Clients often come to us because of issues arising from their agreements with other parties, and the real or perceived failure of one party to live up to the other’s expectations. The unfortunate reality is that most of these issues could have been mitigated or avoided entirely by carefully drafting a contract from the beginning. While there are legal remedies for contract violations, they are much more expensive and time-consuming than proper front-end planning.
What is a contract, anyway? While many people use “contract” as a synonym for a written agreement, this is not quite right. A contract is any agreement which is enforceable at law. Contracts can be written, spoken, and can even be formed without using words at all. An example of a nonverbal contract would be sitting down at a restaurant, pointing at a menu item, and consuming it when it is brought to you – you’re on the hook for that meal! A written agreement can be evidence of the contract but is not the contract itself (though certain contracts are required to be in writing to be enforceable – more on that later!).
The essential elements of an enforceable contract are offer, acceptance, consideration, mutuality of obligation, and competency/capacity. An offer is a promise to perform some act, or refrain from some act, in exchange for a return promise from the other party. For example, “I will sell this bushel of apples for $20,” is an offer to transfer legal ownership (sometimes referred to as “title”) of the apples from the seller to the buyer, if the buyer agrees to pay $20 for them.
An acceptance is simply some outward manifestation by the recipient of his agreement to the offer’s terms. While an acceptance is often given verbally, it can also be given nonverbally, such as by nodding one’s head, a handshake, or by “signing on the dotted line.” To reduce ambiguity, many offers will specify the method of acceptance.
Consideration is what each party “gives” the other to induce him to enter into the contract. In the case of the bushel of apples, the seller agrees to give the buyer the apples, and the buyer agrees to give the seller $20. While consideration is often monetary, or at least tangible, it does not have to be. Consideration can consist of promises to do some act (for instance, painting a fence), or refraining from some act which one has a legal right to do (like smoking cigarettes). Closely related to the concept of consideration is that of mutuality of obligation, which simply requires that each party must be legally bound to perform under the contract. If one party can, on a whim, “opt-out” of a contract, courts will typically deem the contract invalid for a failure of consideration. Discretion to not perform under a contract must usually be limited to circumstances outside of the non-performing party’s control.
The element of competency or capacity refers to characteristics of the parties themselves, rather than the agreement. A person must be legally competent to give valid consent to a contract, which means he must be of sound mind and not under the influence of drugs or alcohol. Certain classes of people, such as minors or those who have been adjudicated as incapable of handling their own affairs, are considered to lack the legal capacity to enter into most contracts.
In addition to these elements, some types of contracts are presumed invalid unless they are put into writing. This legal doctrine is known as the “statute of frauds,” and every state has some version of it (Idaho’s is found in Idaho Code § 9-505). Contracts which cannot be fully performed within one year, obligations for the debts of other people, agreements in consideration of marriage, lease agreements for real property for terms greater than one year, and agreements by professional lenders to lend $50,000 or more all must be in writing. Certain other contracts involving merchants under the Uniform Commercial Code also must be in writing.
When evaluated against the elements of contract we just discussed, our simple agreement to buy a bushel of apples for $20 appears to be valid. But what about some details the parties did not flesh out? Is the $20 due immediately, or within 30 days? This is where contract interpretation comes in. A court will attempt to discern the intent of the parties at the time the contract was formed. If the court cannot determine the intent, it will use “gap-fillers” to more fully define the contract. These gap-fillers can arise from custom, judicial precedent, statute, or other sources. Assuming no other terms were discussed, a court is likely to find that payment for the bushel of apples is due upon receipt, just as it would find that your restaurant bill is due at the end of dinner.
So, if spoken agreements are just as valid as written ones, why would we go through the time and trouble to write up our contracts? For one thing, it is much easier walk into court with a well-written, signed contract than with nothing but a memory, especially when the other side is telling a different story! And the last thing you want is a judge trying to interpret, based on little more than the conflicting testimony of interested parties, provisions which were very important to you at the time you entered into the contract. Oral or “handshake” agreements are inappropriate for all but the simplest, low-value transactions.
Can you draft your own contract? Maybe. You could probably build your own house, too, but there is a reason people hire contractors. Let’s end with a cautionary tale: a client recently came to us, seeking to enforce a contract for the sale of a business. However, the parties tried to save some money and used a contract they had downloaded off the internet. The contract was not specific to Idaho, did not mention many of the provisions which were important to both parties, and there were other problems with its drafting and execution. The client now faces several thousand dollars in legal bills, which could have been avoided by using an attorney on the front end.
On entering a contract, parties are typically excited about the transaction and only see the “honeymoon;” an attorney familiar with Idaho contract law can properly advise you and help you avoid the pitfalls of a potential “divorce.” Give Dindinger & Kohler a call before entering any important contractual relationship!