I’ll attempt to explain why contracts matter, what defines a contract, and describe how contracts are formed.
Courts and juries make tough decisions every day. The toughest decisions are made in circumstances where the law has provided no clear rule for a court or a jury to apply to the facts before it.
In those situations, courts and jurors desperately seek something to hang their hats on, some guidance upon which they can decide the case. There is no better guidance than the rules that the parties to the lawsuit set themselves prior to the dispute.
In business disputes, these rules are set by the contract between the parties.
A contract matters because those good people who are desperately seeking some guidance in their attempt to resolve your dispute are going to pick that contract apart to find some nugget upon which to place their decision. For that reason, it is important that in your contract you say what you mean, mean what you say and do what you say you will do.
Once the contract is signed, don’t just throw it in a drawer and wait to get it out until a dispute. Periodically refer back to your contract throughout the transaction it governs to make sure that you are following its terms. And yes, that means you have to read it and understand it.
A contract is nothing more than a mutual understanding between two or more people that they will be bound by the promises they have made to each other. A contract can be 100 typed pages signed by the contracting parties in front of their lawyers, or it can be a simple nod of the head or handshake.
A nod of the head or a handshake may work in certain circumstances. However, a written contract is far superior for at least two reasons.
First, a written contract makes it much more difficult for one party to later claim that the parties never entered into a contract.
Ideally, everyone’s signature will be notarized.
Second, a written contract makes it much more unlikely that the parties will have a different recollection of the bargain they reached. After all, people’s memories aren’t perfect.
Furthermore, the law generally requires that contracts governing the following transactions must be in writing:
- An agreement for the purchase and sale of land or other real estate.
- An agreement to guaranty of another person’s debt or serve as a surety.
- An agreement by an executor or administrator of an estate to personally pay the debts of the estate.
- An agreement in consideration of marriage, such as a prenuptial agreement.
- Any agreement that cannot possibly be performed within one year, even assuming unlimited manpower and resources.
For example, an employment agreement for a term of two years must be in writing. However, an agreement to build a house need not be in writing since it is theoretically possible given unlimited manpower and resources.
It is important that the parties mutually understand that they have reached a binding agreement. This mutual understanding often occurs through the process of offer and acceptance. For instance, I verbally offer to sell my buffalo nickel to my cousin John for $1.
John then says, “Sure, here’s $1.” John’s acceptance of my offer creates a contract.
An offer can generally be withdrawn prior to acceptance by giving notice to the person to whom the offer is made that it has been withdrawn. That notice can be verbal or written.
Telling my cousin that I don’t want to sell him my buffalo nickel will withdraw my offer. However, once my cousin accepts my offer I cannot withdraw it.
It must be withdrawn prior to my cousin’s acceptance.
Disputes involving withdrawal of offers and acceptance often occur when the parties are not face to face. For instance, in the event that acceptances and withdrawals are sent by mail, email or fax. These problems can be easily avoided. The person making an offer can specify how it can be accepted and when acceptance will be effective. Acceptance should only be effective when notice of acceptance is received by the person making the offer.
All offers expire in accordance with their terms, or are deemed withdrawn after a reasonable time. Thus, if my cousin approaches me one year after I offer to sell him my buffalo nickel, he cannot accept my offer. It expired after a reasonable time. If I give him one hour to decide, he cannot accept after one hour.
It’s important to remember that offer and acceptance is not a game of gotcha. If you play gotcha you will end up in court.
If an objective person would not reasonably consider something to be an offer, then it isn’t an offer. If a reasonable person would understand something to be a joke, it’s a joke, not an offer.
In determining whether a contract is formed you have to think how an objective reasonable bystander would view the parties’ interaction. It’s best to get written confirmation that an agreement has been reached.
Printed in Four Rivers Business Journal (Paducah Sun), April 26, 2012.