Contracts

Contracts

The great gifts of law are social order and predictability.  If
you had no idea whether a person who promises to sell you a home
would actually turn it over to you, and if you had to fear that
even after the seller had handed you the key he might return some
day and move back in, saying that he'd decided the house was
worth more than you paid, your life would be made miserable by
unpredictability.

The same if someone promised to pay you for doing some work, or
if you were told that a merchant would buy your cloth if you
travelled to India to obtain it, or if someone says that he will
carry your possessions to another state and deliver them for you:
What if you had no way of knowing whether those agreements would
be fulfilled...and if they were not, your only recourse would be
to try to find the culprit and punish him with violence and
perhaps tear away from him the value of what you had lost?

To avoid such uncertainty, every civilization has developed some
variations of the concept of contract, some means of making
reasonably certain that the rules of making enforceable promises
are clear, that the content of agreements is mutually understood,
and that the power of government stands by to enforce the
promises at least by seeing that the one who breaks the promise
pays the other adequate compensation.

(The law has always had problems, both pragmatic and theoretical,
with consistently forcing people to perform promises which
involve doing more than just paying money...such as painting a
house properly, or singing in an opera.  Sometimes courts will
order "specific performance", but it is often more practical to
make the person who breaks the promise simply pay money damages
to the disappointed party.  Court-ordered specific performance is
rare and occurs when the subject-matter of the contract is
unique, and money damages would be no substitute for actual
performance.)

How a Contract is Formed

Contracts are legally binding agreements.  Attorneys often use
the terms "contract" and "agreement" interchangeably, but not
just any agreement is a legally binding contract.

A contract is formed by a meeting of the minds of at least two
parties, a mutual assent resulting from the expression of an
offer by one and an acceptance of precisely that offer by the
other.

The offer has no effect if the other person does not accept it.
A mere discussion of the offer does not constitute acceptance.
Negotiation often leads people to believe that they can expect
other people to commit themselves to certain things, but until
there has been an actual offer and a clear acceptance, there has
not been the necessary "meeting of minds" to form a contract.

A person making an offer may revoke it (cancel it completely) at
any time before it is accepted.  If you wish to revoke your
offer, however, you must communicate that fact to the person(s)
who might accept your offer.  The revocation becomes effective
upon delivery to the other person...for example when the letter
revoking the offer arrives at his residence or place of business.

If a person or thing essential to the performance of a contract
dies or is destroyed before the offer is accepted, the offer is
ended automatically.  To avoid possible problems, the fact that
the offer has terminated should be communicated to those who are
considering accepting it.

An offer by mail or telegram may be accepted by mail or 4
telegram unless the person making the offer specifies otherwise,
and the acceptance is effective (the contract comes into
existence) at the moment the acceptance is put into the mail box
or given to the telegraph office.  Unlike the revocation of an
offer, an acceptance does not wait for delivery.

Many business communications such as advertisements and
catalogues are construed not as offers, but as invitations to
others to make offers.  Generally, invitations to make bids (as
for construction contracts) are not considered offers.  That is
why at an auction sale the bidder, not the seller of the property
who is standing in the background watching the auctioneer, is
generally considered the person making the offer, so that the
seller is not bound by bids and may withdraw his property from
sale without accepting an offer if the bidding is too low.

An apparent acceptance of an offer which suggests a change in the
original offer is not an acceptance and does not create a
contract.  It is a counter offer.

A counteroffer is a rejection of an offer.  It has no effect
except to propose a new and different contract.  You should
assume that a supposed acceptance which suggests any change at
all in an offer or counteroffer is not an acceptance.

For example, if party A offers a written printing contract to
party B, and B signs it but crosses out a sentence, it is not yet
a contract; it will not become a contract until A accepts the
changed agreement (in this case probably by saying so and writing
his initials by the deleted portion).

Many disputes arise because one party claims that a contract was
made, while the other party says that the process was still in
the offer and counteroffer stage.  This is a particular danger
when a contract is oral (spoken) rather than written...a good
argument for putting agreements in writing even if it is not
legally necessary.  You must analyze whether people are merely
discussing what they may later promise to do, or may do in the
future, or whether they have agreed on specific mutual
obligations.   Conversations full of words and phrases like "if"
and "would you be willing?" and "I would consider" are almost
certainly negotiation.  To avoid problems: (1) Be sure that both
parties fully understand the content of the agreement (there is a
meeting of minds), and (2) Be sure that the acceptance makes no
change in the offer.

If there are any conditions, make them a part of the contract.
For example, you say "I'll pay you $200 to paint my house by
Wednesday." Painter: "Okay, as long as it doesn't rain." The
painter has made a counteroffer, not completed a contract.

You say, "All right, I'll pay you $200 to paint my house 6 by
Wednesday unless it rains before then; if rain keeps you from
finishing it by Wednesday, you have to finish it as soon as the
rain stops." You have accepted the painter's terms, but you have
also added a kind of deadline, so you are now making a
counteroffer.  If the painter says, "Okay," you have a contract -
- a rather loose one, in which there might, for example, be an
argument over the nature and quality of the painting, or over how
soon "as soon as" is, but a contract nevertheless.

Bilateral and Unilateral Contracts

Remember, an offer plus an acceptance equals a contract.

In effect, the offeror (person making an offer) is making a
promise to do something or to refrain from doing something IF the
other person (offeree) will do something or refrain from doing
something.

A little thought shows that an offer may be accepted either by a
promise or by action.  Where the terms of an offer permit, the
contract is created by a promise in exchange for the offeror's
problem.  It is called a bilateral contract, and both parties are
bound as soon as the mutual promises are exchanged.  For example,
if A says "I'll sell you my car for $400." B can accept by
promising, "Okay, I'll buy your car for $400."  The contract for
sale is immediately formed, and both parties are bound to perform
as mutually promised.

Notice that in the example just given, nobody mentioned when the
actual exchange of car and money would take place. If, having
exchanged a promise for a promise, the buyer for days keeps
putting off producing the money, the seller (regretting that it
didn't occur to him to put a time limit on the transaction) will
at some point become justified in deciding that the buyer has
broken the agreement and that he (the seller) can sell the car to
someone else. If the disappointed buyer sues the seller, the
courts will probably solve the problem with two of their favorite
words:  "reasonable" and "imply". The courts will most likely say
that because there was no mention of time, that a "reasonable"
time was implied by the contract, and that the seller was
justified in selling the car to someone else after a week.  In
other situations a judge might say that failure to mention time
omitted an essential term from a contract, and that the contract
lacks specificity to the point that it is unenforceable...meaning
that the disappointed party just has to lump it.

A contract formed by a promise for a promise is a bilateral
contract.  A unilateral contract is one in which the offer cannot
be accepted by a promise--only by action.

Where the terms of an offer show that it can be accepted only by
an action--"I'll pay you $200 if you'll paint my barn by Tuesday"-
-then there is no contract until the act has been performed.

Notice that the offer did NOT say, "I'll pay you $200 if you'll
promise to paint my barn by Tuesday." A promise to paint the barn
is not an acceptance and does not bind either party to anything.
Only by the complete painting of the barn is the contract formed
and the $200 owed.  And if the offeror comes when the barn is
almost painted and says, "Sorry, I withdraw my offer," there is
no contract.  The painter can, however, recover the value of his
work under the doctrine of quasi-contract (see below), to prevent
the unjust enrichment of the offeror.

The difference between unilateral and bilateral contracts may
seem academic and difficult, but it does have practical
consequences.

One more point about acceptance: A person cannot put another in
the position of accepting an offer by silence.  A writes to B: "I
will assume that you have accepted my offer to print your
brochures for $500 unless I hear from you to the contrary by
Tuesday." B is under no obligation to reply, and his silence past
Tuesday does not accept the offer.

Vagueness, Omissions, and Ambiguity

As we mentioned earlier, a judge may find a contract
unenforceable if its terms (the specification of what the parties
must do) are too vague.  What may appear clearly to express the
intentions of the parties at the time they write a contract may
seem totally unclear on later analysis.

Another common problem is that subsequent events may reveal that
important provisions covering fairly foreseeable potential
problems were not included in the agreement, leaving the parties
at sea without sails or tiller.

Typically, for example, people who are enthusiastic about a new
transaction or cooperative venture of some kind, and filled with
feelings of optimism and good fellowship, do not even want to
think about the possibility that something could go wrong, much
less that the participants could end up suing one another.  A
contract should always contain provisions for dealing with
obstacles, failures, and even betrayals, no matter how farfetched
such things may seem at the time.

Here is an important principle to remember: The courts will
construe an ambiguous provision in a contract against the person
who wrote it.  So, if you are responsible for offering a part of
a contract which is worded unclearly and which could as easily be
interpreted against as for your interests, the court will choose
the interpretation that goes against you rather than penalizing
the other party for your ambiguity.

Consideration

Even an offer and an acceptance with sufficiently specific terms
will not form a contract if another crucial element is missing:
Consideration.

Consideration refers to the benefit a party gets by entering into
a contract.  Each person must get something out of it or the
contract is not enforceable.

For example: Auntie says to you, "I promise to give you a Porsche
for your birthday," and you say, "Thanks, I'll take it!"
Sorry...no contract.  The agreement contains nothing for Auntie.
But if Auntie says: "I'll give you a hundred dollars on your
birthday if you stop smoking cigars," and you accept and stop
smoking cigars, there is a contract, and Auntie must pay you on
your birthday.  The contract includes consideration of your
giving up something at her request, while you are to get some
money.

Consideration may consist of cash, goods, services, actions,
curtailment of actions, or anything else that is requested by one
of the parties. An important note: Even though a contract spells
out consideration, if it gives a party the right to refuse to
perform at will, a court may find that there was no contract at
all.  A duty which one can refuse to do is not consideration.

Many contracts covering performance which take place over time
do, of course, contain a provision allowing cancellation upon a
given notice period.  The courts take the general motion that
even if the terms of a contract allow a party to terminate the
contract by giving a certain number of days' (or weeks') notice,
there is consideration because the canceling party has at least
bound himself by the contract for the length of the notice
period.

To be sure that your contracts aren't lacking in mutual
consideration, you should be sure (1) that the contract cannot be
terminated by either party for some minimum period of time, and
(2) that some sort of notice period, even a short one, is
necessary for termination.  Just remember: There must be
consideration for both parties, and it should be recited in the
contract.

As usual, there is at least one exception to the rule of
consideration: Promissory estoppel.  Where D makes a promise to
P, and P relies on that promise, and changes his position in
justifiable reliance on that promise, and suffers detriment when
D breaks the promise, the courts will usually say that a contract
exists.  D will have to compensate P for relying on D's promise.

Written and Oral Contracts

An oral contract can be as legally binding as a written contract
unless it is one of those types of agreements which lawmakers
have decreed must be in writing.

Writing is, of course, sensible in any case because it creates a
record of what was agreed; it helps prevent misunderstandings and
arguments.

In the United States, the legal requirement that certain
contracts be written and signed is related to the old English
Statute of Frauds which set out in detail the kinds of agreements
that were not legally valid if merely spoken.   The title of the
statute referred to its purpose of preventing fraudulent acts by
people who falsely claimed they were parties to oral contracts.

You must consult the laws of your own state to determine what
version of the Statute of Frauds has been enacted.   Among other
things, the requirement of writing and signing typically applies
to a transfer of real estate, a guaranty to be responsible for
the debt of another person, and a contract which cannot be fully
performed within a year from the making of the contract.  You
should also assume that a contract for sale involving $500 or
more has to be in writing.

Note that statutes requiring a signed writing do not necessarily
demand that both parties sign.  If a suit is brought for breach
of an agreement of a kind covered by the statutes, the
requirement is that the defendant (the person being sued) must
have signed such a writing before he can be held responsible.

Contracts Implied in Fact

The courts, like human beings in their everyday lives, recognize
contracts that are neither written nor spoken.   For example, if
you get in a taxi and tell the driver to take you to the airport,
and he takes you there, you must pay him the fare even though you
have not promised him anything verbally.

(It's interesting to notice that in the above contract, as in
earlier examples, certain additional terms are not specified, but
would certainly be implied: You do not tell the driver to take
you to the airport NOW, and to go there more or less
directly...but if the driver stopped at a restaurant for dinner
first, and then took you to the airport by way of Wabash, what
court would say that he had performed the contract?)

But what if a neighbor offers to keep some of your furniture in
his garage while you are moving, and then tries to charge you for
storage when you want to pick it up a few weeks later? The courts
would no doubt find that when you let an acquaintance do you a
favor, such as help you move or build a fence, and no one has
said anything about payment, no contract for payment is implied
from the facts even though consideration existed in the form of a
benefit to you and a giving up of space by your neighbor.

When judging whether a contract may be implied in fact, all the
circumstances must be taken into account.

Contracts Implied by Law

In certain limited situations, even where the contractual
elements of mutual assent and meeting of minds is missing, the
courts may imply a contract in order to prevent the "unjust
enrichment" of one of the parties.

This legal fiction is called a "quasi contract".

Let's say, for example, that a man is hit and knocked unconscious
by a car, a bystander runs and gets a doctor, and the doctor
administers necessary emergency treatment to the unconscious man
for two hours.  The injured person has asked for nothing and has
done nothing from which a judge could imply a contract in fact
with the doctor.

But the unconscious victim did receive valuable and necessary
professional services, while the doctor has given up his
appointments for two hours to perform work for the injured man.
The injured man would be unjustly enriched at the doctor's
expense if merely because he was unconscious he could escape
paying medical fees.

External Materials and the Parol Evidence Rule

If a contract is in written form and does not clearly incorporate
other materials by reference (that is, refer to and identify
other documents which are to be considered part of the contract),
the obligations of parties and the meaning of the contract will
be judged entirely from the face of the contract itself.  No
evidence outside the writing of the contract will be considered.

You will often see that a contract specifically includes some
such language as this: "This contract contains the entire
agreement of the parties and replaces any former agreements
between the parties relating to the subject-matter of this
contract." The purpose is to clarify the fact that no one is
later going to claim that something not covered by the contract
is also a part of it.

The parol evidence rule specifically states that oral evidence
about the contents of a written agreement will not be heard by a
court except under very limited conditions, as where one of the
parties alleges fraud.

It's usually just tough if the other party says, while you sit
with poised ball-point, "And yes, of course we'll also put in new
wiring if you'll buy the thing," or "I guarantee that nobody will
ever build between you and the lake," and the promise doesn't go
into the written contract.   Under many circumstances you are not
going to be allowed to use such oral promises as evidence.

Despite the exceptions to such rules, your safest course is to
assume, where there is a written contract, that no additional
spoken promises dealing with the same subject-matter can be
enforced, that no external documents are integrated into the
contract unless appropriately mentioned, and that no court
judging a dispute is going to know anything about the contract
except what is written in it.

Signing Contracts

Of course a written contract must be properly signed.   As a
general rule, a contract does not have to be witnessed or
notarized.  It is sufficient that all the parties sign their
names.  If you have any reason to fear that a party may later
deny that his signature is genuine, then you should ask for a
witness to the signature.

If there is a statute requiring witnessing or notarization, then
be sure that the law is satisfied, even though in some cases
courts will enforce documents lacking all the formalities when no
one is suffering injustice through the court's decision.

When you are dealing directly with individuals who are named in
the contract, then it is generally obvious who must sign...that
is, who are the necessary parties to the contract.  Remember that
one person's signature cannot bind another person to do anything
unless the person signing is legally authorized to do so.  That
often means that the authorization must have been given by means
of a formally executed document in which the person not signing
grants power of attorney for the necessary purpose to the person
signing.  Be sure that the power of attorney includes the power
to bind the absent party to everything required under the
contract.  A "general power of attorney" can permit almost any
act; a "limited power of attorney" specifies the particular
things which can be done.

In addition to making certain that a contract is signed by
everyone whose money, property, services, or consent (including
spouses and other possible co-owners of property) are
indispensable to the proper operation of the contract, you should
do whatever checking is necessary to ascertain that everyone is
who he purports to be, and particularly that anyone who is
selling something to you actually owns it and has the right to
sell it.  There have been cases of tenants pretending to be their
absentee landlord and selling the home they were renting...all
very easily, because they dealt with strangers and no one asked
the tenants for identification.

People must have the legal "capacity" to sign contracts.  One can
be qualified in all other respects, for example, but by law be
too young to make contracts.  Insanity is another form of
incapacity to contract.

If you are dealing with a person who is signing a contract on
behalf of a corporation or some other entity, take measures to be
sure that he has authority legally to bind that entity.  State
laws may require various formalities when a corporation enters a
contract.  The by-laws of the corporation itself should specify
which persons are authorized to execute contracts for the
corporation.  You are usually safe if it is the president of the
corporation who is signing.

And if you happen to be the person signing on behalf of a
corporation, and you do not want to be personally liable in a
suit for damages, then make that clear by writing after your
name, "as President, XYZ Corporation," or whatever words describe
your role in the corporation.  The name of the corporation should
appear above your name.  Otherwise, if somebody sues on the
contract, and the corporation has problems, the plaintiff may
claim that you were signing in your personal capacity and try to
satisfy his claims out of your personal assets.

Assignment of Contractual Rights

A person can usually assign (transfer) his rights under a
contract to another person after the contract comes into being.
Let's say that Joe has a contract for the sale of his car, but he
won't get the $1200 proceeds for two weeks.  He needs money now,
and his friend Joan has a lot of money, so he gets the $1200 from
Joan now and assigns his right to the proceeds of the car sale to
Joan.

One could assign his rights under a contract as a gift to
someone; there need not be consideration.  Unless a statute
forbids it, the assignment need not even be written...but writing
is always advisable.

Using as an example a contract for the payment of money to you,
if you assign your rights to the money to friend Homer, you do
not receive the money and pass it on to Homer.   The money is
paid directly to Homer.

One cannot assign a mere "expectancy." The assignor must be the
present or potential owner of the right he assigns.  If your
unemployed nephew, Fred, asks you to loan him money, for which he
will assign to you half of whatever weekly earnings he will
receive when he gets a job, you should not be under the illusion
that a court will enforce the assignment if Fred ever finds work:
An unemployed person cannot assign the expectancy of future
wages.

Unless a contract prohibits assignment, or unless the assignment
would work harm on the non-assigning party, the non-assigning
party has no right to interfere with the assignment, and his
consent is not needed.  He must perform his duties under the
contract just as if he were still dealing with the original
party, but substituting another in that party's place.

Delegation of Contractual Duties

Unless a contract is of a nature to require personal performance,
a person obligated under the contract may delegate (transfer)
some or all of his contractual duties to other people.  This is
typically the case when a general contractor enters into a
construction contract and uses subcontractors to do the work.

The important point to remember is that the person delegating his
duties remains the person legally responsible to the other party
in the contract.  That is, the contractor is not relieved of any
of his contractual obligations by delegating work to
subcontractors, and he can still be sued for failing to perform
the contract properly.

Illegal or Immoral Contracts

People can contract for almost anything, and do, but the State
will not enforce contracts which require illegal or immoral
conduct.  Criminals make such deals with one another, but they
have to enforce them themselves.  The courts generally declare
illegal or immoral contracts void.

Be sure that you do not rely on a contract which a court may find
requires the violation of some ordinance, or which may be called
"against public policy", the latter being a vague term which
courts use to express disapproval when they cannot come up with
something more specific.

There are borderline cases.  Where injustice will be done to an
innocent party (say a party who is justifiably ignorant that the
other party is doing something illegal under the contract), the
courts will sometimes make exceptions so that the innocent party
can recover damages from the more culpable party.

Time

A contract should always specify the time limits by which the
parties wish to structure their deal.  If someone is to do
something for you, you should state a definite date by which it
must be done.

It is always a good idea, when making an offer, to include in it
a time limit by which it must be accepted.

As you will see in the following subsection, the requirements
contained in a contract must be violated in some reasonably
substantial way before a judge will find that the non-violating
party has a right to legal relief.   Minor violations may be
overlooked unless the contract specifies otherwise.  If the exact
timing specified in a contract is critical, then the agreement
should contain words such as "Time is of the essence of this
contract," and perhaps a statement that a party who does not
perform on schedule will be considered to have breached the
contract.

If you want to be more flexible, you might include a provision by
which a delaying party has a clearly defined grace period but
must make some compensation to the other party (such as payment
of interest) for the delay.

Contingencies

A contingency is a condition which is specified in the 20
contract and must be satisfied before other things in the
contract become obligatory.  Generally speaking, a promise is no
less contractual because it is conditional.

A promise is conditional if its performance depends on the
happening of anything except the passage of time.

A familiar example is the contingency written into most contracts
for the sale and purchase of residences:  The sale is conditional
on the buyer obtaining financing within a certain period of time.
This is called a "conditional precedent" because it is a
condition which must be satisfied before the duty of performance
becomes mandatory.  If the buyer exerts proper efforts to find
financing and cannot, then the contract is terminated and the
buyer gets his deposit back.

Be sure that all contingencies, if any, are included within a
contract so that they are clearly understood and agreed to.  And
keep in mind the safety factor of a contingency in preference to
an absolute obligation.  For instance, you wish to borrow money
and pay it back from the proceeds of the sale of property which
you have on the market.  You feel sure that the property will
surely sell within three months; in fact you are already
discussing terms with a possible buyer.  So you might write an
agreement promising to repay the money in six months.  The buyer
fades away, the real estate market becomes sluggish, and you are
left with a grimly threatening deadline.

It would have been much safer and more convenient, if the lender
were willing, to have made the sale of your property a condition
precedent to your duty to repay the money.  Of course the lender
will want some kind of absolute time limit so that he won't be
obligated to wait forever for his money.

Terms other than "condition precedent" are used to describe less
common kinds of conditions, but we shall not go into them here.

Be sure that your contracts protect you by means of
contingencies, and that contingencies proposed by the other party
do not allow him to escape unfairly from his contractual
obligations.

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