Background, Definition & Basic Principles
This manual contains valuable information to help ASU staff negotiate, prepare and maintain legal and effective contracts.
Note: Every employee participating in University contracting is obligated to be familiar with this manual and the University's policies and procedures. Only certain ASU administrators have authority delegated from the President to sign specified ASU contracts pursuant to the ASU Contract Authority Policy (PUR 107), or as otherwise authorized in writing by the President. Refer to the Contract Signature Authority information and the policy.
Questions? Contact OGC.
ASU is one of three institutions in the Arizona University System governed by the Arizona Board of Regents (ABOR). ABOR was established pursuant to Article 11 § 5 of the Arizona Constitution, and derives its powers, including the power to contract, from state statute, ARS § 15-1625. The authority for ASU to enter into binding contractual relationships in ABOR's name is derived from the ABOR Policy Manual.
Definition of a Contract
A contract is created at law when there is a mutual exchange of promises upon reasonably understandable terms and conditions. A contract does not have to be reduced to writing in order to be enforceable; however, for the purposes of this manual, the term contract is intended to mean a written form of communication. Please remember that many types of documents can constitute a contract, including invoices, memoranda and letters.
The Elements of a Contract
- Offer: a promise to do or forbear from doing something within a certain time period.
- Acceptance: an acceptance of an offer through either a promise or performance.
- Consideration: there must be a legal and adequate inducement given in exchange for the promise to do something that one is not legally required to do or to forbear from doing something that one is legally allowed to do.
- Form of the Contract: the contract must be in a form as may be required by law, e.g., Statute of Frauds: certain contracts must be in writing; (e.g., a contract to sell goods with a value over $500 (unless there was partial performance); an agreement in excess of one year, sale of real property, a commitment to loan money in excess of $250,000 and not made in connection with personal, family or household purposes. (See Arizona Revised Statutes (ARS) § 44-101).
- Capacity to Contract: the parties to a contract must have the legal capacity and competency to contract. In addition, a representative of a corporation, partnership or organization must have the authority to bind the corporation, partnership or organization. (See PUR 201-02 and PUR 107).
- Legality of the Contract Matter: the subject of the contract must be legally permissible and not against public policy.
Barriers to Formation of a Contract
- Mutual mistake or ambiguity with respect to material terms.
- Revocation or expiration of offer.
- Lapse of time.
- Death or incapacity of offeror.
- Lack of formality, e.g., letters of credit and other negotiable instruments must contain certain matters.
Enforcement of the Contract
- Is the contract valid, void, voidable or unenforceable?
- A valid contract has the items listed in "Elements of a Contract" and is legally enforceable.
- A contract that is void is not legally enforceable and the parties thereto are not legally obligated to each other. Generally, contracts are void because the subject matter is not legal or one of the contracting parties does not have the competency to contract. For example, a contract to commit a crime is void and cannot be enforced.
- A contract that is voidable is otherwise a valid contract but the obligations can be avoided for certain reasons permitted by law (e.g., duress, lack of capacity). The party with the capacity to void the contract can choose to ratify the contract and perform the obligations thereunder. For example, a party can argue that the other party coerced it to enter into a contract for delivery of certain services at a very low rate; that it did so under duress. In this case the coerced party can argue that the contract is voidable. Unlike a void contract which cannot be enforced, the coerced party can choose to perform an otherwise voidable contract.
- An unenforceable contract is generally a valid contract but is not enforced because of public policy or law.
- Breach of Contract Terms: failure to perform either fully or adequately the obligations provided in the contract.
- Remedies for Breach: the nonbreaching and performing party may be provided relief for the breaching party's failure to perform its obligations.
- Damages: are generally designed to compensate the nonbreaching party for the benefit of its bargain. Damages may be compensatory, consequential, punitive or nominal. The nonbreaching party generally has an obligation to mitigate its damages. Liquidated damages are allowed so long as they are not designed as penalties. Liquidated damages must be agreed to at the time of contract, must be a reasonable estimate of damages and the damages must have been considered at the time of contracting as being difficult to estimate in case of breach.
- Specific Performance: the nonbreaching party may seek an order to force the breaching party to perform in accordance with contract terms. This remedy is generally granted only if money damages are inadequate as a remedy (e.g., sale of land).
- Rescission and Restitution: the remedy of canceling a contract and making restitution to the parties.
- Reformation: this is an equitable remedy that allows the parties to rewrite or reform the contract as originally created in order to reflect what they intended.
- The nonbreaching party may waive its right to enforce a remedy. Generally contracts provide that waiver of one event of default does not mean waiver of any future defaults.
- If permitted by law, the contracting parties can limit the type and amount of remedies provided to the nonbreaching party.
Other Sources of Authority for Formation and Enforcement of a Contract
- The Uniform Commercial Code governs transactions related to among other things, secured transactions, sales, and negotiable instruments.
- State and Federal Law