Contract Basics
Why Contracts Are In A Language You Can’t Understand
Negotiation
Contract Law Basics
Breach of Contract
The Reasonable Person
Remedies
Special Types of Contracts
Why Contracts Are In A Language You Can’t Understand
Every profession has its own jargon, and law is no exception. Law’s language is called legalese.
Lawyers don’t necessarily use legalese to obfuscate, although that is a pleasant side effect. Rather, they use terms they know to be well-defined. Each word of legalese has a time and court-tested meaning.
For years, people have suggested that legal documents should be written in plain English, and some insurance companies now issue “plain English policies” which clearly explain how the company will deny coverage. Many states require all consumer contracts to be written in plain English, and the Federal Truth in Lending Act does the same for certain loan documents.
Occasionally, a public official will introduce legislation requiring government regulations to be clearly written, but, after consultation with her colleagues, will quickly regain her senses.
In virtually any business transaction, from a simple purchase of office supplies to a multi-million dollar corporate merger, a contract is required. Contracts can be a simple handshake, but more often are complex agreements designed by lawyers.
Negotiation
Before there’s a contract, there’s an offeror and an offeree. The offeror is the person making the offer. You should be able to figure who the offeree is. To be valid, the offeror must be able to answer the following questions:
- What is being offered? (Subject Matter)
- How many are being offered? (Quantity)
- How much (Price)
- Who played third base for the ’63 Dodgers? (Sports)
The offeree can respond to an offer by making a counter-offer, which may modify one or all of the above elements. When both offeror and offeree have agreed on all of the terms, there is a “meeting of the minds” and bodily fluids are exchanged.
An offer ends upon the happening of any of the following:
- a stated time to accept the offer has expired;
- the offeror cancels the offer; and
- the offer is unequivocally rejected by the offeree.
Contract Law Basics
What’s a Contract?
A contract (or Agreement, it’s the same thing) is a voluntary promise between two or more people to do something (or not to do something). Most types of contracts don’t have to be in writing (a purchase in a retail store, for instance) although it’s obviously tough to prove the existence of a contract otherwise.
All parties to the contract must be over 18 and mentally competent, and the mutual promises must be supported by the exchange of something of value, or what lawyers call consideration (good manners). Also, the purpose of the contract cannot be illegal: for instance, a contract for the sale of cocaine would not be enforceable, except in Hollywood.
A contract that meets these requirements will be enforced by the law, unless one of the parties is a professional athlete.
What if I’m drunk?
A common question. The courts usually will enforce the contract unless you were so obviously intoxicated that the other party must have known about your impaired state. Also, if you can show a medical history of alcohol abuse (preferably with blackouts and episodes of placing multiple orders for products advertised on the Home Shopping Network), the courts may void the contract.
What kind of contracts must be in writing?
This varies from state to state. In general, they include: contracts for the sale or lease of land; promises to be responsible for someone else’s debts; contracts for the sale of goods worth more than $500 and for the sale of stocks and bonds; contracts to bequeath property in a will; and promises to marry. Your mileage may vary.
Nevertheless, it’s a good idea to put all contracts in writing so that it is easier to prove their existence. Even an order form or receipt in a retail transaction can serve this purpose.
Do I need a lawyer to make a contract?
Not if you meet the maturity and mental health requirements set forth above. So you probably need one.
In the business world, it is often customary to use a pre-contract document called a “Letter of Intent.” A Letter of Intent simply puts the offer into words, but gives the offeror a chance to back out. The following language should be used:
“This letter is not intended to be a binding contract, and until the contract is executed, neither party will be bound.”
“Executed,” by the way is legal shorthand for “signed.” Makes you wonder.
Okay, what about a newspaper advertisement or web banner? Is that an offer?
Yes and no. The courts have ruled that an advertisement is really a semi-offer: only an expression of intent to sell. But if Battlin’ Bert Blyleven, the Tire King, promises a set of recap snow tires to the first ten customers through the door on Saturday morning, that is an offer with respect to the snow tires, and it can be accepted by spending the night camped out in Bert’s parking lot.
What’s an option?
An irrevocable offer for which the offeree provides consideration. (Well, you asked). For instance, you might want to tie up some real estate until you can figure out whether you can afford it. If the Seller was willing, you could pay him $500 to give you the option to purchase the property at a specified price for a specified period of time. If you decide not to buy the property (perhaps because it didn’t meet your specifications) you would lose your $500.
How do I accept an offer?
Say yes. Actually, every term of the offer must be accepted, or your acceptance of some terms and modification of others constitutes a counter-offer. And that makes you the offeror, and the original offeror becomes the offeree, and so on and so on…
Is there a minimum amount of consideration, or payment, necessary to make a contract valid?
No. In fact, consideration doesn’t even have to be money. It can be any promise or act that induces the other party to enter into the contract. Lawyers, however, being conservative creatures, often put the following clause into contracts which otherwise would have no financial terms:
“The [one of the parties] hereto, in consideration of Ten and 00/100 Dollars in hand paid by [the other party], receipt of which is hereby acknowledged, agrees as follows…”
The theory behind this is that it will prevent the contract from being held invalid for “failure of consideration.” This is unnecessary, but lawyers do it anyway.
Keep in mind that both parties must provide consideration: mutuality is very much part of the contract ritual. Each side has to give up something — money, or a promise to do something they wouldn’t otherwise do and which they are not already obligated to do. Otherwise, the contract is invalid.
What’s an agent?
If you authorize someone to negotiate a contract on your behalf, that person is an agent. A literary agent is one example, but agency law (principal/agent relationships) occur in everyday life. The clothing salesperson who sold you the silk teddy with the zippered crotch didn’t really own it, but had authority from the owner to sell it to you, even though your wife will fling it back into your face because what she really wants is intimacy.
Anyway, the law refers to the owner of the clothing store as the principal. As long as the agent doesn’t exceed the authority of the principal (the conditions set by the owner as to price and other terms), the agent can bind the principal to a contract.
Can I make a contract to do something illegal?
You can make such a contract, but the courts will not enforce it: it’s void. For example, if you make a contract with a biker gang to kidnap Rush Limbaugh and transport him, bound with telephone cord to his ego, across state lines to the Bronx, where he will be left on the street, naked and smeared with peanut butter and crack cocaine, I would shake your hand.
What if the contract isn’t illegal, but is immoral?
It’s enforceable. However, in rare cases a legal contract might not be enforced because it is against public policy.
Okay, I understand that an illegal contract can’t be enforced. But what if someone forces me to sign a legal contract? Or tricks me into signing?
You’ve stumbled into a fertile area of litigation: In addition to the reasons mentioned above, such as lack of consideration and being underage or incompetent, you can get out of a contract by using the following defenses:
- duress (the other guy was holding a gun to your head)
- economic duress (the other guy was holding money to your head)
- fraud (the other guy didn’t give you all the facts, or lied to you)
- undue influence (The other guy is your father)
- mistake (you made a mistake regarding a material part of the contract — but only if the other guy knew about your mistake and deliberately didn’t correct it. This defense is not available in all states)
- unconscionability (the contract is so one-sided as to “shock the conscience of the court.” )
- Impossibility of performance (It just can’t be done)
Each of these defenses to a contract may make the contract either void or voidable.
The Difference Between Void and Voidable
This has nothing to do with urinary retention. If a contract is void, it will not be enforced by a court even if all the parties agree that it should be enforced. If a contract is voidable, it means that one of the parties has the right to make the contract void, but doesn’t have to. For example, if you are tricked into signing a contract, the contract is still valid until you declare it to be void. This distinction can be very important to “third parties” (other people) who may rely on the contract.
Breach of Contract
What’s a breach of contract?
A breach is the failure by one party to live up to his or her responsibilities under a contract, without a legal defense or excuse (see above), or a note from their mother.
Usually a breach involves either a failure to perform as promised, or keeping the other party from performing as promised. After a breach occurs, the other party can seek remedies for the failure, including money damages.
What constitutes a failure to perform?
The failure must involve more than just an incidental part of the required performance: it must be a material failure. For instance, if you hire a roofer who satisfactorily repairs a leak but leaves construction debris on your lawn, the failure to clean up is not a breach of the contract (unless you specifically made cleaning-up an essential part of the contract). If, however, the roof still leaks, the contract was breached by the roofer and you would be justified in refusing to pay her.
Time of performance is often an area of dispute. In general, even though a specific time for performance is described in a contract (“Buyer will pay $1000 on Thursday”), the failure to perform on that date is not a material breach. The courts usually will allow a “reasonable” amount of time after the time specified in the contract for performance. If you absolutely, positively, want performance at a certain time and date, you must use a “Time is of the Essence” clause:
“Time is of the essence of this contract; if either party shall fail to perform its obligations agreed to herein, at the time fixed for the performance of such respective obligations by the terms of this contract, such failure shall be deemed a breach of this contract.”
What if the other party won’t let me perform my promises under the contract?
That is called impossibility of performance, such as a Congressional candidate’s promise to reform the income tax laws. If the other party won’t let you perform your obligations, the other party, not you, is in breach. A close relative of this concept is anticipatory repudiation, where one party states, before his performance is due, that he will not perform a material part of his obligations under the contract. That also is a breach of the contract.
O.K., so the other guy breached the contract. Now what?
First, notify the breaching party that you consider them to be in breach, and give them an opportunity to remedy the breach. If that doesn’t work, you’ll have to consult a lawyer.
Yeah, but I don’t want to spend three years in court. Isn’t there another way?
You can try the latest litigation innovation: Alternative Dispute Resolution (ADR). Usually involving mediation or arbitration by a neutral party, it can be significantly cheaper, in both time and money, than litigation. Unfortunately, you can’t force the other party to participate in ADR unless there is an ADR clause in the contract. Therefore, you should consider putting the following clause in all major contracts in which you become a party:
Any controversy or claim arising out of, or relating to, this contract, shall be settled by arbitration, in accordance with the rules, then obtaining, of the American Arbitration Association, and judgment on the award rendered may be entered in any court having jurisdiction thereof.
Unfortunately, American Arbitration Association arbitration hearings also can be expensive and time consuming, and often favor the side that has more resources. Ideally, you should substitute a local voluntary trade association or even individuals to decide the dispute.
The Reasonable Person
If you’ve been paying attention, you’ve noticed the word “reasonable” appears a lot in discussion of contract law. In contracts — as well as other areas of litigation — the law is always concerned with what the “reasonable person” would do. (When the author was in law school, it was still called the “reasonable man” standard. Since then, however, male-dominated courts have grudgingly acknowledged that women also can be reasonable). The reasonable person standard is applied to almost every dispute, in an attempt to bring a degree of objectivity to what are essentially subjective human relationships. For instance, in a civil case involving an automobile accident, the court would consider what a “reasonable person” would have done in a particular situation. The same is true in the area of contracts. If you are in a dispute over whether a contract exists, the meaning of a contract term, or whether there is a breach, the reasonable person standard will usually be applied.
Remedies
If you sue for breach of contract — and win — you usually are entitled to compensatory damages. This is the amount of money necessary to put you in the same position as if the contract had not been breached: to give you the “benefit of the bargain.” If, for instance, you sold the rights to your web domain name in exchange for installment payments of $50,000 a year for three years, and the buyer fails to make the third payment because he has been deported to Pakistan, a court would award you $50,000 in compensatory damages.
Punitive damages may be awarded if the breaching party’s behavior was offensive to the court. Unfortunately, punitive damages are generally not available in breach of contract actions unless fraud is involved.
Liquidated damages are available when provided for in the contract: the term refers to a predefined monetary amount to be paid by the breaching party in the event of a breach. Liquidated damage provisions will be enforced by the courts as long as they are not grossly out of line with the amount of actual damages; if so, they will be considered a penalty, not damages, and won’t be enforced.
In addition to money damages, a court may, in certain circumstances, order specific performance of a contract term or provision. This remedy is available only when damages would be inadequate to compensate for the loss to the innocent party, usually occurring when “one of a kind” property is involved. For instance, if a Seller breaches a real estate contract, the Buyer would want the court to order the Seller to transfer the property to the Buyer. Damages alone would be inadequate, since the money would not allow the Buyer to get the “benefit of the bargain.”
Other remedies available to a court include recision (cancellation) and reformation (rewriting) the contract.
Special Types of Contracts
Leases. Leases are contracts involving the use of property or personal services for a specified period of time. Most states have a separate body of law for dealing with such contracts, and require that leases for real estate of more than one year must be in writing.
Warranties. Special obligations on the part of a seller or vendor. Federal law covers warranties for consumer merchandise; it does not require that merchants make such warranties, but sets the terms of the warranties. Most warranties exclude “consequential damages”: damages caused by a defective product in addition to the cost of repairing or replacing the product.