Sealing the Deal : Contracts (A Smart Investment) Part II

June 7th, 2014

There are two primary types of contracts:  express contract and implied contract.  The express contract is formal, and stated either verbally or in writing.  The implied contract is one that is not written down, but considered to be understood between the parties.  It is a matter of inference and deduction. 

 

Though most oral contracts are not legally binding, they are undertaken on ethical principles.  In the United States every contract for that sale of goods that involves an amount that exceeds $500.00 must be written to be legally enforceable.  The courts generally recognize any defined meeting of the minds of competent persons with a like purpose and intent to undertake some common task as a contract.  The Statute of Frauds mandates for some contracts to be enforceable they must be in writing.

 

There are three ways a term may be implied into a contract:

 

1.             By custom – A contract may incorporate as an implied term any relevant custom.  The custom must be well known within a particular trade and business and be generally accepted within such trade or business.

2.             By statute – The most common terms implied by statute are those relating to the sale and supply of goods and services.  The Sale of Goods Act of 1979 provides for implied terms in respect of:  1) that the seller has the right to sell the goods 2) that goods sold are of satisfactory quality; 4) that goods sold are reasonably fit for the purpose they were bought; and 5) that goods sold by sample correspond with the sample.  The Supply of Goods and Services Act of 1982 states with regard to implied terms in a contract that the service will be carried out with reasonable care and skill, within a reasonable time and for a reasonable price.

3.             By the Court – Courts do not like to interfere in the construction of contracts. They will only imply terms into a contract under certain circumstances and with certain pre-conditions.  Terms can be implied in fact or in law.  

  1. A contract implied in fact is one in which the circumstances imply the parties have reached an agreement even though they have not done so expressly. 
  2. A contract implied in law (the quasi-contract) is not an actual contract, but a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other.  If one party has agreed to a term, but the other party has not, it will not be implied into a contract.  Further, terms will not be implied into a rigorous contract with detailed written terms where any omission would be deemed to be deliberate.

Express terms of a contract outline the primary obligations of the parties.  Distinction has been made among the various types of express terms.  This distinction is important as it sets apart the remedies available to the innocent party in the event of a breach.  Such terms fall into three categories:

 

1.             Conditions – the major terms of the contract.

2.             Warranties – the minor terms of the contract.

3.             Miscellaneous terms – neither conditions or warranties.

 

An implied term cannot contradict an express term.  However, it may widen or narrow an express term when necessary if the express term is flexible.

The basic rule is that parties to contracts must perform as specified in the contract unless (1) the parties agree to the change in the contract’s terms, or (2) the actions of the party who deviates from the terms of the contract are implicitly accepted (“ratified”) by the action or non-action of the other party.

If there is no acceptance of deviation from the terms of the contract, and the deviation is serious enough to make any real difference in the intended result of the contract, then the deviating party is said to have breached the contract.  His justified prevention or interference with the performance of the other party is also a breach.

Of course if one party fails more or less entirely to perform the contract, or totally prevents the performance of the contract by the other party, the situation is straightforward.  The situation becomes more complex where the argument is over specific terms such as the quality of materials or the timing of work.

 

Breach of contract leaves the non-performing or improperly performing party open to a claim for damages by the other party.  If the breach is a material breach, the non-breaching party is relieved of his obligations under the contract by the other party’s breach.

 

There are many possible ways for performance of a contract to give rise to dissatisfaction.  The courts have been forced to analyze the matter in much more subtle terms than “breached” or “not breached.”

 

The doctrine of “substantial performance” saves a party who has largely fulfilled his obligations under a contract from suffering major loss merely because he has unintentionally fallen short in some particular manner which does not affect the essence of the contract.

A breach is not defined as promises laid out explicitly in a contract, rather a breach of contract is defined as any violation of law, principal or obligation.  It is this definition of breach that leaves room for parties to file suits involving breaches of implied contracts.

Sealing the Deal: Contracts – A Smart Investment (Part 1)

May 12th, 2014

A legal contract is an important tool for businesses both large and small.  Unfortunately, we live in a very litigious society and the days of the simple handshake to finalize a deal are, for the most part, over.  Scrimping to save on costs at the beginning of a project may cost your company tens of thousands of dollars in the long run.  Be careful of boiler plate contract forms.  While they may spell out certain legal rights, they may also fail to include other vital provisions that will negate future disputes.  Every contract should be read thoroughly and should you find a provision to be unclear, ask questions.  If the terms of a contract are vague or excessively one-sided, you may end up unnecessarily in court.  Both parties should gain value from the contract.  Clear contracts make for happy profitable business relationships.

A contract should clearly define the terms of the parties and spell out exactly what the project entails.  It formalizes the agreement, clarifies communications, and provides a predetermined recourse for when things go wrong.  It may include payment terms or conditions, protection of trade secrets, restrictive geographic scopes, timelines, warranties, exclusions, cancellation clauses, penalty clauses, etc.  A good contract keeps energies focused on the underlying project and allows the parties to get things done more efficiently.  Therefore, a contract must not only be clear, it must also be concise.

A contract becomes increasingly important in times of dispute.  A lack of clarity in a contract can lead to costly litigation.  Remember, in a court of law, a written contract trumps an oral contract.  To coin a phrase, “the written pen is mightier than the tongue.”  In other words, in instances where written and oral portions of a contract contradict each other, the written portion prevails.  Disputes can be minimized if the hard-line terms are negotiated and spelled out at the beginning of the relationship when the contract is being formed. 

Some essentials to consider when creating a contract are as follows: 

  • Parties to the agreement should be spelled out
  • There should be some consideration offered for the agreement
  • Parties should be competent to contract.  All persons are legally authorized to contract except the following:
    • Minors, who are under 18 years of age.
    • Mentally incompetent persons
    • Persons ineligible from entering into contract by law
  • Free consent to the agreement
  • Object of agreement should be lawful
  • Detailed description of the duties and obligations of the parties
  • Representations concerning warranties
  • Confidentiality clauses
  • The force majeure clause which generally provides that no party will be liable for non-performance arising out of an event of force majeure e.g. war, terrorist act, epidemic
  • The terms of the agreement between the parties should be specific
  • Events on occurrence of which the contract will be terminated should be specific
  • A method of giving notice for breach and providing the breaching party a time to cure (generally a party who has suffered due to a breach of contract can claim damages that will put the non-breaching party in the position they would have been in if the contract had been performed)
  • Relief available to one party on the breach of the other party
  • Arbitration or mediation clause
  • Termination or duration of contract

There are many forms of contracts, to be discussed in Part II of Sealing the Deal: Contracts – A Smart Investment.

Nacol Law Firm PC
Law office of Attorney Mark Nacol
Serving the Dallas / Fort Worth Metroplex for over 30 years
Tel: 972-690-3333

Serving clients throughout Texas, including Collin, Dallas, Denton, Ellis, Grayson, Kaufman, Rockwall and Tarrant counties and the communities of Addison, Allen, Arlington, Carrollton, Dallas, Fort Worth, Frisco, Garland, Grapevine, Highland Park, McKinney, Mesquite, Plano, Richardson, Rowlett and University Park, Murphy,Wylie, Lewisville, Flower Mound, Irving, along with surrounding DFW areas.