What Is an American Business Contract?

Contracts are a critical tool for doing business, because without them strangers would rarely dare to do business with each other. Business contracts in the United States are governed by a general body of contract law that applies equally to both business and nonbusiness contracts. Nevertheless, the application of general contract law to specific issues raised in business contexts is often distinctive.

U.S. Contract Law

• In contrast with most of the world, U.S. contract law is based on a common law system, with a consequence that much of the law that governs contracts is court-made rather than statutory--it is often not stated explicitly, but must be inferred from the content of judicial rulings in similar cases. Furthermore, the overwhelming majority of contract law is state law, which varies slightly and sometimes significantly, from state to state. In cross-state transactions, it may be unclear which state's law should govern the transaction, which is why contract parties often include governing law clauses in their contracts.

Formation

• The formation of a U.S. contract requires an offer, an acceptance and consideration. A contract has consideration only if something of value is given by both sides, which is why a contract to give a gift is not enforceable. This becomes relevant in a business context when a contract is amended in a way that benefits only one party, and the other party later contests the amendment.

Statute of Frauds

• The Statute of Frauds, enacted in every state, prevents the enforcement of verbal agreements for the purchase of real estate or goods worth more than $500. It also prevents the enforcement of verbal agreements that cannot be performed in one year, such as long-term employment contracts. Except for contracts falling within the Statute of Frauds, verbal agreements are enforceable as long as sufficient evidence exists to establish the essential terms.

Termination

• There are four main ways to terminate a contract under U.S. law: expiration, mutual agreement, formation defense and material breach. A contract expires naturally when both parties complete all their duties under the contract. However, a contract may be terminated at any time as long as all parties agree. A party may unilaterally terminate a contract if he can successfully assert that no true contract was ever formed--in the case of a contract entered into as a result of fraudulent misrepresentation, for example. Finally, if one party commits a serious violation of the terms of the contract--known as a "material breach"--the other party may unilaterally terminate the contract and sue for damages.

Remedies

• U.S. courts strongly prefer to award money damages to compensate aggrieved plaintiffs. These damages are calculated to provide the plaintiff not only with compensation for direct losses, but also with the benefit of his bargain--any profit he might have made if the defendant had fully performed the contract, for example. On certain occasions, however, a court will order specific performance--it will order the defendant to perform his duties under the contract.