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What Is Contract Law?
In the intricate world of business, contracts serve as the backbone of countless transactions. Whether you’re sealing a deal with a supplier, hiring a new employee, or leasing a new office space, contracts come into play. But what exactly is contract law, and why is it so crucial for business owners to understand it? Let’s delve deeper.
Contract law governs the creation and enforcement of agreements between parties. It ensures that commitments made in business transactions are honored and provides remedies when they aren’t.
The Essentials of a Contract
For a contract to be legally binding, it must have:
- Offer and Acceptance: One party proposes an arrangement, and the other accepts it.
- Consideration: Something of value exchanged between the parties, be it services, goods, or even a promise.
- Mutual Intent: Both parties must genuinely intend to create a legal obligation.
- Legality: The contract’s purpose must be legal. For instance, a contract involving illegal activities is void from the outset.
Written vs. Oral Contracts
While many believe that contracts must be written and signed to be valid, oral contracts can also be legally binding. However, written contracts are easier to prove and are often required for significant transactions, such as real estate deals or agreements lasting more than a year.
Breach of Contract and Remedies
When one party fails to fulfill their end of the bargain, it’s termed as a ‘breach of contract.’ Remedies for such breaches can include:
- Damages: Monetary compensation for losses incurred.
- Specific Performance: A court order directing the breaching party to fulfill their obligations.
- Rescission: Canceling the contract and restoring the parties to their original positions.
The Role of the Statute of Frauds
Certain contracts must be in writing to be enforceable, thanks to the Statute of Frauds. This includes contracts related to the sale of land, contracts that can’t be performed within a year, and promises to pay someone else’s debts.
Why Business Owners Should Care
Understanding contract law is paramount for business owners because:
- It helps in drafting clear and enforceable contracts.
- It aids in understanding rights and obligations in business deals.
- It provides insights into potential risks and how to mitigate them.
Contract law is more than just a set of rules; it’s a tool that, when understood and used correctly, can pave the way for smooth business operations and minimize disputes. As a business owner, familiarizing yourself with its nuances can be one of your most valuable investments.
What Is Contract Law?
What is a contract? A contract is an agreement between two parties or more.
Essential Elements of a contract, and what exactly is involved in that agreement? It has to have a few pieces: an offer; that offer has to be accepted; and there has to be sufficient specificity in the terms. For example, price, delivery date, quality, and description of the product or services to be provided.
The Role of Consideration in Contracts has to be considered. Consideration is a legal term. Business owners need to understand a contract. I am going to talk for a moment about consideration. The simplest way to think of consideration is as a benefit. So in other words, one party has to be doing something for the other party at least.
For example, if I say, “I will pay you a hundred dollars if you paint my house,” the consideration is a hundred dollars and the service I am receiving from you painting my house. So if you have just a one-way transfer, that is usually a gift, not a contract.
It might still be enforceable under the doctrine of promissory estoppel, but that is a topic for another day. Here, the question is: Do you have a contract? There has to be consideration. You might say, “When could there possibly be a contract where there is no consideration?
Non-Compete Agreements: A Practical Example
I will give you an example that comes up all the time with business owners: Imagine you have an employee who has been working in your company for a while, and then you decide, I would like to have this employee be given access to some really important information, some trade secrets that I don’t want any of our competitors to know about.
So I want the employee to sign a non-compete agreement, which says, “For a hundred-mile radius, you won’t go work in this particular industry with these competitors.” And so you go to your employee and say, “Hey, look cool opportunity. I would love to get you involved, but because of the confidential nature of this, I want you to sign a non-compete agreement. And if you don’t, I am not going to be able to move you to this department,” and the employee says, “Oh, sure, sure. I will sign that.” And then time goes on. The question is: Is the employee bound by that contract? You, as an employer, might say, “Of course they agreed to it.” But what did the employee get? Remember, you are getting a promise that the employee will not compete. But what did the employee get for signing that? Employers have said, “The employee gets to keep the job,” and courts have said, “No, that is not enough. That is not a consideration. That is not enough of a benefit to the employee.”
Valuation of Consideration in Contracts
You might say, “How much money?” Generally, $500 to $1,000 is going to be sufficient. It is at least a significant amount. Now, the employee may argue that it wasn’t a fair market rate, but that isn’t the standard for consideration. Just think about it. A contract was not enforceable unless it was based on fair market rates. A lot of contracts would be thrown out because a lot of them have discounts or rates that are not fair market value.
So it doesn’t matter that the consideration is a fair market rate. It just has to have some consideration, and I would go for more than a dollar because I think you might be asking for trouble. If it is just a dollar, that doesn’t necessarily feel like good faith; it feels like you are just trying to check a box because, at the end of the day, the question will be, will a judge believe that there was some compensation for the employee signing the non-compete, and a dollar just feels like a de minimis amount or a mere token without any actual value, and so I think that it is risky to throw in a dollar as consideration? Historically, a dollar was used, and there are several cases where a dollar was sufficient, but let’s face it, that was before a dollar was worth what it is today.
A dollar was worth a lot more in the past. And so these days, at a minimum, you should throw in a hundred dollars as a consideration, but depending on the circumstances, the size of the contract, and what you are asking the employee to give up, you would probably want to pay the employee a lot more to ensure your contract has consideration.
Distinguishing Contracts from Other Agreements
So what is a contract? It is an offer by one side, which is then accepted by the other side. And we assume the offer has to have sufficient detail because if there is not a price or a product, there probably is not one. In most cases, but not all, this is not sufficient detail. And then, finally, you have to have consideration, where both parties are getting something for the transaction.
Statute of Frauds: An Exception in Contract Law
As a general rule, that is a contract. Of course, there are a lot of exceptions. One exception is the Statute of Frauds. The Statute of Frauds is a state statute that lists certain types of transactions that are not enforceable unless they are in writing, or the other side admits that they agreed to them. So, under the Statute of Frauds, a contract of a certain type has to be in writing, or the other side has to admit that they agreed to it.
“The validity of Oral and Implied Contracts” is a quick summary of what a contract is. You might be wondering, “Can a contract be oral and not in writing?” Sure. Can it be an email? Sure.
Understanding Contracts Through Actions
Can a contract not be spoken at all but be understood by the circumstances? The law says yes. Here is how that works: Let’s say I am seal-coating houses. Seal coating is when you put a protective cover on asphalt. It is a tar-based cover to protect the asphalt from rain, wind, and erosion and fill some cracks. Let’s say I am going down the street, and the homeowner comes to me and says, “Oh, I am so glad you are here. We all need our driveways done today.” And let’s say the homeowner says, “I sure hope you have time to do everybody,” and then let’s say you say, “Hey, I am charging a hundred dollars per driveway.” And the owner says, “That is a good deal. ‘Cause mine would be like 150 with most places.” So we didn’t have the person providing the services say, “Hey, I will do your driveway for a hundred dollars,” and you don’t have the homeowner specifically saying, “I accept that offer. Come do my driveway.” But let’s say I then show up at the driveway, and I start unloading. The homeowner looks up and smiles at me, acknowledges I am there, and is about to seal coat the driveway. I then seal coat the driveway, and I go to get the check from the homeowner for a hundred dollars, and the homeowner says, “I never agreed to a contract with you. I don’t owe you for this. You didn’t offer to do my particular driveway. I didn’t accept.”
Is there a contract in that scenario? A court could conclude that there was an offer and acceptance by the conduct of the parties, even though there was not an express offer and acceptance.
Interplay of Different Legal Concepts
You might say, “Isn’t this similar to Quantum Meruit?” The answer is yes. Usually, in a scenario like this, you will have a claim for breach of contract based on the conduct of the parties and a claim for Quantum Meruit. You would probably also have a claim for unjust enrichment. So when this video is done, we will put links to resources for those different concepts so you can learn more about them.
If you are interested in this topic, those will be of interest to you as well. So yes, a contract can be fulfilled by performance. Here is another example of how contracts can be based on performance. Let’s say once a month I call you and order a hundred widgets for a hundred dollars, and let’s say after eight months I don’t call you, but you still send those hundred widgets, and let’s say I say, “You know what? I didn’t order those. I am going to keep them and I will pay you for them, but I am not going to pay you the standard rate.” Under the doctrine of course of conduct, which is the conduct between two parties, the price that I owe is going to be assumed from the prior conduct between the parties.
So even though there may not have been a contract at all in that particular month, the fact that we’ve had month after month of the same contract for a certain price allows that price to be injected in there as the lawfully enforceable price under the course of conduct doctrine of contracts. It would also be relevant under the uniform commercial code, which is probably a separate claim. It would also be relevant in a Quantum Valebat scenario. And I will put links in the video below to those other doctrines. If you are interested in this area, those may be of interest to you as well.
If you are interested in becoming a business owner and getting educated on common mistakes business owners make and how to avoid them yourself, you can go to AaronHall.com/free and sign up to get several videos and other resources to help equip you to prevent problems in your business. This is for entrepreneurs, startups, business owners, and CEOs. Generally, I am thinking about companies with under 500 employees, even as few as one or two, because you, as a business owner or a future business owner, can either prevent these problems or pay the much more expensive cost of having the problem and having to clean it up afterward.
The purpose of this YouTube channel is to help you avoid problems, grow your company, provide great value to your customers and clients, create a great environment for the people that you work with, and experience the success that comes from having a good company built on best practices. I am Aaron Hall, an attorney for business owners and entrepreneurs.
If you have questions about any of this, feel free to put them in the comment section below. I look forward to seeing you next time.