What Makes A Contract Enforceable? Nick offers to sell Natalia a used photocopier for $4,000 and gives her a week to think it over. Five days later, Joe offers Nick $4,400 for the copier. Not having heard from Natalia, Nick immediately accepts Joe’s offer, takes his check and gives him the copier. The next day Natalia accepts Nick’s offer. When told he sold it to Joe, she says, “But you gave me a week to think about it and the week’s not up yet.” Natalia might shrug it off or she might sue Nick for breach of contract. And chances are she’d have a good case, because Nick never withdrew his offer before selling to Joe. Here’s another scenario. Bob wants to sell his copier and shows it to Nicole. She says, “I definitely want to buy it but I need my boss’s OK.” Bob says, “Good.” While Nicole is calling her boss, Patty comes in and offers to pay Bob $4,000 for it. Bob accepts on the spot. Patty writes Bob a check and takes the copier. Natalia hangs up and says, “My boss says I can pay you $4,000 for the copier.” Ralph says he just sold the copier to Patty. “But I said I definitely want to buy it, and you said OK,” complains Natalia. “We had a deal.” If Nicole were to sue Bob for breach of contract, a court would probably find that she had no contract with Bob, and he was free to sell the copier to anyone else. When Nicole attached a condition, her acceptance became a counteroffer. Promises, Promises These scenarios show the difficulty in sometimes determining whether a promise, pledge or stated intention is enforceable. A legal contract or binding agreement can be written or merely spoken. It can be typed in triplicate -- using terms such as “whereas” and “hereinafter” -- or it can be hand-written on a cocktail napkin in everyday language. It can be a single attorney-composed document, or a series of informal correspondence between the parties -- sent in envelopes or by e-mail. What makes a contract binding and enforceable? Not whether it’s in writing, not the kind of paper it’s written on, not how it’s conveyed between the parties, not the vernacular it employs and not the writer’s background. What makes it binding is whether it meets these three criteria: 1. It contains all the material terms -- or promises -- each party makes to the other, 2. The parties exchange -- or promise to exchange -- something of value, and 3. It represents an offer by one party and an acceptance by the other. If one of the parties fails to perform or deliver on its promises, a breach of contract occurs. And the law provides remedies for the injured party. We’ll take a closer look at each of the three criteria that make a contract enforceable, and then briefly discuss what an injured party can do when faced with a contract breach. Material Terms To make an enforceable deal, you must include some essential contract terms. You must put them in the agreement and make them specific and unambiguous. Essential terms include: o Identification of the parties, including names, of course -- either persons or businesses -- as well as addresses and any other information that would distinguish one John Doe or Acme Corp. from another. o Description of the goods or services one party provides, and the compensation the other party pays. o Dates, periods or conditions under which those goods, services and payments must be provided -- possibly including a formal delivery or payment schedule or both. o Agreement date and both parties’ signatures. Contracts involving large sums of money or long-term relationships between the parties usually contain many other provisions, such as: o Conditions for terminating the contract, o Merger clauses that extinguish previous agreements between the parties, o Choice-of-law clauses that identify the law (if a statute applies) or the state (or country) whose law governs the transaction, and in which either party would litigate a dispute, o Alternative dispute resolution clauses that can specify how the parties will resolve disputes over contract terms -- typically mediation or arbitration, o Limits on damages in case of a lawsuit or liquidated damages (that is, a dollar amount agreed to in advance and spelled out in the contract that a violating party must pay the other party for violating the agreement), and o Names of successors who would be responsible for contractual obligations if the original parties die or go bankrupt. You may include many other provisions in a contract, depending on jurisdiction, the transaction’s nature and your line of business. Valuable Consideration For a contract to be legally binding, the parties must exchange goods, services, assets, money or items of value -- what lawyers call valuable consideration. But the quid needn’t have the same value as the quo. If you agree to sell your Beverly Hills mansion to a friend for $10, you can’t later claim the deal is void because the price was inadequate -- unless you were incapacitated, defrauded, coerced or a minor without parental consent when you made the offer. A mansion and a $10 bill both qualify as valuable consideration. But a one-sided promise is not enforceable. If your neighbor promises to water your rare prize-winning bonsai trees while you vacation in Tahiti, you have no recourse if you return to find they’ve dried up and died. If you had pledged to bring your neighbor a souvenir key chain from Tahiti for his watering services -- valuable consideration -- you then might be able to recover damages for your loss. Offer and Acceptance To enforce a contract, you must be able to prove that one party made an offer that contained all the material terms and the other party accepted the entire offer. At some point, one party (let’s call him George) must say, “OK, here are the terms I will agree to -- will you also agree to them?” If the other party -- Elena -- writes back and says, “Yes, George, I agree to the terms in your letter of March 1, 2002,” then the contract is final and legally binding, even if no single document contains both parties’ signatures. If Elena takes too long to respond, George can revoke the offer at any time before Elena accepts it, unless the offer specifies a period in which it will remain open. On the other hand, George may choose to leave it open indefinitely. In that case, it remains open until Elena accepts, rejects or makes a counteroffer. But you can’t assume the offer will remain open forever -- just a reasonable time. As you might expect, what’s reasonable depends on each case’s circumstances and has been the subject of countless lawsuits. Likewise, the question of what constitutes a valid offer and clear acceptance can become quite complex. For example, let’s say Elena tells George, “OK, that sounds good.” Is that an acceptance? Or what if Elena mails George a check for payment in full, without any other communication? Is that an acceptance? In some cases, a judge or jury may have to decide. After an offer is accepted, the contract binds both parties with some exceptions. For example, some states allow consumers a cooling-off period -- typically 24 to 72 hours -- to reconsider and nullify a contract that involves a major purchase or home repairs or a contract signed in one’s home. Breach of Contract Any party failing to live up to the bargain breaches the contract. Besides failing to perform as promised, a breach occurs if either party makes it impossible for the other party to perform. If the contract doesn’t spell out remedies, the law provides remedies for the injured party. Here are the two most common: o Compensatory damages. The injured party can recover the money it would have gained or saved had the other party fulfilled the contract, and the court may award the plaintiff legal fees, court costs and punitive damages. o Specific performance. Less common, and used mostly in real estate transactions, a court may order the breaching party to perform as promised. Don’t Take Chances Before signing any contract, read it carefully and ask your attorney to review it. Because we know the ins and outs of contract law, we can probably help you negotiate more favorable terms. When Contracts Should Be in Writing Although an oral contract is just as enforceable as a written one, proving an oral contract’s terms can be difficult if a dispute arises. So as a rule, you should either insist on a written contract or at least confirm in writing an important oral agreement. Some contracts must be written to be enforceable. Most states require a written contract in these transaction types: o Any contract that involves a real estate purchase, sale, long-term lease or transfer, o Any agreement involving the sale of goods exceeding a specified dollar amount, o Any contract whose terms can’t be complied with or completed in less than one year, o An agreement to lend a large sum of money, o A promise to pay someone’s debts, and o A contractual obligation that is likely to extend beyond either party’s lifetime. Contact | Legal Disclaimer