function of any responsible business is to take risks. Risks lead to profits and ensure that the company continues growing. In order to properly mitigate risks, business owners enter into contracts. Contracts are enforceable agreements between parties that specify to the best of each party's ability the expectations and requirements that each party must fulfill.
Not everything is a contract and not all contracts are valid. The basic definition of a contract is an agreement between two parties wherein there contains instructions for an exchange of goods or services for compensation. In other words, contracts must always be payment based. If only one party is acting and no one is paying, then there is not a vaild contract.
In order to protect those entering into contracts, current law requires that certain contracts are always placed into writing. This document is called the Statute of Frauds. As stated in the Restatement of Contract Law, the statute of frauds states that:
Certain agreements must satisfy the statute of frauds, which requires the agreement to:
1) be memorialized in a writing or record;
2) be signed by or on behalf of the party against whom enforcement is sought;
3) indicate that a contract has been made between the parties;
4) state with reasonable certainty the essential terms of the unperformed promises, in the case of non-goods contracts;
5) specify the term of quantity, in the case of contracts for the sale of goods . UCC § 2-201 specifically states that "a record is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable . . . beyond the quantity of goods shown in the record."
Furthermore, the following types of agreements fall within the statute of frauds:
1) Agreements that by its terms cannot be performed within a year from the making of the contract -- The statute of frauds only applies if the contract specifically precludes performance within one year, not merely if performance would appear impossible to complete within one year of the making of the contract. (see § 6.04 for an exception to this writing requirement)
2) Promise to answer for the debt, default or miscarriage of another -- A promise by a surety or guarantor to a creditor to pay the debt or perform the obligation of a principal debtor must be in writing where the creditor has reason to know of the surety/guarantor relationship. Many states likewise require a writing to memorialize a promise by an executor or other personal representatives to pay the obligations of the estate which they represent with their own funds. This requirement does not apply when the promise merely involves payment of another's debts with funds that belong to the debtor or which the promisor holds for the purpose of paying the debtor's obligations.
3) Agreements made upon consideration of marriage, other than mutual promises to marry, e.g., to provide a dowry or child support.
4) Agreements for the sale of land and for an interest in land (see § 6.04 for an exception)
5) Agreements for the lease of real property for longer than one year
6) Agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust upon the property, unless assumption of the indebtedness by the purchaser is specifically provided for in the conveyance of the property.
7) Contracts for the sale of goods for the price of $500 or more [UCC § 2-201]; under the proposed revision, the price threshold is raised to $5,000 (see § 6.04 for an exception)
8) Contracts for sale of other personal property -- e.g, intellectual property, royalties -- in the amount or value exceeding $5,000 [UCC § 1-206]
9) Leases of goods in the total amount of $1,000 or more [UCC § 2A-201]
10) Agreements which creates a security interest in personal property if it is not in possession of the secured party, and agreements for the assignment of contract rights [UCC § 9-203(1)(a)]
In other words, any large contracts such as property agreements and any contracts that are for work that will extend past one year must be in writing in order for the court to enforce them. Any contract of this type that is not placed in writing is unenforceable.
Keeping this in mind, many business people place all of their contracts in writing to ensure that the court will enforce and honor the agreement and that parties who may consider breaking their agreement might be persuaded otherwise.
There are multiple legal risks that arise from the formation and performance of a contract. These include questions of consideration, whether their was a contract to begin with, unforeseeable circumstances rendering a change to the contract, and failure of either party of complete the contract. Consideration is the legal principle that everything must be payed for value in a contract. For instance, if you employ a painter to paint your house, the only way that they will actually agree to the painting is if you offer them something in return for their work. That something in return is the consideration. Contracts that do not contain consideration are considered gifts and are not honored by the court.
The next problem that can arise during the formation of a contract is objections as to whether there was an offer and whether there was assent. According to the Restatement of Contract law, an offer is, "a manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it." In other words, there must a clear offer in order for their to be a contract. Assent is defined as, "manifest confirmation of a position for approval. Implied assent is that which the law presumes to exist because the conduct of the parties demonstrates their intentions. Mutual assent, sometimes called the meeting of the minds of the parties, is the reciprocal agreement of each party to accept all the terms and conditions in a contract." Disagreements tend to arise when offers are expired or when someone accepts in a way that was misunderstood by the other party.
Another area that brings disagreement and litigation in business is extensions and changes to contracts. Unforeseen circumstances are bound to happen and when things to happen one or both parties may be damaged by the event. For instance, if a carpenter has built a home that burns down the day before the new family moves in, the family is still responsible for paying the carpenter, and the carpenter is not required to do any further work without compensation. The problem arises when the parties see the damage and intend for the damage to be dealt with by either party.
The final area where businesses run into disagreements is in the actual completion of the contact. On occasion, a contract may become impossible to fulfill due to added unanticipated expenses or statutory limitations. In these instances, parties will go to court to seek out who is liable for the remaining damages.
The traditional damages for contracts include injunctions and payment. As a general rule, the courts cannot force someone to complete a contract, but they can prevent a party from acting in a way that would further increase the damage to the parties. With regard to damage payments, parties are only liable for damages that were foreseen in the contract and damages are always reduced if there should have been mitigating factors in place. So, in order to ensure the most damages, business owners must act responsibly if they find themselves in a situation where there is a breach of contract.
A prudent business man always stays ahead of these circumstances by specifying expectations in his contract. The best ways for a business owner to mitigate their risks in a contract is to outline their exact expectations, give specific completion deadlines, allow for room of unanticipated events, and clearly state the damage expectations should a breach of contract occur.
Every contract should have specific customized wording for the job that is to be completed. While form contracts are great and inexpensive, they cannot replace the use of a lawyer in creating business agreements. If a form contract is to be used, then the business owner should review the contract and make any necessary changes to ensure every provision is customized to the deal at hand. Otherwise, they could leave the contract open to interpretation by the other party and possibly a judge if there are any disagreements down the line.
Another way to ensure legal protection and clarity in your contract is to set specifically dated deadlines in the contract. These check points will allow better guidance for both parties as to each other's expectations. So, if the contract is for an office remodel, set specific days when the walls should be completed, the shelving installed, and the desks constructed.
Unanticipated events can happen in any agreement.…