Contracts and Investing

Authored By: Carl Vinson Institute
Contracts and Consumers For More Detailed Information About Investing Federal Trade Commission Securities and Business Regulation Division Georgia Secretary of State

Contracts and Consumers


Contracts are legally binding agreements used in borrowing money, obtaining housing, and getting a job. In short, contracts are basic to living in our society. Consumer law governs the spending of money for personal, family, and household purposes. It covers purchases as major as a car and as minor as a piece of gum.


The right to enter into contracts is an important legal right. A contract is an agreement between two or more people requiring each person to do something specific. This agreement may also require a person to refrain from doing something that he or she has a right to do. Contracts have four essential ingredients. To have a legal contract, there must be (1) a mutual agreement or "meeting of the minds," (2) two or more parties capable of contracting or reaching an agreement, (3) an agreement in which all parties have to carry out some obligation, and
(4) a lawful purpose.

Requirements for a Contract

1. A Meeting of the Minds

Basic to a contract is a "meeting of the minds." The parties have to understand and express to each other what is expected of each of them. For instance, in a situation in which something is being bought and sold, both the buyer and the seller have to agree on what is being bought and sold and the price of what is being bought and sold. The process of making a contract usually begins with one party making an offer. The other party may accept the offer, reject the offer, or make a counteroffer. Making a counteroffer is negotiating.

To create a contract, one person must accept another person's offer or counteroffer. A legally binding contract is formed once an offer or counteroffer is accepted. An offer or counteroffer can only be accepted by the person to whom it is made.

The meeting of the minds necessary for a contract can only occur when the agreement is freely entered into by both parties. If one party is coerced into signing, then their minds have not met. The legal term for being coerced into entering a contract is "duress."

Under Georgia law, duress is defined as imprisonment, threats, or other acts by which the free will of a party is restrained and his or her consent induced. For example, what if a salesperson has "pressured" you into signing a contract to buy a motorcycle? Could you get out of the contract? Maybe, but if you took the motorcycle home and used it, probably not. Your use of the motorcycle would reinforce your acceptance of the contract.

2. Parties Capable of Contracting

The expression "parties capable of contracting" has a very specific legal meaning. To have a contract, the minds of the parties must meet. For minds to meet, each party must understand what is taking place.

The law regards certain groups of people as incapable of understanding agreements. The mentally incompetent, for example, are considered unable to make a valid contract. The courts could void a contract signed by a mentally incompetent person.

Young people are also considered incapable of understanding enough about contract obligations to be bound by what they sign. In Georgia, the legal age of majority (the age at which a person is considered to be an adult in contractual situations) is 18 years. Youths under 18 (that is, minors) may not legally enter into contracts.

The law does not allow persons under 18 to enter into contracts. However, the age requirement does not mean that persons can lie about their ages to sign contracts and retain the benefits without paying for them. In Georgia, to get out of a contract, a minor usually must return the benefits, if possible. 

One kind of minor can enter into contracts under Georgia law. Someone under 18 who is not supported by his or her parents can be legally classified as an emancipated minor. An emancipated minor may enter into contracts (in certain limited situations) for necessities (that is, food, clothing, shelter, and education).

3. An Agreement with Obligations

Suppose Steve says to Rick, "I will give you my horse next Tuesday." Rick says, "I agree." Would this be a contract? No, it is a proposal to make a gift. In a contract agreement, both parties-not just one-must have some type of obligation. They must each make some promise to the other. These mutual obligations are called consideration. Without each party agreeing to obligations, no contract exists.

In rare cases, a great variance in obligations may be used as evidence to void a contract. If the terms of the contract are so one-sided that it is obvious that no sane or reasonable person would agree to them and no honest person would take advantage of those terms, the contract is said to be unconscionable. An unconscionable contract will not be enforced by the courts. That would be particularly true if there were also a great difference between the mental abilities of the two parties. 

The consideration does not have to be of equal value on both sides, and it does not have to be money. It can be a concrete object or an action. It can be a promise to do something that someone is not already required to do, or it can be a promise to keep from doing an activity that someone has a legal right to do. What if John promises to give Richard $100 if Richard does not smoke cigarettes for a year? Their agreement would be enforceable.

It is not essential to a contract that the mutual obligations be carried out at the same time. One person may perform his or her obligation immediately. The other person may carry out the obligation at some time in the future.

It is possible to have a contract in which both persons agree to perform in the future. An example would be a contract in which an author agrees to write a textbook and a publisher agrees to publish it and pay the author $5,000 when it is done.

4. A Legal Purpose

Having a legal purpose is as important to a contract as having a meeting of the minds, legally capable parties, and mutual obligations. However, unless prohibited by law, almost any purpose is permissible in our free society. A contract cannot be enforced by law unless its purpose is legally permissible.

A contract to break a law-whether it involves gambling, beating someone up, or buying illegal drugs-does not have a legal purpose. It cannot be enforced. Further, being party to a contract to break a law can land a person in jail.

Just because a contract does not break a criminal law doesn't mean that it has a legal purpose. A contract that doesn't comply with a civil statute or that violates constitutional, statutory, administrative, or case law also is illegal. For that reason, the contract imposing racial discrimination would be illegal and unenforceable. Governments cannot violate the constitutional rights of individuals to equal protection under the law.

Spoken and Written Contracts

Contracts may be oral (that is, spoken) or written. However, spoken contracts are difficult to enforce in court because they are difficult to prove. Certain types of contracts must be in writing in order to be enforceable. For example, a promise to pay someone else's debt must be in writing. So must a contract to buy or sell real estate. Any agreement that cannot be fully carried out by both parties within one year must also be written.

Courts will presume that each party to a written contract has read the contract and understands it. It is difficult to convince a court that a person did not understand the terms of the contract. To the courts, the signing of a contract means that there has been a meeting of the minds. Therefore, it is very important to understand the terms of a contract before signing it. However, sometimes state or federal laws will protect a consumer even if that consumer has signed a contract. (See "Voiding a Contract: Fraud" later in this chapter.)

Unfortunately, people often sign contracts without reading them for any number of reasons. For one thing, the wording in contracts can be difficult to understand. There are currently efforts to have contracts written in plain English.

If you don't understand a contract, ask someone you trust to explain it to you.

When you enter a Written Contract:

  • Read and understand the contract before signing
  • Don't sign any contract with unfilled blanks.
  • Don't sign a contract if the signature line is on a page by itself.
  • Be sure what you are buying or what you have been promised is clearly written. The contract should include information on the quality of goods, terms of services, repair or replacement guarantees, all charges, etc.
  • Check on provisions for canceling the contract.
  • Make sure any changes in the contact are initialed and dated by you and the other party.
  • Make sure your copy of the contract is identical to the other party's copy
  • Keep the contract in a safe place.

Enforcing Contracts

To be found enforceable, a contract must have the four essential ingredients. In addition, the court must also find that there was no legal justification for one of the parties not to carry out his or her contract obligation. If the four ingredients are in place and there is no legal justification for not complying with the contract, a lawsuit can be made successfully against the party breaking the contract.
If the party attempting to prove the contract succeeds, the court will make a decision (or judgment) in favor of that party. This decision says that the other party must pay a certain amount of money for breaching (or breaking) the contract. The winning party then has the right to collect the money from the party that is sued.

What if the sued party does not willingly honor the court's order to pay? Then a court officer (for example, a sheriff) may be ordered to seize the money of the party breaking the contract and deliver it to the other party. The officer also has the power in most cases, to seize property of the contract-breaker. The property may be sold to obtain money to pay the civil judgment.

Sometimes, however, the judgment comes in the form of an order for "specific performance," which means that a party is obligated by contract to do something other than to pay money. Then the court may order the person to do whatever is required. For instance, if you made a contract to buy a one-of-a-kind baseball card of a famous player but the seller changes his or her mind, you might be able to get specific performance in the form of receiving the card itself rather than the value of the card. If a person refuses to do what the court orders, he or she could be jailed for contempt of court. However, in the United States, people cannot be jailed for being unable to pay money they owe.

Many people mistakenly believe that there is a right to cancel most consumer contracts within three days of entering into them. Only certain kinds of contracts are required by law to have a cancellation period. Examples include door-to-door sales and sales of services.

Voiding a Contract: Fraud

When one person tries to mislead another, the parties will not be expecting the same things from their contract. Such attempts to deceive are sometimes considered to be fraud.

Fraud can prevent a meeting of the minds. Therefore, a contract often can be legally voided for reasons of fraud. To void a contract for fraud, it must be shown that the party attempting to prove fraud relied on the other party's fraudulent statements. It must also be shown that these statements were crucial to the bargain. In other words, the bargain never would have been made if the fraudulent statements had not been made. A person selling a car who claims that it has 100,000 miles when it really has 200,000 would be an example of fraud.

Matters of opinion generally are not considered facts by the court. Puffery is not illegal. It is assumed that consumers will be wary enough not to be misled by such exaggerations.

Value is also regarded by the courts as a matter of opinion. Suppose you buy a guitar for $100. You are later told it is worth only $50. You would not be able to sue on the basis of being defrauded.

* Excerpted from An Introduction to Law in Georgia, Fourth Edition, published by the Carl Vinson Institute of Government, 1998 (updated 2004). The Vinson Institute is not responsible for errors in the online text. Content is for information only; in no way should the information in the book be considered legal advice to anyone on any matter for which there are legal implications. Any such matter should be specifically addressed with an attorney. The book is available for purchase at or by contacting the Publications Program, Carl Vinson Institute of Government, University of Georgia, 201 M. Milledge Avenue, Athens, GA 30602; telephone 706-542-6377; fax 706-542-6239.

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