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Law School For You – Contracts

  |   By   |   Paul SamakowOpen link in another window

Everyone makes deals.  Children and parents make them; usually daughters get the better of fathers.  Athletes and coaches make them; usually the coaches acquiesce. Husbands and wives make deals every day, multiple times each day. Usually, if the husband is smart, the wives get the edge (happy wife, happy life — but wives will often let the husbands think they got the better).

In business, deals abound.  They are called contracts.  Here is a contract primer.

 

A contract has three elements.

First, there must be an offer.  Next, there must be an acceptance of the offer.  Finally, there must be what is known as consideration.  Consideration is only necessary if one or the other party to the contract wants to enforce the agreement when the other seeks to avoid the terms agreed upon. A contract without consideration is often called a promise.

 

Consideration is the getting or giving of value, even a remote advantage or gain.  It is a right gained, an interest gained, a profit, a benefit, something given up, a detriment, a loss, or a responsibility. Consideration has been found to be the slightest gain.  Many contracts call for the delivery of one dollar as the consideration by one of the parties, which while clearly is almost nothing, remains a common recitation of consideration upon which the parties can rely to enforce their agreement.

 

Verbal contracts can be enforced, but in business, it is always best to have things in writing so that in the event of a contract breach, a clear understanding of what was agreed cannot be as easily disputed.

 

When circumstances, conditions and “things” change, parties to a contract sometimes seek to change the contract, or otherwise breach the terms agreed upon previously.  Thus a word to the wise if in business:  anticipate the future, identify things, events, circumstances and “things” that are possible, and put the “what if” and “what then” into the contract as part of the agreement.

 

In their first year of law school students take a class in contracts.  They learn about the famous case of Mr. Raffles and Mr. Wichelhaus, two businessmen who entered into a contract for the sale of 125 bales of cotton.

 

Shipment of the bales was set from India to England on the British ship Peerless.  Unknown to both men, there were two British ships with that name.  Mr. Wichelhaus, the receiver of the cotton, expected the shipment on the Peerless to arrive in October.  The cotton however, was being carried on the other Peerless, which arrived in December.  Mr. Wichelhaus refused to accept delivery.

 

Mr. Raffles sued for breach of contract.  The court was unable to determine which ship named Peerless was intended in the written agreement.  As the parties did not agree on the same thing, there was no “meeting of the minds.”  There was, therefore, no binding contract.  The court ruled that Wichelhaus did not have to purchase the cotton from Raffles.

 

This case, decided in 1864, established the concept in contract law of “the meeting of the minds.”  It also is probably remembered because the possibility of two ships, much less two British ships having the same name is obviously very small.

 

Next word for the wise:  spell out all terms in a contract and be precise about the significant, or material terms – date, time, location, price, quantity and quality are terms that are most deemed “material.”

 

Deal-breakers typically involve the failure of a material term.  A contract that specifies delivery by noon without stating something like “time is of the essence” likely will be enforceable if delivery takes place at 1:00 PM.

 

A contract to supply a clothing model for a runway show, specifying a tall blonde woman likely will be considered void if the model who shows up is a short dark-haired man.

 

Performance of a contract can be complete or partial.  In the event of partial performance, often resolution of the matter means partial compensation.

 

The concept of capacity is also important in contract law.  A party must have capacity, or the legal ability to bind him or herself, and to be responsible for the agreements made.  Small children thus cannot contract, because of their age, immaturity, and lack of ability to understand what they are doing.

 

An employee cannot bind a company, as the employee is not an owner, nor a director, nor otherwise authorized to act for the company.

 

Seemingly there are always two sides to every story. Thus the defaulting party often provides defenses to the performance of a contract. These typically include such things as mistakes (lack of a meeting of the minds on significant, or material terms), incapacity (age, mental incompetence, lack of authority), duress, undue influence, and misrepresentation or fraud.

 

Misrepresentation means a false statement of fact made by one party to the other, intended to trick the other into making the agreement.  False promises or statements made by a seller of goods regarding the quality or nature of the product that is to be sold would likely be a misrepresentation that would allow the buyer to void the contract and not be obligated to pay the seller for what was delivered.

 

When an agreement is determined broken, and a party is determined to have suffered, damages of different sorts are available, depending upon the circumstances.

 

Specific performance will require the defaulting party to do what was agreed.

Injunctions order halting or stopping actions.  Both of these remedies are rare.

 

Compensatory damages can be awarded, to compensate the wronged party for losses, costs and profits.  Another word to the wise:  put terms into the contract that set out the “what if” and “what then” in the event of a contract breach.  These terms become what are known as liquidated damages and are often referred to as the “penalty clause” in the contract.

 

Nominal damages are awarded in contested contract cases when the court determines that despite a breach by one party, the other party suffered little, if any consequence.

 

Punitive damages are awarded in cases where active fraud was involved.  This type of award by courts is rare.

 

Final words to the wise:  when contract terms are not met, remedies include a variety of options.  The most simple is to walk away and opt not to do business with the other party again.  Because you have the legal right to do something does not mean you should.  Pursuing legal remedies can mean significant time and expense; the “bottom line” may be that it is not worth the effort even if it results in “winning.”

Many contracts today call for alternatives to filing lawsuits.  Mediation and arbitration are often favored resolution vehicles that reduce costs and speed up the resolution process.

 

Before you sign on the bottom line, research the other party and read the contract.