The Fundamentals of Contracts
Many Businesses or small business owners enter into a variety of contracts in the ordinary course of their day-to-day operations. Many managers or owners do not even recognize they are entering into a contractual relationship. Typically, these simple agreements work out very well, and without any issues. However, misunderstandings and disagreements do arise causing significant problems and possible litigation if not addressed during the formation of the agreement.
It is important to point out, that many contract disputes originate from unclear terms, misrepresentations, or not taking into account unforeseen issues that may arise later in the contracting process. We have found over the years that had clients taken the time to draft a properly written agreement, the cost of litigating a breach of contract claim would have been greatly reduced or eliminated completely. The cost of having an attorney draft a properly formed detailed contract, far outweighs the potential cost of lengthy and expensive litigation and the loss of an important business relationship.
In general, Contracts are basically written (or oral) agreements between two or more parties. These contracts generally form a legally binding agreement outlining the details or terms of an agreement and what each party is obligated to do. There are a number of elements that go into the formation of contract. Typically, the initial step takes place when one party makes an offer and the other party accepts that offer. The parties must also have a meeting of the minds. (For example, if one party agrees to sell, and the other party agrees to buy, a two acre parcel of land. It is necessary that both parties are thinking of the same parcel of land. If not, there is no meeting of the minds.)
If a dispute does arise between the parties, and a breach of contract lawsuit is initiated, the courts will look at a number of issues to determine if the agreement is binding. These include whether the offer was valid, if a proper acceptance of the offer was made, and whether there was valid consideration. (Both parties giving something of value in exchange)
In addition to the basic elements, the court will look to whether the proper formalities were observed, the legal capacity of the parties, and whether the parties truly intended to create a legally binding agreement.
Basics of an Offer
Generally, making an offer is the first step in forming a contract. When one party proposes to another that they will offer, sell or agree to perform a certain task, with definite and certain terms, conveyed to the other party, with the intent to be bound by those terms, this will typically represent a valid offer. It is important to note that mere negotiations or general discussions will probably not establish a valid offer. When an offer is made, it should include language that indicates the party is willing to enter into a contract without any additional negotiations taking place if the party accepts.
Acceptance
Acceptance occurs when the party who was made an offer accepts it without modifying or changing the terms. An acceptance can take place in many forms. For example, a person can accept verbally or perhaps through their conduct, such as beginning performance. There are several requirements for an acceptance to be binding. First, the acceptance needs to be a mirror image of the offer. Then the accepting party (Offeree) must clearly communicate their acceptance to the offering party. (Offeror) Once the acceptance has been communicated, the contract generally becomes binding on both parties.
If there is a condition or additional requirements that accompanies the acceptance, this may be considered a counter-offer requiring its own acceptance. With a counter-offer, the Offeree is proposing new terms or a change in the original terms of the offer. The party that originally made the offer has the ability to either reject or accept the counter offer. Once a counter offer is made, acceptance of the original offer is no longer possible, because a counter offer is considered to be a rejection of the original offer.
As a general rule, the accepting party must clearly communicate their acceptance to the offering parties’ specific terms. Contracts do not become binding until this communication between the parties occurs.
Defenses to Contracts
There are a number of defenses that may be asserted to avoid or enforce a contract. For example, if one of the parties to the contract was a minor or had a mental illness at the time the contract was formed, that party can raise lack of capacity to form the contract. Also, if there was a mutual mistake by the parties, then they could void the contract on the theory that there has been no meeting of the minds and thus, no agreement. Fraud or misrepresentation of a material fact may also be a valid defense to enforcement of a contract.
Other defenses may include duress, undue influence, impossibility, and frustration of purpose. Undue influence may occur if one party has a great deal of control over the other a party and utilize that control in order to improperly influence that person to enter into the contract.
Impossibility is another defense when it becomes impossible to perform under the contract due to something that is unforeseen by the parties. (For example, if the product intending to be purchased is destroyed making the sale impossible.) Another similar defense is frustration of purpose. This occurs when an unforeseen event undermines a party’s principal purpose for entering into a contract such that the performance of the contract is fundamentally different from the contract that was originally contemplated by both parties, and both parties knew of the principal purpose at the time the contract was made.
A properly drafted contract attempts to avoid many of these pit-falls by foreseeing potential problems and establishing set damages or voidable provisions if certain events should occur. Our office attempts to limit potential problems and litigation with properly drafted contract agreements. Many small business owners or managers attempt to use boiler-plate online contracts that are not tailored to suit their particular needs and many times result in significant liability down the road.
Arbitration & Mediation
Many contracts also include arbitration clauses that prevent the parties from litigating in Superior Court or specify particular jurisdictions to bring an action. In many cases, depending of the amount of damage, arbitration can be significantly more expensive than Civil Court. Many Arizona and California jurisdictions provide free or low cost judicial mediation for damages under $50,000. Attending mediation may resolve numerous claims and help the parties reach a mutually agreeable settlement. More importantly, mediation may also preserve client-business relationships that may be lost in confrontational litigation. It is important to choose the right venue for resolving disputes. Our office is here to address these concerns and to establish appropriate agreements suited for your specific situation and business needs.