Contracts can be a huge source of confusion and a cause for a wide range of legal questions. Contract law can be very complicated and it is recommended that an attorney be consulted for a serious contract dispute. This is informational only and does not replace the advice of an attorney.
A contract consists of a legally binding agreement or promise between parties and it can be either written or oral, though some contracts must be written such as those involving real estate. The agreement must be voluntary and be made by competent parties. The promise or agreement must be supported by an exchange of something of value; e.g. goods or services and this exchange must be legal.
Parts of a Contract
A contract must be made up of certain elements to be considered legal:
- Competent Parties – Certain parties would not be considered competent to enter into a contract including, minors & those found to be mentally incapacitated.
- Offer – An offer is a proposal to either do or pay something. It is accompanied by a commitment and the offer must be communicated to the other party and must contain conditions or terms. An offer can be either accepted, denied or there can be a counter-offer.
- Acceptance – The terms of the contract must be agreed upon mutually. An offer is made, understood by both parties and accepted. Both parties must agree to the same thing and this is sometimes referred to as “a meeting of the minds”.
- Consideration – Each party must gain something through the contract. If one party agrees to do something they must gain something in return. (Note: This "gain" can be very small: the requirement is generally satisfied if the other party is required to do anything under the contract.)
- Performance – Fulfillment of an obligation stated in the contract. If done correctly can signify the end of the contract, if done partially or incorrectly can lead to a lawsuit.
Fraud – the court may cancel a contract if one of the parties knowingly made a misrepresentation or told a lie in forming the agreement. Proving fraud can be difficult; there will usually have to be an outright lie or a substantial omission in the contract.
Breach of Contract – A Breach of Contract occurs when one party fails to live up to their part of the contract. The main ways in which a contract has been breached are by;
- failure to perform
- making it impossible for one party to perform
- refusing to perform.
All conditions must be clearly stated in the contract. For example, if a contract says a contractor will start work on May 1st and that contractor does not begin work, there is a “failure to perform”. If the contractor shows up but the homeowner has not gotten the necessary paperwork needed to do the job, the homeowner has made the job “impossible to perform”. If the contactor does the work but the homeowner will not pay, that is “refusal to perform”.
When a contact has been breached, the contract can be renegotiated or reconsidered. If this isn’t an option, state or federal consumer protection agencies can help or alternative dispute resolutions can be used. If nothing can be done by these means then a party can file suit.
Filing Suit – If the amount in question is $5,000 or less, it is considered a "Small Claims Action." The case must be filed in the District Court.
If the amount in question is exceeds $30,000, the case must be filed in the Circuit Court, and it may be advisable to discuss the matter with an attorney. Amounts over $5,000 and less than $30,000 may be filed in either District or Circuit Court.
Statute of Limitations – In Maryland, the usual Statute of Limitations for filing suit for breach of contract is 3 years, though there are some exceptions.
Read the Law: Md. Code, Courts and Judicial Proceedings, § 5-101
Three-Day Cooling off Period – People often think that all contracts allow a three-day cooling off period to cancel. In most cases, there is no cooling off period after signing a contract. There are a few exceptions. In Maryland, the Door-to-Door Sales Act provides for a 3-day right of rescission for certain contracts that resulted from door-to-door solicitations. The FTC also has a Cooling-off Rule that applies to purchases made at your home, e.g. door-to-door sales or at locations that are not the seller’s permanent place of business. Under the Cooling-off Rule the seller must tell you of your right to cancel at the time of your transaction and give you copies of the cancellation form. Additionally, in Maryland, only a few other types of transactions are required to allow you to cancel within three days and these include health clubs, credit service centers, self-defense school or weight loss center. The right to cancel a contract for a timeshare, and vacation club extends to 10 days after you sign. You do not have a right to cancel other types of future service contracts unless it is clearly stated in the written contract.
Home Improvement Contracts -- The cooling off period is longer for Home Improvement Contracts. For these contracts, the buyer can cancel the transaction before midnight of the 5th business day after the transaction. Also, if the buyer is 65 or older, they can cancel until midnight on the 7th day after the transaction.
Generally, Saturday is considered a business day. Business days include all days except Sundays and certain holidays.
Oral vs Written Contracts – Oral contracts are generally enforceable, but written agreements are recommended in order to help resolve later disagreements. Further, a writing may be required to enforce a contract in certain situations, including the sale of goods that are worth more than $500, and for real estate transactions.
Parol Evidence Rule – Parol evidence is oral statements made before and during contract negotiation that explains the contract at issue. For example, when negotiating with a plumber for installation of a new water heater, you discuss disposal of the old water heater but the contract you subsequently enter into does not include anything about disposal of the old water heater. Those disposal discussions are parol evidence.
Sometimes parol evidence may not be used in court. If there is a written contract, the terms generally can not be changed by evidence of prior oral statements that contradict the written contract. In cases where ambiguity exists, however, evidence in addition to the contract sometimes is permissible. This is why, if there is a written agreement, it must be checked to make sure that it accurately states the deal that has been struck (even if one party orally agreed to do something different before the written agreement is signed.) In most cases, if the prior oral agreement contradicts the written agreement, a court will not be willing to hear evidence of the prior oral agreement.
According to the Uniform Commercial Code (U.C.C) there are some warranties that are imposed by law. These warranties are called express warranties and implied warranties. Express warranties are often referred to as “warranties” and they come directly from the manufacturer. It is a guarantee that the product will perform as stated. There are two types of implied warranties; a "warranty of merchantability," which means that the product will do what it is supposed to do (example: a blender will blend), and a "warranty of fitness for a particular purpose" which means (with some additional requirements) that if you have been told by the seller that the product will be suitable for a certain purpose it will live up to that expectation (example: a coat will keep you warm to a certain temperature).
A seller can disclaim these warranties but has to do so in writing by using statements such as “sold as is." The U.C.C. has specific rules for disclaimers and how they are to be included in a contract.
Service Contracts or Extended Warranties
A service contract or extended warranty is in addition to the U.C.C. warranties. Upon making a major purchase the consumer is often offered a service contract or an extended warranty. The purchaser must first determine if a warranty is already included and how long that warranty will last. Other considerations include, what is covered under the service contract and who is the administrator of the service contract. If the administrator of the service contract goes out of business will it still be honored in some way?
Both the Federal Trade Commission (FTC) and the Maryland Office of the Attorney General (MD OAG) have information about warranties and service contracts or extended warranties.
MD Code, Commercial Law
US Code - Public Contracts
5a, Maryland Law Encyclopedia, Contracts
Contracts in a Nutshell, 7th ed., Claude D. Rohwer, St. Paul, MN: West Publishing, 2006.
The Law of Contracts, Margaret C. Jasper, Dobbs Ferry, NY: Oceana Publications, 1995.
Farnsworth on Contracts, 3rd ed., E. Allan Farnsworth, New York, NY: Aspen Publ, 2004 w/updates.
Corbin on Contracts, Arthur L. Corbin, St. Paul, MN: West Pub. Co., with updates.