage, for example, the right to cancel, the court contemplates if mutuality of obligation is observed. If it is not exercised, the court will most probably invalidate the contract (Davidson, 2020). In the case of John’s contract, he couldn’t provide all the information necessary to file returns and create general ledgers.
Capacity and competency are also essential elements for a contract whereby both sides should have the capacity to concur to the terms and be legally competent. Individuals with limited understanding and minors are regarded as incompetent. According to the court of law, such a person cannot get into a legal contract. Both the firm and John had the capacity and competency to get into a binding contract. Some other minor elements include written documentation and lawful purpose.
Breach of Contract and Remedies
Breach of contract refers to the violation of terms and conditions agreed on during the setting of a contract. It could be anything, including late payment or failing to deliver something that was promised. It is of vital importance to have valid evidence for one to report a breach of contract successfully. An example is when one party refuses to do a minor and non-essential responsibility as required in the contract (Ningsih & Disemadi, 2019).
Another form of contract breach is when a party fails to finish the terms fundamental to the contract completion’s satisfaction. John claimed that the CPA firm breached the contract. The firm had sought so much information from John concerning his business required for the construction of general ledgers and tax returns preparation. He could not provide complete information, and therefore the court credited the testimony of the CPA, which states that using incomplete information to file taxes breaches the ethical obligations of the CPA. The various rectifications for breach of contract include an award of damages, rescission, and specific performance.
A contract is legally binding when the parties assuredly manifest their intent to get into a contract and give the terms, whether oral or written. The elements of an enforceable contract include an offer, acceptance, mutuality of obligation, consideration, capacity, and competency. These elements describe the process and the requirements of a legally and fully binding contract. Breach of contract entails a failure to fulfill the promises made during the start of an agreement. One of the most common remedies for breach of contract is the award of damages.
Davidson, D. (2020). When Client Relationships Don’t End Amicably. CPA Journal, 10, 68–71.
Ningsih, A. S., & Disemadi, H. S. (2019). Breach of contract: an Indonesian experience in akad credit of sharia banking. Ijtihad: Jurnal Wacana Hukum Islam dan Kemanusiaan, 19(1), 89-102.
Rendleman, D., & Roberts, C. L. (2018). Remedies: Cases and Materials (2018). West Academic.
Werbach, K., & Cornell, N. (2017). Contracts ex machina. Duke LJ, 67, 313.