Need a contract for your business? Wondering if you can get paid for work done without a contract? Are oral agreements enforceable?
Below, we’ll cover what goes into the formation of a contract and how to make sure it’s legally sound.
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Contracts outline the expectations and define the rights and obligations of each party involved in an agreement. As such, they are an essential component of business.
A well drafted contract will be unambiguous and attempt to cover every reasonably foreseeable contingency. Understanding the situations where an otherwise valid and enforceable contract is unenforceable is essential.
There are many types of contracts, from general employment contracts to non-disclosure agreements to promissory notes. Here, we’ll discuss contracts generally, and the different facets that may render them valid or invalid.
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Several components must be in place in order for a contract to be valid. While the specifics will vary by situation, the essential components will not.
The formation of a valid contract consists of an offer, acceptance, consideration, and mutuality. Each of these four components are required or there is no contract.
The first rule of contract drafting is to be clear and unambiguous about everything. Any ambiguity can result in misunderstandings or disputes, which increases the likelihood of litigation. (Ambiguity in contracts is counterproductive, as the main goal of contract drafting is to avoid litigation.)
Drafting a contract can be looked at as being done in two phases. We’ve outlined what info to include in each of those phases below. This is not an exhaustive list of what can or should be put into a contract, but it covers the basics of what goes into drafting a valid and enforceable contract.
The first phase of contract drafting is to include all of the information that is specific to the transaction at hand. This can be comprised of:
The second phase of contract drafting is putting the boilerplate provisions into the contract. These are contract clauses that are in every contract and are commonly referred to as the “fine print.” These types of clauses can include:
Most contracts can take either written or oral form. But, relying on an oral or “handshake” agreement can present numerous problems if a contract dispute arises.
The simple answer is no, a contract does not have to be in writing. The better answer is “it should be.”
Outside of the Statute of Frauds (discussed below), there is no requirement that a contract has to be in writing. But just because the law doesn’t generally require written contracts doesn’t mean it’s not a good idea or an even better business practice. However, oral contracts continue to exist because people often don’t have time to create a written contract, or they feel a written contract is unnecessary for their situation.
Before you can enforce an oral agreement or “handshake” agreement, its existence must be proven. In Perles v. Kagy, 473 F. 3d 1244, 1249 (D.C. Cir. 2007), the federal court of appeals for the District of Columbia set out the methodology that is generally used when one party is asserting the existence of an oral contract.
The case breaks down as follows:
The Statute of Frauds is a common law concept that has been formalized by statute in most states. The contents of a statute of frauds can vary from state to state, but generally the statute imposes an absolute requirement that the following types of contracts be in writing:
Unenforceable valid contracts might seem like a contradiction, but they do occur. Sometimes circumstances arise that may invalidate an otherwise perfectly valid and enforceable contract.
Here’s an overview of the most common reasons that render valid contract unenforceable:
If a party is under the age of 18 or is unable to understand the terms of the contract and its implications, that party lacks the capacity to contract.
Duress occurs when a party would not have entered into the contract without being coerced, such as in instances of blackmail.
Fraud occurs when Party A intentionally misrepresents or fails to bring an important fact to the attention of Party B in order to induce Party B to enter into the contract. An example would be failing to disclose a leaky roof when selling a house.
Unconscionability occurs when a significant or material term in a contract is oppressive to one party as a result of an unfair bargaining process. When this happens, the contract can be found unconscionable and voidable.
This occurs when one or both parties make a mistake which significantly effects the negotiation process regarding a material term of the contract. Unilateral or mutual mistake demonstrates that the parties never achieved the requisite “meeting of the minds” to form a valid contract.
A contract found to violate public policy is voidable. Examples include where the contract is about illegal goods or activities or prohibiting significant rights of a person, such as taking medical leave from work or joining a union.
If you provided work or services without a valid or enforceable contract—and the other party is neglecting to pay you—there are still some legal options available to get paid.
Quantum meruit (“QM”) is a legal cause of action seeking to recover compensation for work or services provided where no price has been agreed upon. QM is used when the person who provided the work or service should be paid, so the amount owed is measured by the value of the service or work performed. A successful QM claim will demonstrate:
Unjust enrichment is a legal cause of action based on society’s interest in preventing the injustice of a person retaining a benefit for which they have not paid. Unjust enrichment is used when someone has received a benefit and it would be unfair if they didn’t pay for the benefit. The amount to be paid is determined by the value of the benefit conferred. A valid unjust enrichment claim will show:
Yes. You can prepare your own contracts for your business. However, valid and enforceable contracts are complex and detailed. Having a lawyer prepare and/or review your business contracts can save a lot of money down the road.
Yes. All of your business contracts should be in writing. If a dispute arises out of an oral contract, proving its validity and enforceability is an uncertain, expensive, and time consuming process.
Yes. If you sue to enforce a contract, attorney fees can be recovered as long as the contract contains an attorney fee provision.
The contract is voidable if your parent cannot understand the terms of the contract and its implications, as they lacked the capacity to contract. However, voidable means they even though they can seek to have it canceled, it is not void immediately. These are often difficult situations since companies that are prone to create predatory contracts are often aggressive in trying to enforce them. Sometimes people can simply call and get the services canceled. But, frequently, people end up paying the cancellation fee to get out of the agreement, or the matter has to go to small claims court to be resolved.
Yes. If you have the ability to read the contract and understand its terms and its implications, your decision to not read it will not relieve you of your contractual obligations.