Contracts are both very simple and extremely complex. Sometimes, that’s just the law!
They are simple in that they can be formed very easily and sometimes without even knowing you’ve formed one. If a neighbor boy comes to your door and says he’ll mow your lawn for $15 and you say, “Great, do it!” You’ve formed a contract and you’ll have to pay him when he’s done. Likewise, if the same boy starts mowing your lawn and you see him and let him continue, you have also formed a contract that he can enforce against you for some kind of payment.
So what constitutes a valid contract? Very simply a contract is formed when there is an offer, an acceptance and consideration. The example above illustrates two kinds of offers: one is explicit (I will mow your lawn for $15), the other is implicit (the action of starting to mow the lawn with you watching). Both are valid offers. The same is true with acceptances. You can say, “Yes” to an offer or by your actions imply that you have accepted it. So you see, it can happen quite easily! Having an offer and an acceptance creates an “agreement.” Whether that agreement is legally binding depends on “consideration.”
Consideration is a legal term which basically means that “something of value” is promised or exchanged in the agreement. The boy commits to mowing your lawn and your promise back to pay him. You’ve exchanged promises that are of value and that “legalizes” the agreement. Usually consideration is not an issue in business contracts (but on rare occasions can be!). The question of consideration is more prevelent when gifts are involved. Lets say your neighbor sees that you have broken your leg and tells her daughter to mow your lawn. The young girl mows your lawn as you watch from your porch with a blanket over your broken leg. Is that a gift? Can the young girl expect to be paid? How is that different than the example where you watch the boy mowing your lawn?
If all three elements (offer, acceptance and consideration) are there, you have a legally binding contract. It’s that simple. But once you start getting into the details about the terms, payments, exceptions, terminations and many other “what if’s,” contracts can become very complex.
You’ve probably heard that oral contracts are not valid. Right? Wrong! Many oral agreements are legally binding.
In the course of business you will undoubtably encounter numerous situations where you are forming contracts with others. And you might do this without putting anything in writing.
CONTACT TIP: ALWAYS PUT YOUR AGREEMENTS IN WRITING!
Because a contract is formed any time there is an offer, an acceptance and consideration, if you offer to hire someone and they agree, then you may have formed a binding employment contract, even if it’s not in writing. If it’s not in writing, then there will be ambiguity about the terms and conditions. How much am I supposed to pay the boy for mowing my lawn? Confusion about the parties responsibilities always leads to problems and even litigation. Was the boy supposed to trim the edges, too? And litigation (or a negotiated settlement) is ALWAYS more expensive than writing a contract in the first place.
Did we make our point? While some kinds of contracts must be in writing (like contracts to transfer real property), others don’t. So make sure you know what you are doing.
Breglio Law Office provides most contracts that small business owners need at economical pricing. We can also draft contracts to suit your needs and review contracts given to you by other parties. Don’t get stuck out on a limb; make sure you understand your contracts.
TERMINATION: Most contracts either stipulate the way of terminating the arrangement or naturally expire at some occurance (payment and delivery) or time (end of a lease agreement). It can get difficult to get out of contract if there is no termination clause in the agreement itself.
BREACHING CONTRACTS: This is a big topic which we can’t completely cover but whenever you fail to perform a term of the contract you are in breach. Not paying rent when due is a breach of a lease agreement. You are then liable for damages that result from your breach unless you have a valid defense for breaching the contract.
DEFENSES: Sometimes, a breach of a contract won’t result in having to pay damages. In other words, you have a “defense” for your actions. While we won’t go into detail here, some common defenses for breach of contract are: unconscionability (the contract is really unfair or one-sided); mistake (usually only when the mistake is one of both parties); fruad (one side intentionally deceives the other); undue influence (when one side has unfair control over the other); and duress (under some threat of harm).
CONTRACTUAL DAMAGES: In contract law, courts only permit compensatory damages. This generally means that the non-breaching party can be made whole, as if you didn’t breach the contract in the first place. The damage award “compensates” you for whatever you “actually” lost because of the breach. Sometimes, these can be hard to determine. In these cases, some contracts stipulate “liquidated damages.” Liquidated damages are a fixed amount that is written into the contract in the event of a breach.
Instead of having to prove what the value of your losses is, you simply receive the fixed liquidated damage amount. Earnest money on a real estate purchase agreement is an example of liquidated damages. What contract law does NOT provide is punitive damages. Punitive damages are those that are inflicted upon the offending party as “punishment” for their actions. These kinds of damages occur in tort (personal injury) and similar cases. However, in some situations permitted by law, you can receive what is known as “treble damages” in a breach of contract case. In these situations, once the damages amount is determined (the amount to make you whole), it is multiplied by three. This is a form of punitive damages but must be authorized by law.
THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY BEFORE FORMING ANY CONTRACT.