Attorney Steve's Contract Law Overview – “Contracts College”
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Everyone knows what a contract is, but not everybody knows how “contracts law” works. This blog will provide you a general legal overview of the way you should look at contracts when analyzing a contracts law case (ex. breach of contract). Attorney Steve Vondran “Am-jured” contracts law in law school (meaning he got the top grade out of about 150 students who took the course. So this overview might also be good for law students taking the bar exam and need some good language to HIGHLIGHT and UNDERLINE on their bar exams.
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NOTE: The underlined words and phrases will be words you want to point out in your bar exam (the “phrase that pays” as I call it).
What is a contract?
A contract is a “promise or set of promises which the law will enforce.” This is what my Contracts professor (from Harvard law school), taught me. As I tell our business clients, its really nothing fancy. You write down a list of things you want, for example:
1. Buyer will pay me $10,000 on or before April 1, 2015
2. When I receive the money I will ship the goods no later than May 1, 2015
This is a really basic contract. Two promises to do something. The buyer will pay the money and the seller will deliver the goods. As you can see, this is fairly straightforward. The promises are clear an unambiguous and there is a mutual obligation. Both parties are binding themselves to do something. The subject matter of the agreement is not illegal, so looks like something the Court's will enforce in case there is a breach of contract.
A contract may also add other terms and conditions (for example, addressing contingencies that might pop up). This is something that is critical to provide for in most contracts.
1. If the buyer cannot obtain real estate financing, she gets her deposit back
2. If the goods are shipped in defective form, the buyer has 15 days to reject and ship back the defective units at seller's cost and is not obligated to pay for them.
A great contracts lawyer will ask you: “tell me the 10 things that can go wrong on this deal.” Once you understand the things that could go wrong in a deal or business relationship, you provide for these concerns in your contract.
For example, you may want to add an arbitration clause (ex. you know the party you are dealing with is litigious and you do not want to end up in Court litigating your disputes. Or say you know a party has a history of breaching agreements, you may want to insert a liquidated damages clause.
Contracts may be oral or written
Contracts can be either oral (spoken – no writing) or written (for example an agreement written on a napkin, or something more formal like something a contracts lawyer would draft up). Either way contracts can be deemed enforceable. Note three things however:
1. Oral contracts are much tougher to prove in Court (its a “he said she said” many times)
2. Certain contracts must be in Writing to be enforceable under the Statute of Frauds (statute of frauds is discussed below)
3. The statutes of limitations will differ depending on whether the contract was oral or written
These are some important things to keep in mind. As we tell our business law clients “GET IT IN WRITING – DONT TAKE CHANCES WHEN IT COMES TO PROTECTING YOUR BUSINESS.”
In order to be enforceable, a contract requires both an offer and an acceptance (discussed below).
The offer must be seeking something the other party has (for example, you want someone to cut your grass, build you a fence, sell you real estate, license you software, etc.). There must be a mutual exchange between the parties. Each one must bargain for what the other person has.
In addition, the offer must be unequivocal in nature (certain and definite), and contain the essential terms & conditions and must be communicated to the other party (called the offeree). The person making the offer is called the “offeror.” Fancy terms that you don't have to spend too much time memorizing.
Once the offer is made, it is available to be accepted by the other party.
The acceptance must be an unequivocal manifestation of assent to be bound by the terms and conditions of the contract.
When an offer is made, the offeree and only the offeree has the power of acceptance. This means, the offeree has the right to say “I accept your deal” and a contract is thereby created, as long as the acceptance is timely, and made in the manner set forth by the offeror (for example, if the offer says “you must accept by faxing your acceptance to fax number 555-555-1212 no later than 5 pm midnight on December 15, 2015” then you must accept the offer on those terms.
The “mailbox rule”
The general rule is that acceptance of an offer is effective upon DISPATCH (meaning when the offeree puts the offer in the mail). There are general exceptions to this, but the main one being when the offer tells you exactly how you must accept the offer, as set forth above.
The “mirror image rule”
When you are accepting a contract under the common law, the acceptance must be a “mirror image” acceptance. That means, if the buyer of a commercial industrial building offers “I will pay $2,000,000 for the property and it must close on July 4, 2015.” In order to accept the offer to purchase the property, the seller must so OKAY, I AGREE. If the seller say “closing date is fine but I want 2.5 million, that is not a “mirror image” acceptance, and will be treated as a “COUNTEROFFER” as opposed to creating a binding contract. So it can get a bit tricky, but if you want to accept a deal and make it a contract, don't change or add any new terms, just indicate your total acceptance of the contract on the terms written.
Consideration (the “glue” that binds the contract)
As mentioned above, in order for contracts to be binding and enforceable, there must be “consideration” on both ends. Both parties must be bargaining for what the other party has, and must be seeking the other party to exchange something valuable (note that the law will not inquire as to the “adequacy of the consideration”) but there must be some legally sufficient consideration being exchanged between the parties. Commonly recognized examples including either selling something, agreeing to perform a service, or even agreeing to forebear from something in which a party has the legal right to do (for example agreeing not to file a lawsuit).
To give you an example of something that is NOT a valid contract because there is a lack of consideration or a “want of consideration” as it is sometimes called, say you promise someone (i.e. you make an offer) “I promise to pay you $10,000 bucks if I win the horse race.” Here, this is known as a GRATUITOUS OFFER because the offeree does not have to do anything. They are not bound to do anything, and the offeror is not even seeking the offeree to do anything. In cases like this, even if the offeror wins the horse race, there is normally no legal obligation to pay the $10,000. Some exceptions to that might be if the offeree lost money by reasonably relying on the promise. This is another issue (Promissory Estoppel).
What is mutual assent? (was their a “meeting of the minds”)
So at the end of the day, in order for their to be a binding contract there must be an offer, acceptance, consideration, and a basic “meeting of the minds” as what's to be done. This is known as mutual assent. And there must be definite and certain terms so that if there is a material breach of the contract they Courts will know how it should be enforced.
That in a nutshell is how a contract is formed. Congratulations you now know more than 90% of the public will ever know about contract formation. Keep in mind these are only general rules, and under the UCC, where “goods” are the subject matter of the contract, slightly different rules apply.
Formation Defenses (to argue a contract was never formed in the first place)
There are some defenses (called “real defenses”) that the breaching party can raise to assert that no contract was formed in the first place and thus, regardless of any alleged breach, there was no valid contract. Some of these defenses are as follows:
1. Fraud (the old saying is “fraud vitiates consent”)
2. Duress (express or implied threats of mental or physical force)
3. Undue influence (breach of a confidential or fiduciary relationship)
4. Illegality (the subject matter of the contract is illegal – ex. cannot bet on cock fight, or agreement to buy or sell drugs)
5. Lack of capacity (inability to appreciate the nature and quality of the acts – arises sometimes in financial elder abuse situations)
6. Lack of consideration (as discussed above – no mutual exchange)
7. Minors under 18 (infancy). Minors can contract, but they cannot be HELD to their contracts unless it is an item considered to be a “necessity of life.” (food, clothing, shelter, etc.)
8. Mistake of fact (the parties never reached a meeting of the minds due to some material mistake of fact)
These are some of the defenses to a breach of contract that you will commonly see raised by parties in arbitration or litigation.
What are the terms and conditions of the contract (this is what the parties are expected to do)
The terms and conditions of a contract spell out what the obligations of each party are, for example, what they must do in order to avoid being deemed the breach ing party. For example, the seller shall transfer the domain name to the buyer within 5 days of receiving payments. This tells both parties what must be done.
Conditions in a contract basically involve something that something that needs to occur before liability for non-performance arises. Let's break this down. For example, as the offeror, I can say “If the Mets win the world series, I hereby agree to purchase season tickets for the 2016 season.” As the offeror, I am the master of my offer and I have created a condition wherein if the Mets do not win, I am excused from performing on the contract, and no liability to me arises (i.e. I cannot be deemed a breaching party). So conditions in a contract need to be closely examined by skilled contracts legal counsel.
What is a “material” breach of the contract?
A lawsuit is normally filed for breach of contract (sometimes there is an “arbitration clause” requiring the parties submit to arbitration as opposing to going into state or federal court), when one party to the contract “materially breaches” the contract. This is often a question of fact. A material breach is one that goes to the “essence of the bargain.” When there is a material breach, the non-breaching party is excused from having to continue to perform other terms of the agreement. But if the breach is only a “minor” breach, then the non-breaching party must continue to perform its obligations under the contract. This is where things get tricky and hiring a breach of contract lawyer is no longer a good idea it is absolutely mandatory, although of course you can choose to handle it yourself at your own peril
How to tell the difference between a “minor” breach (which means you must continue performing your obligations under the terms of the contract) and “major breach” (which excuses all performance due under the contract and sets up a lawsuit for money damages)?
Again, this is always the “million dollar question” so do not risk it, seek a business attorney who can properly review and advise on your case. Don't be penny wise and pound foolish. There is the old saying “the person who represents themselves has a fool for a client.”
What is an “anticipatory breach” of contract?
This is when one party makes clear that it will not be performing as required under the contract. This allows the non-breaching party to file a lawsuit or initiate the arbitration.
What damages are available when there is a breach of contract?
The general measure of damages where a party has breached a contract is CONSEQUENTIAL DAMAGES, that is the amount of MONEY to put the non-breaching party in the position it would have been had the contract been performed.
Of course, there are other types of damages that might arise, however, punitive damages are normally not available for a breach of contract (other than a bad faith insurance claim).
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Are there any defenses the breaching party can raise in a breach of contract lawsuit?
There are many recognized defenses to a breach of contract case. For example:
1. Contract is VOID for vagueness / ambiguity: (there is no meaningful way to understand what the parties were obligation to do).
2. Substantive / Procedural Unconscionability: (terms are harsh, one-sided, oppressive, shocking, violative of public policy).
3. Frustration of Purpose: (unforseeable event which could not be anticipated, or predicted at the time of contracting makes the return performance of the other party worthless. The contract should not be enforced).
4. Impossibility of performance: (something has happened, not caused or created by the breaching party, that makes it impossible to perform the obligations under the contract.
5. Commercial impracticability: (intervening event makes performing the contract commercially impractical and neither party assumed the risk).
6. Discharge by Accord & Satisfaction: (the parties reached a new agreement or accord and satisfied it, making the duties under the original contract discharged).
7. UCC defenses (failure to provide a perfect tender / damaged goods / failure to provide adequate reasonable assurances, etc.)
8. Novation (there was an agreement between two or more parties that discharged the legal obligations of the alleged breaching party). A third party is thus responsible to perform.
9. Statute of frauds – California civil code section 1624
There are other defenses that might apply, so if not sure, contact your contract lawyers.
Watch Attorney Steve explain the Statute of Frauds defense
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Does contract law differ where you are a dealing with a contract for “goods” versus a contract for “services”?
Yes. As discussed herein, the UCC (Uniform Commercial Code) governs contracts for the sale of “goods”.
ATTORNEY STEVE TIP: If you miss this on the bar exam, and fail to apply the UCC rules you will probably fail the bar exam.
Contact a breach of contract law firm (CA and AZ cases)
When you have questions about contract interpretation, or need a contract drafted or reviewed, or are facing a breach of contract arbitration or litigation case, contact one of our Contract Attorneys to discuss your case. We will speak in plain english so you understand what is going on, and we do not “triple bill” you like some law firms might. We fight hard for your business, real estate and insurance clients and we look forward to working with you. We can be reached at (877) 276-5084, or fill out the contact form below to have one of our contract lawyers contact you, usually within the hour. We have very flexible legal fee arrangements.