Contract Law Fundamentals for the CP Exam

Contract law is one of the most heavily tested subjects on the NALA Certified Paralegal exam. Contracts touch virtually every area of legal practice. Whether you are reviewing a commercial lease, drafting an employment agreement, or analyzing a purchase contract, you need a solid foundation in contract principles.

What Is a Contract?

A contract is a legally enforceable agreement between two or more parties. For a contract to be valid, four elements must be present:

Offer: A manifestation of willingness to enter into a bargain, made so that another person is justified in understanding that assent is invited
Acceptance: An expression of assent to the terms of the offer
Consideration: Something of value exchanged between the parties (a bargained-for exchange)
Legal Capacity: The parties must have the legal ability to contract (minors and mentally incapacitated persons have limited capacity)

The Offer in Detail

An offer must be definite and communicated to the offeree. Important rules about offers include:

Advertisements are generally invitations to deal, not offers (exceptions exist when the terms are specific and leave nothing open for negotiation)
Revocation: An offeror can revoke an offer at any time before acceptance, unless the offer is supported by an option contract or is a firm offer under UCC 2-205
Termination: An offer terminates by rejection, counteroffer, lapse of time, death or incapacity of either party, or destruction of the subject matter
Mirror Image Rule: Under common law, acceptance must mirror the exact terms of the offer. Any different or additional terms constitute a counteroffer.

Acceptance

Acceptance must be unequivocal and communicated to the offeror. Key rules include:

Mailbox Rule: Acceptance is effective when dispatched (mailed), while rejection is effective when received. If a rejection is sent before an acceptance, whichever arrives first controls.
Method of Acceptance: If the offer specifies a method of acceptance, that method must be used. If no method is specified, any reasonable method is acceptable.
Silence as Acceptance: Generally, silence is not acceptance unless the parties have an established course of dealing
Unilateral Contracts: Acceptance by performance. Once performance begins, the offeror cannot revoke.

Consideration

Consideration is the bargained-for exchange of something of legal value. Issues that arise include:

Past Consideration: Something done before the promise was made is not valid consideration
Pre-existing Duty Rule: A promise to do something you are already legally obligated to do is not valid consideration
Illusory Promises: A promise that does not actually bind the promisor is not valid consideration
Promissory Estoppel: When there is no consideration, a promise may still be enforced if (1) the promisor should reasonably expect reliance, (2) the promisee actually relies, and (3) injustice can only be avoided by enforcing the promise

Defenses to Contract Formation

Even if all elements are present, certain defenses can make a contract voidable or unenforceable:

Statute of Frauds: Certain contracts must be in writing, including contracts for the sale of land, contracts that cannot be performed within one year, contracts for the sale of goods over \$500 (UCC), suretyship agreements, and contracts in consideration of marriage
Duress: Physical or economic coercion that overcomes free will
Undue Influence: Abuse of a position of trust or confidence
Fraud/Misrepresentation: A false statement of material fact that induces the other party to enter the contract
Mistake: Mutual mistake of material fact makes a contract voidable; unilateral mistake generally does not, unless the non-mistaken party knew or should have known of the mistake
Unconscionability: A contract so one-sided that it shocks the conscience, involving procedural unfairness (unequal bargaining power) or substantive unfairness (unreasonable terms)

Performance and Breach

Understanding the types of performance and breach is essential:

Complete Performance: Fulfilling all terms of the contract
Substantial Performance: Performance that deviates only in minor ways from the contract terms. The performing party can recover the contract price minus damages for the deviation.
Material Breach: A failure to perform a significant part of the contract, which excuses the non-breaching party from further performance
Anticipatory Repudiation: When a party clearly indicates before performance is due that they will not perform, the non-breaching party may treat this as a breach immediately

Remedies for Breach

When a contract is breached, several remedies may be available:

Compensatory Damages: Put the non-breaching party in the position they would have been in had the contract been performed
Consequential Damages: Foreseeable damages resulting from the breach (established in Hadley v. Baxendale)
Specific Performance: Court order requiring the breaching party to perform. Available when the subject matter is unique (e.g., real estate, rare goods).
Liquidated Damages: Pre-agreed damages that are valid if reasonable in relation to anticipated harm and if actual damages would be difficult to calculate
Restitution: Restoring the non-breaching party to their pre-contract position

The non-breaching party has a duty to mitigate damages by taking reasonable steps to minimize losses.

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Contract Law Essentials Every Paralegal Must Know