tennessee contract basics
Contracts are an important part of modern business all over the world. Businesses do not make deals without specific written agreements in place and will ensure that the agreements are legally enforceable before finalizing. Contracts are governed by state law, although most states base their laws on The Uniform Commercial Code, which is a comprehensive set of laws governing all commercial transactions in the United States.
What is a "Contract"?
Most people think of a contract as a stack of paper signed in a few places by two people in a formal setting. Practically speaking, this image is correct, as most are reduced to writing and signed by the parties. In some cases, the writing is necessary under the statute of frauds.
However, in simple terms, a contract is just an exchange of enforceable promises by two or more parties. Unless specifically required by law, a valid contract does not necessarily need to be in writing.
A valid contract creates legal duties for both parties, requiring them to perform the promises they made according to the agreement. If a party refuses or fails to perform as specified in the agreement, then that party can be held liable for monetary loss, missed opportunities, etc. (damages) caused to the other party who relied on the agreement to his detriment.
What are the Requirements for a Contract to be Valid in Tenessee?
In Tennessee, certain elements are required for a contract to be legal and enforceable. The elements are:
An offer and acceptance;
Consideration – the exchange of something of value;
Mutual agreement about the terms of the contract;
The legal capacity of the parties to enter into a contract; and
The legality of the subject matter.
Most of these elements are straightforward, but I would like to note that the term “consideration” includes more than just money. Generally speaking, consideration can be payment of money, provision of goods or services, assuming an obligation, or refraining from doing something. Additionally, the requirement of mutual consideration applies to both the initial contract being made and a contract being modified.
What Happens if a Party Breaches a Tennessee Contract?
A breach of contract occurs when one party to the agreement fails to perform the promise they made. A breach can either be material or immaterial.
A material breach occurs if the party to whom the duty is owed does not receive the substantial benefit of the agreement due to the breaching party’s failure to perform. In some circumstances, a material breach will excuse performance for the aggrieved party.
An immaterial breach occurs when the party to whom the duty is owed has received the substantial benefit of the bargain, if not the entire benefit, despite the partial performance of the other party. The aggrieved party will still likely be able to seek damages for the breach but may not be excused from performance.
In the case of a breached contract, common remedies include:
Compensatory damages – monetary payment to place the aggrieved party in the position he would be but for the breach;
Liquidated damages – payment of an amount specified in the contract in the event of a breach; and
Specific performance – court-ordered performance of the contract. This is a rarer remedy, and usually only when the contract involves something unique, like a piece of property or a very rare and valuable car.
Contracts for Real Estate
Real estate contracts are required to be in writing under the statute of frauds. Without a written agreement signed by both parties to the transaction, there is no agreement.
In Tennessee, most residential property contracts are standardized to reduce errors and save drafting costs. However, for more complicated transactions, bespoke contracts drafted by an attorney may be more appropriate. Additionally, commercial realtors use standardized contracts; however, as transactions become more expensive and complicated, multiple attorneys typically get involved on behalf of the parties.
In the event of a breach of contract for real estate, the standard remedy is a forfeiture of earnest money. This is also known as a “good faith” payment and is standard in real estate contracts in Tennessee. However, for a particularly unique or rare piece of property or home, a buyer may have a chance at specific performance. In that case, the court would order that the seller complete the transaction and sell the house to the buyer. These cases are extremely rare, however; in most cases, the remedy will be forfeiture of the earnest money for a buyer breach and a return of the earnest money for a seller breach.
As you can see a well-crafted contract is extremely important in most business dealings, especially so in real estate. If you need help with a contract, book a consultation today.
