Contracts

What are the components of a valid contract?

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.

• Offer
  An offer consists of one party promising to do something or to refrain from doing something in the future.
• Acceptance
  Acceptance occurs when the offer is unambiguously accepted by the other party. Acceptance can be expressed through words, deeds, or performance. Generally, the acceptance must mirror the terms of the offer or it can be viewed as a rejection and a counter-offer.
• Consideration
  Each party has to receive a benefit from the contract. Consideration provides that benefit, as it is the value that induces the parties to enter into the contract. Consideration can take the form of an expenditure of money or effort, a promise to perform or refrain from performing a service or action, or reliance on a promise.
• Mutuality
  Mutuality requires the parties to understand and agree to the basic structure and terms of the contract. This is called a “meeting of the minds.”

How do I draft a contract?

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.

Contract Drafting Phase 1

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:

• Legal names of the parties
• Contract start date
• Contract duration
• Detailed description of the goods or services at issue
• Payment information
• The law that governs the contract
• What constitutes a default
• How a default can be cured (if uncured, default leads to breach)
• The remedies available to the non-breaching party
• If one or both parties are required to indemnify (reimburse) the other
• Whether the rights and obligations under the contract can be assigned to a third party
• What events cause termination of the contract
• Restrictive covenants such as non-compete or non-solicitation agreements
• A liquidated damages clause providing for a specific amount of damages if actual damages would be difficult or impossible to ascertain

Contract Drafting Phase 2

The second phase of contract drafting is putting the boilerplate provisions into the contract. These are contract clauses that are in almost every contract and are commonly referred to as the “fine print.” These types of clauses can include:

• Integration: a statement that the contract contains the complete and final agreement between the parties.
• Prohibition of oral modifications: a statement that oral modifications are not allowed to the contract.
• Severability: a statement that if any portion of the contract is deemed to be illegal or unenforceable, that the remainder of the contract will still survive.
• Waiver: a statement that defines and restricts the circumstances in which legal rights, including the right to terminate the contract, may be lost by a failure to exercise them.
• Alternative dispute resolution: a statement that the parties agree to participate in mediation or binding arbitration if a contract dispute arises, instead of filing suit in court.
• Attorney fees: a statement that either contract party will bear their own cost of attorney fees should a dispute arise out of the contract, or that all attorney fees will be paid by the prevailing party.

Does a contract have to be in writing?

The simple answer is no, a contract does not usually 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.

How do you enforce an oral agreement?

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:

• Summary: The Kagy court stated that a valid and enforceable oral contract requires both (1) the intention of the parties to be bound; and (2) an agreement as to all material terms. An otherwise valid oral agreement does not constitute a contract if either party knows or has reason to know that the other party regards the agreement as incomplete and intends that no obligation shall exist … until the whole has been reduced to … written form. The fact that the parties contemplate a writing is evidence, therefore, that they do not intend to bind themselves by an oral agreement.Courts determining whether the parties intended to be bound by their oral representations consider other factors as well, including whether the amount of money involved is large or small. The conduct of the parties after the alleged oral agreement is also considered. (Paraphrased from Kagy at 1250.)
• Conclusion: The conclusion reached in Kagy was that an oral contract did not exist because the evidence showed (1) the parties contemplated a written agreement; (2) the conduct of the parties after the oral agreement indicated there was no intention by the parties to be bound by the oral agreement; and (3) the potentially large amount of money at issue further suggested a lack of intent by the parties to be bound by their oral agreement. (Paraphrased from Kagy at 1251.)
• Takeaway: As seen here, the determination of whether an oral contract exists is a subjective decision that is based on the totality of the circumstances surrounding the alleged oral agreement.Reliance on an oral agreement is problematic when the other party doesn’t hold up their end of the deal. While the law doesn’t require most contracts to be in writing, working on a “handshake” agreement can result in you not getting paid for your work or services.

What is the Statute of Frauds?

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:

• Credit agreements
• Those involving an estate or interest in real property, other than a lease, for less than a year
• Those that outline performance that cannot be completed within one year of the contract’s creation
• A promise to marry, unless the promise is mutual
• A promise by an executor of an estate to personally pay a debt of the decedent
• A promise to pay the debt of another person by a surety or guarantor

Lack of Capacity

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

Duress occurs when a party would not have entered into the contract without being coerced, such as in instances of blackmail.

Fraud

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

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.

Mistake

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.

Public Policy

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.

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:

• The work or service was provided.
• The other party knew of and consented to the work or service.
• Circumstances exist that make it reasonable for the party providing the work or service to expect payment.

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:

• A benefit was conferred upon a party.
• The party knew about the benefit.
• It is inequitable for the party to retain the benefit without paying the other party the value of the benefit that was conferred.