Contracts

Topics on this page

• What is a contract?
• Parts of a Contract
• Legal Issues
• Three-Day Cooling Off Period
• Warranties

What is a contract?

A contract consists of a legally binding agreement or promise between parties. The agreement must be voluntary and made by competent parties. The promise or agreement must be supported by an exchange of something of value (e.g., goods or services). This exchange must be legal.

Oral vs Written Contracts – A contract can be either written or oral. Oral contracts are generally enforceable, but written agreements are recommended to help resolve later disagreements. However, some contracts must be written. For example, a written contract may be required to enforce a contract in certain situations, including the sale of goods worth more than $500 and real estate transactions.

Read the Law: Md. Code, Commercial Law Section § 2-201

Contracts can be a huge source of confusion and a cause for a wide range of legal questions. Contract law can be very complicated. It’s a good idea to consult an attorney for a serious contract dispute.

Parts of a Contract

A contract must have certain elements to be considered legal:

1. Competent Parties
   • Certain parties would not be considered competent to enter into a contract. Examples include minors and those found to be mentally incapacitated.
   • In Maryland, you must be 18 or older to enter into an agreement. If you are under age 18, you can still make an agreement and if both parties honor it, there is no problem. If the minor fails to honor the agreement and the other party tries to sue the minor in court, the court  will not enforce the agreement. Read the law: Md, Code, Commercial Law § 1-103
2. Offer
   • An offer is a proposal to either do or pay something.
   • The offer is accompanied by a commitment.
   • The offer must be communicated to the other party.
   • The offer must contain conditions or terms.
   • An offer can be accepted or denied or there can be a counteroffer.
3. 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. This is sometimes referred to as “a meeting of the minds.”
4. Consideration
   • Each party must gain something through the contract.
   • If one party agrees to do something, then they must gain something in return.
   • This "gain" can be very small. The requirement is generally satisfied if the other party is required to do anything under the contract.
5. Performance
   • Performance is the fulfillment of an obligation stated in the contract.
   • If done correctly, performance can signify the end of the contract.
   • If done partially or incorrectly, it can lead to a lawsuit.

Legal Issues

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 happens when one party fails to live up to their part of the contract. The main ways in which a contract can be breached include:

• failure to perform
• making it impossible for one party to perform
• refusing to perform

The contract must clearly state all conditions.  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 to do the job, then the homeowner has made the job “impossible to perform.”  If the contractor does the work, but the homeowner will not pay, then that is “refusal to perform” by the homeowner.

Options When a Breach of Contract Occurs - When a contract has been breached, there are multiple options. The best option for you will depend on the specific facts and circumstances of your situation.

• Renegotiate or reconsider the contract.
• Contact a state or federal consumer protection agency for assistance.
• Attempt alternative dispute resolutions, such as mediation.
• File a lawsuit.
  • If the amount in question is $5,000 or less, then it is considered a Small Claims Action that must be filed in the District Court.
  • If the amount in question is exceeds $30,000, then 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 Court or Circuit Court.
  • You will have to show in court that there were damages (i.e., an actual loss).
  • Learn more about filing a lawsuit.

NOTE: If you are a minor (under age 18), you will need to have an adult sue on your behalf. A parent or guardian has “standing” (the recognized right) to file a lawsuit for you.

Read the Law: Md. Code, Courts and Judicial Proceedings § 4-405

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 the installation of a new water heater, you discuss disposal of the old water heater but the contract you sign 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 cannot 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. If there is a written agreement, check 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.

Statute of Limitations – In Maryland, the usual Statute of Limitations for filing a lawsuit for breach of contract is 3 years, but there are some exceptions. Learn more about statutes of limitations.

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. However, there are a few exceptions.

• The Federal Trade Commission's (FTC) Cooling-off Rule 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.
• The Maryland Door-to-Door Sales Act provides for a 3-day right of rescission for certain contracts that resulted from door-to-door solicitations.
• Additional exceptions that allow you to cancel within three days include health clubs, credit service centers, self-defense school, and weight loss centers.
• The right to cancel a contract for a timeshare, and vacation club extends to 10 days after you sign the contract.
• You do not have a right to cancel other types of future service contracts unless it is clearly stated in the written contract.

Read the Law: Md. Code, Commercial Law § 14-301 et seq., § 14-12B-06, § 14-2402, § 14-2403; Real Property § 11A-114

Read the Regulation: U.S. Code of Federal Regulations, Title 16, Part 429

Home Improvement Contracts - The cooling off period is longer for Home Improvement 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.

Read the Law: Md. Code, Commercial Law § 14-301 et seq.; Business Regulation, § 8-101

Warranties

Uniform Commercial Code (UCC) Warranties - According to the UCC, the law imposes some warranties. 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.
  1. A "warranty of merchantability," means that the product will do what it is supposed to do (example: a blender will blend).
  2. A "warranty of fitness for a particular purpose," 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 must do so in writing by using statements such as “sold as is." The UCC has specific rules for disclaimers and how to include them in a contract.

Read the Law: Md. Code, Commercial Law Section § 2-313, § 2-314, § 2-315

Service Contracts or Extended Warranties - A service contract or extended warranty is in addition to the UCC 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?
• 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?