What is a contract?

Contract1. A promise that the law will enforce. A painter agrees to paint your house for $15000. You expect the house painted and the painter expects his $15000

2. Society could not function without reliable promises, law of contracts, promises must be enforced, whole fundamental principal

3. Not all contracts are written. They can be oral and written. Just remember an oral contract is not worth the paper it is written on.

4. Certain contracts have to be in writing. These contracts were derived from the ancient English statute which was called the statute of frauds. The following contracts must be in writing to be enforceable:

A. Contract which cannot be performed within a year

B. Contract which cannot be performed within a lifetime of the promising party

C. Promise to answer for debt or default of another(a performance bond)

D. An agreement in exchange for marriage

E. Contract for the sale of goods over $ 500

F. Contract to sell real property or lease it for more than 1 year

G. Contract employing a real estate agent to sell real estate for a commission

H. Contract which modifies a written agreement

I. An arbitration agreement

J. Certain consumer contracts that must also be in writing to be enforceable by the contractor

5. No other contracts must be in writing but there must be mutual assent to the terms. I promise to pay the painter $15000 and he agrees to paint my house for that sum, sign a written contract and there is mutual assent. It could also occur if you tell the painter to paint my house and he does so.

6. An agreement to agree is not enforceable. Suppose two fathers, one is a contractor, are watching their kids play soccer. The homeowner father says that he is thinking about converting his garage into a playroom. The contractor says that he could do the job for $10000. The fathers then agree that they will get together the next day at noon and sign a contract. There is “an agreement to agree” it is too uncertain to be enforceable–there is no way for a court to tell the terms of the agreement and make it enforceable.

7. Conduct of the parties is sufficient to form a contract. Without words, you take your shirts to the laundry, leave them on the counter and walk out without speaking to the owner. The conduct is sufficient to create a contract between you and the laundry. You are in effect saying if you wash these shirts I will pay you.

The same is true for construction. A prime contractor can call one of its regular subs to go out on a job without mentioning the price and not signing a contract. P calls S out to pour a driveway. No writing and no price is agreed upon. P and S have done business in the past and always on the same price formula. There is no gift of the work by S, so the law implies the missing price and payment by prior conduct. P cannot escape paying.

Here are several legal terms

Express contract:   A contract created by the words of the parties-an express contract can be either written or oral

Implied contract:   A contract implied by actions or circumstances

Promisor: A person who makes a promise

Promisee: A person who receives a promise from a promisor

Offeror: One who makes an offer

Offeree: One who receives an offer

8. Privity of contract. This rule has many exceptions states that a contract may be enforced only by those who are parties to the contract.

9. Mutuality. Sometimes there are contracts in construction where there is a reservation granted to either the owner or the prime contractor giving them an unrestricted right to cancel the contract at any time. This clause may render the contract unenforceable due to lack of mutuality.

10. Manifestation of mutual assent. This is rather a complex concept if there is an outward expression of agreement for example construction contracts usually require that the contractor perform in a workmanlike manner. The parties may honestly disagree as to what qualify of work is workmanlike. The owner may have visions that beguile the imagination. This may be quite different than the contractor envisioned. Yet such a failure to achieve a true meeting of the minds does not prevent a contract from coming into existence. The law will look to the parties’ objective conduct. The contract is the sum total of the obligations which the parties, by their words and conduct, objectively assume.

A meeting of the minds is something the parties to a contract should always try to achieve. However, if they fail to achieve a complete meeting of the minds, a contract may nevertheless be formed if, by words and actions, the parties have manifested an intention to exchange enforceable promises.

11. Uncertainty–sometimes a contract cannot be enforced due to uncertainty despite the parties unequivocally manifesting their intention to enter into a contract. If a promise is too uncertain to be understood. If P agrees to build a building in accordance with preliminary plans and outline specifications and agreed that the construction would be in accordance with final plans and specifications to be prepared by P in the future and thereafter approved in writing by the tenant. There could not be unreasonable withholding of approval of the plans by T.

The T refused to approve the plans and specs and P sued alleging that the refusal to approve was unreasonable. The court held that the contract was too uncertain to be enforced. It was merely an agreement to agree in the future, and such an agreement is unenforceable, especially if the matter left to future agreement is an essential terms such as the contents of plans specifications.

12. Offer and counter offer

Mutual assent is often manifested by an offer and acceptance.

Suppose an offeree rather than accept the work makes a counter-offer. If painter offers to paint owners house for $5000. Supposed painter says I accept your offer to paint my house and to paint the garage floor and driveway for the same price included. Is this conditional offer sufficient to form a contract?

Is there a manifestation of mutual assent? Since the acceptance was conditioned the assent was incomplete. Both parties agreed to the price but not what was to be painted. However, the counter-offer can ripen into a contract if P and O agree that the $5000 will be paid for painting the house and the garage leaving out the driveway.

Suppose K announces that in the trade papers it is accepting plumbing bids on an apartment house job. S sends in a written proposal to do the job for $25000 and a written contract will follow. K prepares a written contract, signs it and mails it to S. S crosses out a clause in the contract and initials the change, signs the contract and returns it. K notices the change, puts the contract in its file, does not initial the change, and notifies S that he should start work. S installs the groundwork and send a bill to K. K refuses to pay on the ground there is no contract.

Is there a contract?

A newspaper announcement states that K is accepting bids on a job, S submits a written proposal. There is an offer but no acceptance. Therefore, there is no contract. The invitation to bid was a solicitation for an offer. S’s proposal is an offer than can ripen into a contract if it is accepted.

K calls s on the telephone and tell S that its bid is satisfactory and that a written contract will follow. There is a tentative manifestation of assent. It is not sufficiently complete to form a contract. K has indicated that it does not intend to be bound until a written contract is signed.

S receives a signed contract from K. K draws a line through part of it and initials the change, signs the form and returns a signed copy to K. Still no K. When K presented a signed form to S, it was in effect an offer to enter into a contract. But instead of accepting the offer unconditionally, S drew a line through part of the form and signed it as changed. Conditional acceptance amounts to a counter-offer. A counter-offer cannot ripen into a contract until it is accepted.

Next K without initialing the change -places a signed copy of the contract in its file, and sends S a notice to start work. S installs the ground work.

Now there is a contract–but the questions is what contract? K by conduct has indicated an intention to be bound to the subcontract,–but K’s action in ordering s to go work is still ambiguous, that action is not specifically referable either the contract originally drawn up by K or to the contract as modified by S.

In order to find out whether the contract includes the modification the court will look for some conduct of the parties that is specifically referable to the modification. That is some conduct to show that the parties agreed to the modification or that they did not.

Suppose the original contract provided s would be paid 30 percent of the contract price when the groundwork was installed. S cross out 30 percent and wrote in 40 percent. And substituted 10 percent on final completion instead of 20 percent. S then sent a bill for 40 percent on completion of the groundwork and K paid the bill. The action of K in paying the bill would be consistent only with the theory that K had accepted the offer as modified by S.

However if K did not pay the bill on the ground that there was no agreement to change the percentages. Then there would be no contract. But that does not mean that S would not be paid for its work–to prevent K from being unjustly enriched, the court would require to have K pay the reasonable value, as opposed to the bid price, of the work performed.

13. Reading the contract. Sometimes a person tries to avoid liability under a contract by failing or stating that he or she failed to read the contract. Liability is not avoided. If you have the capacity to read and understand the contract, in the absence of fraud or imposition, you are bound by the terms of the contents and are estopped to claim that the explicit provisions are contrary to intention or understanding.

14. Consideration–we know a contract is a promise that the law will enforce. But the law will not enforce all promises. For example, I promise to take my son fishing sometime or make a gift of my watch–they are not legally enforceable promises because there is no consideration. A promisee is not entitled to insist that a promisor perform its promise unless the promise has given something up in return. This thing that is given up is known as consideration.

For example, if I offer to paint you house for $5000 and you accept my office a contract arises. The consideration passing from me to you is the painting of the house and the consideration from you to me is the payment for $5000.

There must be consideration on both sides.

Consider the situation:   P has finished a building for O. O says he can’t pay the balance and asks K to wait six months for payment and P says he agrees. Instead of keeping his promise P sues O. Is there a breach of contract by P? No P’s promise to wait six months was not supported by consideration from O. O gave nothing more up for the forbearance–not a watch for security not additional interest. O gave up nothing. Hence no consideration and no enforceable forbearance contract.

15. Illegality

A contract must be legal to be enforced. P was to be paid money to paint O’s house. P forgot to renew his license for $25 halfway through the painting of the house. It was illegal to act as a contractor without a valid license. On P’s part. Therefore, any monies paid by O were recoverable if he paid them and O would not have to pay the balance of the monies due if he didn’t pay P. This is because for P to require payment was illegal due to the fact the statute required P to have a valid license. P didn’t pay the required $25 to renew his license. Tough luck and love.

An improperly written contract can cost you.  Have your contract reviewed by filling in the form below.

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© 2013 Robert L. Bachman