To avoid 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.
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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 optimisms 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.
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 cancelling 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.
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.
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.
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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