Understanding Contract Basics
Basics of a Contract
Contracts can be created under a variety of circumstances and under endless possibilities of terms. It is important to know when an agreement creates a contract so that you can best understand your rights and obligations. Whether it's verbal or written, for services or goods, the contract basics remain the same. The formation of any contract requires an offer, acceptance and consideration.
An offer is the expression of a willingness to enter into a contract. It must be made with the intent that the terms shall become binding upon acceptance. An obvious example is an offer to purchase a home. The buyer proposes to the seller to purchase the home for a certain amount of money and on certain terms. If the buyer disagrees with the offer, the buyer can then make a counter-offer and propose new terms. The back-and-forth aspect of a negotiation is a series of offers, rejections of those offers, and new offers. It is a fallacy to believe that an agreement has been reached merely because most of the terms have been agreed upon. An exception to this is a contract for goods, which is subject to unique rules pursuant to the Commercial Code.
Offers are not always as clear as a purchase offer. For example, an offer might also be a store advertisement that includes the sales price of an item. When Walmart offers to sell a TV for $1,500.00, the consumer expects to be able to accept that offer and buy the TV at the stated price. Imagine waiting in line all night on the Thursday before Black Friday just to get into the store finally and discover that all the advertised sales were no longer offered. Those shoppers are there to accept the offered products at the offered prices.
Acceptance is a promise or act by an offeree with the intention to be bound by the terms of the offer. Signed contracts are obvious examples of acceptance. The terms are laid out – hopefully– such that each person understands his or her rights and obligations.
Acceptance is more complicated when it is expressed in the form of an act. Consider a landowner who asks a contractor to build his home for the flat fee of $100,000.00. (For those in the construction industry, ignore for a moment the 50 change orders that would likely follow in real life.) The landowner hands the contractor the check and the contractor then begins to build the home. While is this certainly not an example of best business practices, it’s an example of acceptance through action.
Consideration is something of value that each party contributes to the agreement. It is important to remember that different parties place value on different items and experiences. There is no requirement that the consideration be fair or reasonable. Consideration may be as obvious as money or something less tangible such as time. In the example above, the carpenter provides his time and services to the landowner who provides money.
That’s it. Regardless of the size of the document or scope of the work, an offer, acceptance and consideration are all that is required to properly form a contract.
Is a Verbal Agreement an Enforceable Contract? ... YES!
Let me begin with a disclaimer: I do not advise people to enter verbal agreements. That said, verbal agreements happen all the time, and it is important to know that they are enforceable. As a practical matter, it is important to know that your spoken word matters. This notion relates back to the hope that "people are good" and "trustworthy." When you tell someone you promise you will do something in exchange for something else, you can be legally held to that promise.
Check out this article on CNN about Oral Contracts. For your convenience, I'll recap below.
Sometimes individuals are stuck with a verbal agreement because one of the parties is being difficult and refuses to put something in writing. I often see this happen with employer-employee relationships. Specifically, employers will make the employees (or past employees) promises to pay a severance or commission but then refuse to put it in writing. So, how can the employee prove an agreement exists if the agreement was made verbally?
"The short answer is: other writings and partial performance. With the advent of text messages and emails, people often send messages that form a bigger picture when put into context. After an in-person meeting, one party may text the other: 'So glad we reached an agreement this afternoon!' This type of messages supports the existence of an agreement, which is sometimes in dispute.
Partial performance exists when a person actually does something that would usually only be done in exchange for something else – usually payment. If a painter paints a home, it can be reasonably inferred that the homeowner promised to pay something in return. Without a written agreement, the painter may not be paid exactly what was promised, but at least he can recoup the fair value of his efforts."
Armed with this knowledge, if you are facing a situation in which you cannot create a formal agreement, you can still take steps to memorialize the verbal agreement in writing. Before you start sending text messages and emails in lieu of formal written agreements, consider the following reasons why written contracts are better:
- "Clarity. Verbal agreements are generally vague and ambiguous. Individuals often define terms differently. Most importantly, people frequently forget or misremember the details.
- Evidence. A contract is a person's best evidence of what both parties actually promised to do or not do. Even when all parties are acting in good faith, sometimes people remember wrong. Having the ability to refer to terms in writing can save all parties in time and resources by avoiding unnecessary arguments.
- Statute of limitations. If someone breaks a written promise to another, they have four years from the date of the broken promise to bring a lawsuit. In contrast, one only has two years to bring an action on a broken verbal agreement."
Finally, there is an important concept called the Statute of Frauds. This refers to certain statutes that require specific types of agreements be put in writing to be enforceable. Here are a few examples of contracts that are only enforceable in writing:
- An agreement for performance when the performance is to take place after one year.
- A lease exceeding one year.
- An agreement not to be performed within the lifetime of the person making the promise.
- A loan exceeding $100,000.00.
- The sale of goods for the price of $500 or more.
This list is certainly not exhaustive. As a general rule, the more important a transaction or commitment is, the more likely it should be put in writing. And, if you want to ensure that contract is enforceable, you should also contact us to speak to an attorney. But if all else fails and you are faced with a situation in which all you have is a verbal agreement, don't hesitate to contact us for that too.
Contracts Need Face-Lifts Too
Contractual agreements often last for years. During that time, circumstances often change and so do the needs and priorities of the participants. Some underlying contracts require than any amendments or changes are required to be made in writing. Yet people frequently make handshake agreements to change important contractual terms. If the agreement was important enough to put in writing in the first place (and most agreements are), then why do people think changes to the agreement can be made on a handshake... or based on a text message?
A popular example is the lessee-lessor arrangement. After a few years of tenancy, a landlord may wish to raise the rent or impose new terms. Another common example is a homeowner who wishes to refinance in order to utilize the equity in his or her home. While lenders would not dare to refinance without creating the proper paper trail, individuals often fail to do so. Then, when it comes time to enforce their agreement, they have nothing to show but an outdated agreement and a set of handshakes.
There is a better a way. Tara Burd, San Diego Civil Law Attorney was quoted in the Boston Globe on line news service, boston.com as saying “Planning ahead and protecting your interests and relationships, makes sense.”
The first lesson in updating a contract is not to touch the original contract. Do not cross out dates and write in new ones. Do not cross out terms and interlineate new amounts. Do not use white out. Just leave the original agreement alone.
The next step is to decide to what extent the old agreement will continue to govern. When updating a rental agreement, the new terms typically consists of rental amounts and a new rental period. In this case, it is not necessary to create an entirely new lease. The old lease will usually be sufficient and it contains important provisions about the landlord-tenant relationship and expectations of the parties.
Instead, it is sufficient to create an addendum. The new addendum should state that "To the extent that there are any conflicts between the provisions of the Agreement and the provisions of this Addendum, the provisions of this Addendum shall supersede the conflicting provisions of the Agreement." The line is necessary to clarify which document is controlling if there is a conflict. The addendum should also reference the original document that it is updating. Include the name of the document, signors and the relevant dates.
Alternatively, it may be necessary to create an entirely new agreement. The important key to remember here is to again, reference the original document, and then use language that makes it clear that the new agreement supersedes all past agreements verbal and written.
These steps are simple. However, the failure to take these minimum precautions often leaves wronged parties without a remedy.
Types of Contract Disputes
Business contracts come in all forms. They range from complex mergers to an agreement among friends. Any time two individuals or entities enter into an agreement whereby each party promises to do something in exchange for something else, they have created a business agreement. It does not matter whether this agreement was verbal, written or inferred based on the party's behavior. An example of an inferred contract is one between a seller who routinely delivers a product and a buy who routinely pays for that product. When one party fails to hold up his or her side of the bargain, there is a breach of contract. The injured party is then entitled to be made whole.
It is also important to recognize that many business disputes are not only based on contract principles, but often involve allegations of fraud and other tortious conduct.
Evictions - also formally known as unlawful detainer actions - are the process through which a tenant can be removed from either residential or commercial property for non-payment of rent or other specific reasons defined under California's landlord/tenant laws.
Do Not Delay: In an action to evict the tenants - otherwise known as an Unlawful Detainer - a homeowner is only entitled to demand payment for 12 months of unpaid rent.
This does not mean unpaid rent beyond the 12 months is unrecoverable, but it does mean that everyone needs to go back to court for another proceeding. Whereas an unlawful detainer is an accelerated trial -- 30 to 60 days -- a second action could take significantly longer depending on the amounts owed.
Even a renter's home is their "castle" under the law, which means strict procedures must be complied with in order to evict a tenant, especially when they have not done anything wrong. T.Burd Law Group can help you get it right the first time -- Contact us to discuss how we can help you reclaim your property
Construction Law involves the unique application of many different general bodies of law to the industry specific issues and problems that arise in connection with the construction process and its many different business relationships.The complex, time sensitive nature of bidding construction projects often leads to breach of contract disputes when owners, prime contractors and subcontractors disagree on contract terms and/or scope of work. The consequence is often extra work and change orders that sometimes lead to further contract disputes.
What is Extra Work? What is a Change Order?
Extra work is work that a contract does not specify. Reasonable minds often differ on whether a particular item is within the scope of work in a construction contract. Also, construction contracts often allow a project owner to make additions or deletions to the contract after work has begun. Construction contracts usually require that extra work be approved by the owner in writing through a change order. However, in practice, this requirement is frequently ignored as both owners and contractors tend to believe it is better to continue working than to halt progress for paperwork. The law provides for this type of scenario through a variety of legal theories that do not require a written contract. Please Contact us today to speak with a construction law attorney who can help protect or defend against construction related claims.
Contractors and owners should each be aware of their statutory and contractual rights and responsibilities in order to properly preserve claims for breach of contract disputes.
For example, to preserve possible claims for non-payment, contractors must file and serve notices in a timely fashion. Failure to properly serve a 20-day notice may result in the inability for a subcontractor to collect payment for labor, materials, equipment and services provided for use on a project. Further failure to timely file a stop notice and bring a claim against it may result in a lack of funds available from the project owner. This means that even if a contractor wins a claim, the owner may no longer have available funds to collect on the breach of contract. Contact us to help file timely notices and legal construction claims. Additionally, sureties, project owners, and contractors who fail to pay or untimely pay their subcontractors are not only liable for breach of contract related claims, but may also be liable for late payment penalties, interest, attorneys fees and court costs. Contact us today to bring or defend an action for breach of contract related claims including actions on stop notices, payment bonds, performance bonds and mechanics liens.
If you're an employee that has just been terminated and handed a severance agreement, T.Burd Law Group can help you understand what it all means. Typically, with the signing of a severance agreement, an employee waives any right to bring a future claim against his or her employer. We can help you decided whether you have a viable claim that you should protect or whether the severance package is in your best interest. And, while employees are not entitled to severance packages under the law, we can help you determine whether you have any leverage to ask for more.
The California Supreme Court has limited employers' ability to enforce noncompete agreements. This allows sales representatives and executives to benefit from the close client contacts they have developed while employed. However, duties of confidentiality and loyalty are still enforceable. It is important for employees and employers to understand these differences. Whether you are an employer or employee, the attorneys at T.Burd Law Group can review and interpret existing noncompete and nondisclosure agreements.
It is particularly important for employers to implement legal and enforceable rules and guidelines in their business. Not only are noncompete terms important, but so are the policies and procedures that are required of employees. For example, implementing reporting procedures and open-door policies can maximize a business's ability to guard against unwanted litigation and defend itself when disputes do arise.
A big mistake made by partnerships is not having a well drafted partnership agreement. Although California law does not require a partnership to have a written agreement, a partnership agreement is strongly recommended. California has default partnership rules that often do not mirror the partners' intent. A partnership agreement allows the partners to define the terms of the partnership and outline each partners' rights and responsibilities. Also, in the event of a disagreement or dispute among partners, the partnership agreement will help dictate how the disagreement should be resolved. This is one way that partners can take preventative measures to avoid costly future litigation.
For example, the default partnership rules in California require equal sharing of profits and losses as well as equal management rights. If your partnership would prefer a 60-40% split or even a silent managing partner, a partnership agreement is necessary to accomplish your goals. If you are considering entering into a partnership, contact T.Burd Law Group for a consultation.