Contract Issues

Businesses use contracts for a variety of important purposes, from hiring and selling goods and services to transacting with vendors and forming partnerships with other businesses. There are many misconceptions about contracts. For example, many business owners think that oral contracts are not as valid as written contracts. On the contrary, in a large number of cases, they are equally enforceable.

There is also a lot of confusion regarding how a contract is formed, what constitutes a breach of contract, whether another party’s silence can constitute acceptance of a contract, and whether an advertisement can be considered an offer.

To protect their interests, businesses must ensure that their contracts are narrowly tailored with specific provisions, negotiated assertively to preserve their rights (while maximizing their benefits), and scrupulously examined for loopholes and other issues that could create problems down the road.

An experienced business lawyer should be consulted before drafting or signing any significant contract.

Sales Contracts

  • Bills of sale
  • Agreements
  • Purchase orders
  • Warranties
  • Security agreements

Employment Contracts

  • Agreements for employees, independent contractors, consultants, distributors, and sales representatives
  • Non-compete, confidentiality, nondisclosure, and separation agreements

Leases

  • Real estate property
  • Equipment

General Business Contracts

  • Franchise agreements
  • Advertising agency agreements
  • Indemnity agreements
  • Covenants not to sue
  • Settlement agreements
  • Releases
  • Assignments of contract
  • Stock purchase agreements
  • Partnership agreements
  • Joint venture agreements
  • Agreements to sell a business

Contract Formation

At its simplest, a contract is an agreement between two or more parties, each of which makes a legally enforceable promise to do (or not do) something. There are four fundamental elements necessary for a court to consider a contract enforceable: offer, acceptance, consideration (something of value), and reasonably specific essential terms.

Offer

Any objective sign of an intention to be bound by an agreement can constitute an offer. Telling someone: “I’ll sell you this product for $100” is an offer because you have explicitly stated that you are interested in trading your product for the other party’s money.

Advertisements are rarely considered contractual offers because they are better understood as an invitation to make a deal, a preliminary step before a party makes a genuine offer. The advertiser isn’t promising to sell their product to any particular person or group, but merely letting the public know that they are interested in selling it.

Acceptance

When a party communicates that they agree to an offer, they must do so in a manner which is consistent with the offer. If a seller says: “I’ll sell you this product for $100” and the buyer replies: “Ok, I’ll buy it for $90” the acceptance is not valid because it doesn’t comport with the offer.

If the acceptance is ambiguous in any way, a court will attempt to determine the objective implications of each party’s words and actions to determine if an acceptance was in fact intended.

Silence (i.e., not responding to an offer) is generally not a valid form of acceptance, with a few limited exceptions, such as if the parties have an existing relationship where a non-reply had previously indicated a desire to extend the current arrangement.

Consideration

All parties must give something up for a contract to be valid. Whatever it is they are giving up is called ‘consideration’ or a ‘bargained-for exchange.’ Consideration doesn’t have to be money or a good or service, it can also be a promise to do something or not do something. What’s important is that all parties are exchanging something of value to them.

So long as the consideration meets a very nominal threshold and holds some objective value, courts will generally not examine whether the bargain was fair. Businesses are free to negotiate and sign contracts that they believe are in their best interest. Except in special circumstances (such as in the case of fiduciaries who owe an elevated obligation to protect their clients’ interests), businesses are not required to give fair consideration for a contract to be valid.

Essential Terms

An overly vague contract or one that lacks certain pertinent information can be found to be unenforceable. What constitutes an essential term can vary in different jurisdictions, but generally they are defined as terms that the parties would reasonably regard as vitally important elements of their bargain. For example, sales contracts must include the price of the good or service in virtually all cases.

Oral Contracts

Most contracts are valid without a written document. Even deals worth billions of dollars have been found to be enforceable by courts despite any written record of the agreement.

However, some jurisdictions require certain contracts to be in writing, such as the sale of real estate, the sale of goods for more than $500 covered by the Uniform Commercial Code (laws enacted by all 50 states to standardize commercial transactions), property leases longer than a year, and home improvement agreements.

Breach of Contract

Contracts require all parties to uphold their end of the bargain. If a party falls short of their obligation, they are in breach of the contract. Breach can also occur if a party expressly communicates that they intend not to perform their contractual duties.

Breach can occur in many ways, such as if a party:

  • Doesn’t perform an action they said they would (e.g., they don’t complete a promised job or pay for goods or services they accepted).
  • Performs an action they said they wouldn’t (e.g., a former employee who takes a job with a competitor after promising they wouldn’t).
  • Does something that makes it impossible for the other parties to carry out the terms of the contract.

When suppliers deliver lesser quality goods than stipulated in the contract or buyers fail to pay in full, they are in breach of contract (provided the losses suffered by the non-breaching party are more than minor).

Remedies

A party suffering a loss as the result of a breached contract has several remedies available to them. If private negotiations or alternative dispute resolution forums like mediation and arbitration are ineffective, they can sue for breach of contract and ask for monetary damages or equitable relief (court orders for the breaching party to perform or not perform an action).

Money Damages

Consequential Damages

The breaching party must make the injured party whole by paying a monetary amount that fully compensates them for their loss and returns them to a position similar to the one they were in before the contract was signed.

Nominal Damages

If the harm suffered by the non-breaching party is minimal, the breaching party may be ordered to pay a small amount that is proportional to the consequences of their breach.

Liquidated Damages

In some cases, the parties to an agreement specify the damages that must be paid if any party breaches the contract. In several states, including Pennsylvania, liquidated damages can also include paying the non-breaching party’s legal fees.

Punitive Damages

In rare cases where a party has behaved in a manner deserving of punishment, punitive damages can be awarded to deter future behavior of that type.

Equitable Relief

Specific Performance

The breaching party is compelled by the court to perform their contractual duties.

Rescission

The contract is rendered null and void. None of the parties are required to perform any of the duties originally agreed upon.

Reformation

The contract is canceled, and a new contract is formed and enforced by the court.

Statute of Limitations

State law determines the time limit for filing a claim for breach of contract. In Pennsylvania, the non-breaching party has four years to bring an action, or the court will almost certainly dismiss their claim.

Filing deadlines are extremely strict, so it’s very important to speak to a business attorney as soon as an issue arises.

Contracts Have Long-Lasting Implications

The consequences of signing a contract that exposes your business to a financial liability can be serious and difficult to remedy. Likewise, the damage that can occur when other parties don’t abide by the terms of a contract can be significant.

If you have a contract dispute, an experienced business lawyer can help you resolve it, either through negotiation, mediation, arbitration, or, if necessary, by filing a claim in a court of law. But the best course of action is always to take a proactive approach and confer with an attorney who will review and draft contracts that are clear, concise, legally defensible, and strategically-designed to avoid disputes and protect your interests.

Pond Lehocky Giordano offers a completely free consultation with an experienced business attorney specializing in contract law who can help you protect your business. For more information, call 1-800-568-7500 or fill out the form on this page.

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