Texas Contract Interpretation

August 17th, 2010

The most basic principal of contract interpretation is that a contract is interpreted objectively and not subjectively. This idea originated at Harvard Law School, but still holds true in Texas today.

The formal view of contract interpretation ignores what the contracting parties thought the bargain to be and instead asks what a reasonable third party would interpret the words of the contract to mean. This approach is reflected in the following quotation from Federal District Judge Learned Hand:

A contract has, strictly speaking, nothing to do with the personal or individual intent of the parties. A contract is an obligation attached by the mere force of law to certain act of the parties, usually words, which ordinarily accompany and represent a known intent.

A contract requires a meeting of the minds. A determination of whether there was a meeting of the minds is based on objective standards of what the parties said and did, not on their alleged subjective states of mind. In re Hudgins, 188 BR. 938, 942 (E.D. Tex. Bankr. 1995), cited in Spectrum Creations L.P. v. Carolyn Kinder Int’l LLC, 2008 WL 416246, *45 (W.D. Tex. 2008).

An integrated agreement may be either fully integrated or only partially integrated. A fully integrated contracted is a final and complete expression of all terms agreed upon between or among the parties. A partially integrated contract is a final and complete expression of the terms regarding an agreement, but not a final and complete expression of all terms agreed upon between the parties. Some of the terms agreed upon are not contained in the written agreement.

Under the Parole Evidence Rule, if the parties have integrated their agreement into a single written contract, all prior negotiations and agreements with regard to the same subject matter are excluded from consideration, whether written or oral. Parole evidence is admissible to supplement or explain a partially integrated contract, but is not admissible to contradict it.

The primary duty of a court when considering the validity of a contract is to ascertain the intent of the parties from the contract as a whole, known as the “four corners rule,” not from isolated parts of the contract. This rule requires the court to look at the words of the contract, not prior drafts or exchanges of letters or other documents or testimony to determine the intent of the parties. To achieve this goal, the court must examine the entire document and consider each part with every other part so that the effect and meaning of one part on any other part may be determined. No one phrase, sentence or section of a contract should be isolated and considered apart from the other provisions.

Terms of a contract are given their plain, ordinary and general meaning unless the instrument shows that the parties used them in a technical or different sense. Words should be taken in their immediate context.

The expression of one thing is the exclusion of another. This is used to control, limit or restrain the otherwise implied effect of an instrument, and not to annex incidents to written contracts in matters with respect to which they are silent.

When words of a general nature are used in connection with the designation of particular objects or classes of persons or things, the meaning of the general words will be restricted to the particular designation. In some cases a list of consistent terms will include an overly-broad term that seems to reach beyond the scope of the other things listed. Ejusdem generis will limit an overly-broad term to be consistent with the list. However, the doctrine is not limited to lists. It can also apply to sentences in a paragraph.

When a contract is unambiguous, the court should apply the pertinent rules of construction, apply the plain meaning of the contract language, and enforce the contract as written.

It is a generally accepted rule of contracts that where several contracts are executed contemporaneously or at different times and pertain to the same transaction, they will be read together although they do not expressly refer to each other.

There are other general rules such as: Specific terms will prevail over general terms. Earlier terms will prevail over later terms, except in the instance of a Will. Handwritten terms will prevail over typed terms and typed terms will prevail over preprinted terms. Words prevail over number or symbols. Courts are required to follow elemental rules of grammar for a reasonable application of the legal rules of construction.

It is also a rule universally recognized that if an instrument admits of two constructions, one of which would make it valid and the other invalid, the former must prevail.

There is a presumption against illegality. When a contract by its terms, construed as a whole, is doubtful, or even susceptible of more than one reasonable construction, a court will adopt the construction which comports with legality. It is presumed that in constructing contracts the parties intend to observe and obey the law.

Finally, when agreements between parties are reduced to writing, the written instrument is presumed to embody their entire agreement, and the court should not read into the instrument additional provisions unless this is necessary to effectuate the intention of the parties as disclosed by the contract as a whole. Danciger Oil & Ref. Co. v. Powell, 154 S.W.2d 632, 635 (Tex. 1941).

Do you need a business contract reviewed by a Dallas attorney? Contact Dallas business contract attorney Mark Nacol today!

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THE ORAL CONTRACT

August 14th, 2010

A ”contract” is a promise or set of promises with legal consequences.  The Texas Supreme Court has noted that every contract includes an element of confidence and trust that the parties will faithfully perform their obligations under the contract.

 

You may hear that an oral agreement is just as valid as a written agreement.  However, in a court of law, a written contract ordinarily trumps an oral contract.  This means that in disputes, should there be a disagreement on a provision of the contract, the Court will use the written provisions of the contract to interpret the meaning before it will consider the oral arguments.  Further, typewritten provisions control over printed provisions.  Under Texas law, the requirements for a valid contract are: (1) an offer; (2) an acceptance in strict compliance with the terms of the offer; (3) a meeting of the minds ”meeting of the minds” is actually subpart of offer and accepted elements, not an independent element; (4) each party’s consent to the terms; (5) consideration; and (6) execution and delivery of the contract with the intent that it be mutual and binding. The elements of written and oral contracts are the same, and they all must be present in order for the contract to be binding.

 

In determining whether an oral contract exists, the court looks to the communications between the parties and to the acts and circumstances surrounding those communications. The terms of an oral contract may be established by direct or circumstantial evidence Although delivery is generally essential to the validity of a contract, when the parties manifest an intent through their actions and words that the contract is effective, delivery is shown.

 

It is important when making an oral contract that a party keep any and all documentation regarding the agreement.  Should a party end up in litigation, notes regarding the agreements between the parties, the times such agreements were made, the witnesses to such agreements and any emails or written correspondence between the parties can be important to proving that a valid contract existed. Even hand written sticky notes become important when trying to prove the existence of an oral contract.  Place all information pertaining to your agreement in one place. 

 

A basic element of any contract is a promise. A ”contractual promise” is an express or implied declaration made by one person, the promisor, for the purpose of assuring another person, the promisee, that a particular action or restraint from action will occur. A contractual promise is what is objectively determinable from the parties’ words or actions. It is different from either party’s subjective intentions. ”Intentions” are the purposes formed in one person’s mind, which may begin and end with that person. Similarly, a party’s subjective ”expectations” that the other party will act or refrain from acting are also irrelevant to objectively determinable, contractual promises.

 

To prove a valid offer, a party must show (1) the offeror intended to make an offer, (2) the terms of the offer were clear and definite, and (3) the offeror communicated the essential terms of the offer to the offeree.  An ”offer” is a clear and definite proposal to enter into a contract immediately once the offer is accepted. A proposal qualifies as an offer when it is sufficiently definite so that, if accepted, it clearly and definitely establishes the promises and performances to be rendered by each party certainty of terms as element of valid contract analyzed. Thus, an offer that may ripen into a contract differs from a mere expression of desire or hope that the parties may, at some time in the future, come to an agreement. An offer that may ripen into a contract also differs from mere preliminary negotiations.

 

To determine whether there was a meeting of the minds, a court reviews in an objective fashion, without considering subjective intent, what the parties actually said and did. One party’s uncommunicated reservations concerning the contract are insufficient to prevent a meeting of the minds. The parties’ failure to agree on a material term precludes a meeting of the minds necessary to form a valid contract.  If evidence of the parties’ mutual agreement consists of their conduct and course of dealing, their mutual agreement may be inferred from the circumstances, in which case their contract is an ”implied contract’.’

 

In some cases, what objectively appears to have been a valid offer and acceptance results in only a voidable contract because one party’s consent was, in fact, procured by fraud, undue influence, duress, or mistake.

 

Some contracts cannot be made orally.  Contracts that must be in writing and must be signed are the following:

 

  • A promise by an executor or administrator to answer out of the executor or administrator’s own estate for any debt or damage due from the testator or intestate.
  • A promise by one person to answer for the debt, default, or miscarriage of another.  For example, an alleged oral agreement between current and former partners in a joint venture, that the current partner would take over the former partner’s obligation on the venture’s debt in exchange for the former partner’s assignment of his interest in the venture, was subject to the statute of frauds as an agreement to assume the debt of another.
  • An agreement made on consideration of marriage or on consideration of nonmarital conjugal cohabitation.
  • A contract for sale of real estate.  An agreement to pay a certain sum of money out of the proceeds of a future sale of real estate in return for personal services rendered does not fall within this provision of the statute of frauds.  However, the Texas Supreme Court has indicated that the conveyance of an overriding royalty interest in future production from unleased land may be subject to the statute of frauds.
  • A lease of real estate for a term longer than one year.
  • An agreement that is not to be performed within one year from the date of making the agreement.  If the agreement may be conceivably be performed in one year, the statute of frauds does not apply, no matter how improbable performance within one year may be.  For the purpose of the one-year rule, there is a technical distinction between the termination of a contract and the performance of a contract.
  • A promise or agreement to pay a commission for the sale or purchase of an oil or gas lease or royalty, minerals, or mineral interest.
  • An agreement, promise, contract, or warranty of cure relating to medical care or results made by a physician or health care provider other than a pharmacist.
  • Loan agreements in excess of $50,000 made by financial institutions are also required to be in writing in order to be enforceable.  [Dorsoneo Litigation Guide].

 

A written contract that is not required by law to be in writing may be modified by the parties’ subsequent oral agreement, even if the written contract provides that it can be modified only by a written agreement.  Courts have allowed oral modification, reasoning that a written agreement is of no higher legal degree than an oral agreement, and either may vary or discharge the other.

 

Not every oral modification to a contract is barred.  The critical inquiry is whether the modification materially affects the obligation of the contract.  An oral modification is enforceable if the character or value of the contract is unaltered.

 

The fundamental problem with the oral contract is that it can be difficult to prove.  If a party chooses not to honor the bargain they will most likely claim that no agreement was ever reached. Thus, the case may be decided on the evidence available. 

Do you have an oral contracts with business vendors or employees that you would like to discuss with a Dallas contract attorney? Call Dallas contract attorney Mark Nacol to dicusss any questions you may have on oral contracts in the  Dallas,  Texas area.

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Sealing the Deal: Contracts – A Smart Investment

June 25th, 2009

The Importance of Employment Contracts

 
An employment contract is a legal agreement between an employer and employee in which the terms and conditions of employment are spelled out.  Though there is a body of statute law which governs specific aspects of the employer/employee relationship, such laws only form part of the basis upon which the employment relationship is based.  Other areas of the employment relationship are based on the written terms and conditions given by employers to their employees, which function to work in conjunction with existing statute law to specify and define an employee’s rights and obligations.

 

An employer must within two months of the start of employment provide the employee with written terms and conditions of employment.  There are different formats in which these terms and conditions may be presented, which include the following:

 

1.             A formal legal contract which is signed by both parties.  The terms are often negotiable and can be tailored to include terms very specific to the individual position and the employee concerned.

2.             A “letter agreement” which may be detailed, or which simply sets out the minimum information required under the Terms of Employment Act of 1994.  This letter is normally signed by the employee as an acceptance of the position offered.  This letter might not contain sufficient detail to inform the employee fully of their terms and conditions and may not be adequate to protect the employer.

3.             A handbook may be presented which will comprise of the terms and conditions of employment.  The employee is normally asked to sign an acknowledgment of receipt and acceptance of the terms and conditions of employment contained in the handbook.  The negative consequence of the handbook is that it applies for all employees and specific terms are not negotiable as they would be in a formal contract in the form of a traditional legal document.

The Term of Employment Act of 1994 requires some employers within two months of an employee beginning employment to set out in writing the terms and conditions of the job and to specifically include, but are not limited to, the following:

Name of employer

Name of employee

Place of employment

Job title

Location of work (and if location may also be elsewhere or outside the state than further details must be given by the employer)

Start date

End date (if a temporary contract)

Work hours and details of overtime pay

Pay and frequency of payment

Benefits, such as bonus scheme, health insurance, 401(k), retirement, use of company car, payment of tuition fees, etc.

Holiday entitlements

Details of any sick pay scheme

Details of pension scheme

Minimum notice to end the employment relationship must be given by both employer and employee.

 

Employees can ask for written terms and conditions at any time and the employer must provide same within two months.  If a person has been in employment since before the Terms of Employment Act of 1994 and has never been issued written terms and conditions or a contract of any type, the employee is still entitled to receive a written copy of these terms.  If, however, an employee has been in employment without a contract, an employer cannot force an employee to sign a contract of employment and employment will continue under the “custom and practice” created between the employer and employee.

 

The employment contract is equally as important to the employer as the employee.  Employers can use contracts to their advantage, especially in times when jobs are scarce.  Employment contracts often set out such things as probationary periods, sick pay scheme, additional leave which might be taken, pension scheme and any further benefits to be provided by the employer.

 

The great advantage to the employer is there, in some cases, are many items which can be included to protect the employer such as a restrictive covenant restricting a former employee from taking employment within a specified geographical area, a clause which would prohibit a former employee from doing business with the employer’s clients for a specified period of time or a confidentiality clause wherein the employee must keep all trade secrets of the employer confidential.  Employers can set out the minimum notice an employee must give to terminate employment.

 

Employment contracts should be well drafted and should include proper protection for both the employee and employer.  A well drafted contract may save a company thousands of dollars in legal fees.

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