Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.
Contracts, legally binding agreements between parties, are the bedrock of honest, good faith business relationships. Contracts can exist in many forms (such as written, verbal, and implied), but one common theme is that there are only a limited number of circumstances that will allow the parties to be relieved of their obligations under the contract. Although a contract is nearly always a legally enforceable document, there are certain conditions under which a contract is no longer valid.
The six elements that make a contract legal include:
| Validity Element | Example of Presence | Example of Absence |
|---|---|---|
| Entity Making an Offer | Company A asks Company B to consider a business relationship. | Company A never makes a proposal to Company B |
| Entity Accepting the Offer | Company B agrees that a relationship with Company A is a good idea as well. | Company B never responds to the offer from Company A |
| Consideration | Both Company A and B agree to the thing(s) of value upon which the contract is based. | Company A refuses to pay more than $100, but Company B refuses to accept less than $500. |
| Capacity | Both parties to the contract are legally permitted to enter into a contract. | One or more parties is a minor, not mentally competent, or under the influence of a mind-altering substance at the time of the contract. |
| Mutually Acceptable | When the contract negotiation is complete, both Company A and B are satisfied with the provisions. | Despite a hopeful start to negotiations, the final terms are unsatisfactory to one of the parties. |
| Legally Binding | The contract's terms are all legal and enforceable. | The contract contains conditions that would be illegal to enforce, such as an agreement to work for $1.00 per hour or to work for a minimum of 21 hours each day. |
Here are a few scenarios that illustrate some of these conditions.
A contract between a hospital and mental health provider organization provides that (in 90% of the eligible cases) patients with mental illness will be seen by a psychiatrist within 48 hours of being admitted to the hospital. For three months in a row, the mental health provider group has failed to meet the 48-hour provision on more than a dozen cases each month. There were also three instances in which the provider evaluation the patient was, in fact, not a psychiatrist. The hospital wants to hire a new psychiatry group to meet their needs.
A company that mitigates asbestos and other hazardous chemicals in occupied buildings has executed a contract with the school district to remove the asbestos from its ceiling tiles as part of a larger renovation project. However, after the school district reviewed the increasing costs associated with removing the asbestos, it became clear that the project to renovate might actually exceed the cost of replacing the entire building. The school district discharged their contract for asbestos mitigation and updated the contract to include removal of asbestos and all contaminated materials exposed during the old building's demolition.
A medium-sized commercial airport won a federal grant to lengthen the runway so that it could accommodate larger aircraft. After being awarded the grant, the airport's board of directors determined that a new terminal building was actually a more pressing need. They voted to use the grant to expand the terminal rather than lengthen the runway. The airport signed a contract with a local construction company to make the new terminal building improvements. Unfortunately, about halfway through the project, regulators came to inspect progress on the runway expansion. Upon realizing the funds had been improperly re-allocated, the government sued the airport for the misuse of the grant money.
Using what you learned in the lessons Methods of Discharging Contracts and Other Contract Discharge Options, review the table below and then review your answers to the questions posed above to make sure that your answers were accurate.
| Discharge Type | Definition | Fictional Example |
|---|---|---|
| Mutual Agreement | A contract can be discharged if both parties are in mutual agreement that the contract should be canceled. | Although a construction company and hospital had a contract to repave the parking lot, the hospital has determined that they are relocating the hospital. Both the hospital and the construction company agree to cancel the paving contract. |
| Frustration | A contract is discharged by frustration when an unforeseen and substantially large incident creates the inability to fulfill the terms of the contract. | After the attacks on the World Trade Center caused a major building collapse, a contract to wash the building's windows would be considered discharged by frustration. |
| Breach of Contract | A contract may be discharged if one party intentionally fails to act in a manner bound by the contract. | A contract between a homeowner and a pool company can be discharged if the contractor digs out the hole for the pool but then walks away from the project without notice. |
| Repudiatory | A contract can be discharged when a party unequivocally indicates that there is no intention to perform the duties required by the contract. | A painting company that was under contract to paint a house are told by the homeowners that they have no intention of paying for the work even though they are contractually obligated to do so. |
| Rescission | A contract can be discharged when there are technical problems with it. These types of technical errors include an incompetent signatory, provisions that are unlawful, or mistakes related to material aspects of the contract. | A car salesman convinces a 15 year-old boy to purchase a vehicle. However, the contract is deemed invalid because a minor is an incompetent signatory by virtue of his age. |
| Novation | A contract is discharged when it is superseded or replaced by another contract with different provisions. | A contract to build a two-level parking garage is discharged when the garage must now have four levels, and the new contracts reflects this. |
| Accord | A discharge due to an accord occurs when circumstances dictate a change in the terms of the contract because one of the parties is not satisfied that the other party has fulfilled their obligations as expected. | After arguing about the quality of a residential roofing job, the contractor and homeowner agree to a reduced price for the job. |
To unlock this lesson you must be a Study.com Member.
Create your account
Already a member? Log In
BackAlready registered? Log in here for access
Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.
To learn more, visit our Earning Credit Page
Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.
Back To Course
Business Law: Skills Development & Training24 chapters | 182 lessons
{{courseNav.course.topics.length}} chapters | {{courseNav.course.mDynamicIntFields.lessonCount}} lessons | {{course.flashcardSetCount}} flashcard set{{course.flashcardSetCoun > 1 ? 's' : ''}}
Watch 5 minute video clips, get step by step explanations, take practice quizzes and tests to master any topic.
Study.com has a library of 750,000 questions and answers for covering your toughest textbook problems
I love the way expert tutors clearly explains the answers to my homework questions. Keep up the good work!
- Maritess, College StudentStudy.com video lessons have helped over 30 million students.
"I learned more in 10 minutes than 1 month of chemistry classes"
- Ashlee P.
"I learned more in 10 minutes than 1 month of chemistry classes"
- Ashlee P.
"I aced the CLEP exam and earned 3 college credits!"
- Clair S.
Over 65 million users have prepared for {{displayNameByProductKey[registrationData.product || testPrepCocoon]}} and other exams on Study.com
"The videos have changed the way I teach! The videos on Study.com accomplish in 5 minutes what would take me an entire class."
- Chris F.
Over 65 million users have prepared for {{displayNameByProductKey[registrationData.product || testPrepCocoon]}} and other exams on Study.com
