Many individuals and companies enter into contracts without fully understanding the terms. Often, neither party has clarity on what the contract requires in terms of performance standards, remedies for breach and whether unwritten terms can supplement the written contract.
This post is intended to provide a quick guide to some key terms and issues that are relevant in the area of contract law.
What is a contract and how is it formed?
In general, a contract may be defined as a bargained for exchange. The typical contract formation process involves an offer, acceptance, mutual assent and consideration for a promise to do or not do a particular thing that may be done or omitted. In general, an acceptance needs to unambiguously accept the terms and conditions of an offer in order for a contract to arise. Mutual assent is often called a “meeting of the minds”. If the parties did not agree to the same essential concepts of a deal, then there was no mutual assent because no meeting of the minds occurred.
What counts as consideration for a contract?
Consideration consists of a party acquiring either: (a) some right, interest, profit or benefit; and/or, (b) some forbearance, detriment, loss or responsibility. Consideration is a necessary element of a valid contract partly because its absence can help reveal that one party’s promise to do something was actually gratuitously given. If a court finds that one party’s contractual promises were gratuitously given, then the contract is generally invalid and cannot be enforced in accordance with its terms.
What if someone orally promised something that is not written into the contract?
In such a case, one question is whether the oral promise preceded the written contract. If the oral promise preceded the written contract and the written contract was intended to be the final expression of the agreement, then the parole evidence rule generally prohibits introducing evidence of oral communications that would contradict or supplement the written agreement terms. Therefore, it is very possible that testimony regarding oral promises will be inadmissible in the case of litigation relating to a written contract. However, various exceptions and nuances exist that allow attorneys to craft a strategy to best advance a client’s interests depending on the nature of the dispute.
Another question is whether the statute of frauds applies. The statute of frauds generally prohibits enforcing the following types of agreements if they are not evidenced by a writing that is signed by the party against whom it would be enforced: Agreements for the sale of interests in real property, agreements that by their terms cannot be performed within a year, agreements to pay another’s debt and other types of agreements as may be listed under state law. For example, ORS 41.580 codifies the statute of frauds under Oregon law. Again, an attorney can help navigate the various nuances and exceptions that exist with respect to the statute of frauds.
What are covenants, conditions, representations and warranties?
These terms often get mixed up, but the general definitions are as follows: A covenant is a promise of action or inaction that applies with respect to future events. A condition is a future and uncertain event whose occurrence or nonoccurrence can destroy, create or modify the right and obligations of one or more parties to the contract. A representation is a purported statement of fact relating to the past or present. A warranty is a statement or promise regarding some present or future quality of goods or services. The nature of a contractual clause heavily impacts how that clause is interpreted and applied. Therefore, it can be crucial to identify whether a specific contractual clause is a covenant, condition, representation, warranty or some combination thereof.
What is a choice of law provision?
A “choice of law” or “governing law” provision of a contract states the parties’ intent for which jurisdiction’s substantive law will govern in the event of a dispute. For example, this type of choice of law provision indicates that in the event of a dispute, the parties want the court or arbitrator to apply Oregon substantive law to determine the parties’ rights and obligations: “This agreement is governed by the laws of the State of Oregon, without giving effect to any conflict of law principle that would result in the laws of any other jurisdiction governing this agreement.”
As you can see from the sample language quoted above, the conflict of law principles of state laws also need to be considered. This is so because the failure to address such principles in the contract could mean that one state’s substantive law (e.g., Oregon) ends up directing the court or arbitrator to apply another state’s law (e.g., Delaware) to ultimately decide the dispute. For example, under ORS 81.135 a contract that merely indicated that it is “governed by the laws of the State of Oregon” might end up being decided on the basis of Delaware law if the contract was one for personal services that were primarily rendered in Delaware.
What is a venue provision?
A venue provision of a contract states the parties’ intent for where a dispute related to the contract should be litigated or arbitrated. The venue can be different from the choice of law. For example, the appropriate venue may be any state and federal courts located in Multnomah County, Oregon, but the governing law could come from the State of Washington. In such case, the Oregon court that will decide the dispute will generally apply Oregon procedural rules, but Washington substantive laws to adjudicate the dispute.
What are some common defenses to enforcing a contract?
Contractual defenses are often split into two categories: Defenses to contract formation and defenses to contract enforcement. For example, if a valid contract never arose because the offer and acceptance were unclear and no meeting of the minds occurred, then there is no valid contract to enforce. Other examples of defenses to formation include fraud in the execution of a contract, misrepresentation, concealment, mistake, duress, undue influence and unconscionability. All of these terms require a showing of specific legal and factual elements that your attorney can help you analyze.
If a valid contract arose but defenses to enforcement exist, then a court or arbitrator might conclude that the contract cannot be enforced as written. Some examples of defenses to contract enforcement are prior material breach and termination of the contract, impossibility, frustration of purpose, a nonoccurrence of a condition and unenforceability on grounds of public policy. For example, if one party’s obligations under a contract are conditioned upon the happening of an earthquake but no earthquake occurs, then the corresponding obligations should not be enforced. Once again, any of these types of defenses require specific factual and legal analysis before they can be successfully asserted and used.
If a contract is invalid or unenforceable, does that mean that no legal remedy exists for a dispute?
Not necessarily. If there is no valid or enforceable contract, then the area of law concerned with “quasi contracts” or “implied contracts” might still provide a legal remedy for an aggrieved party. Terms such as promissory estoppel, unjust enrichment and quantum meruit are the frequently used legal principles that might allow recovery in this area of the law. In general, an aggrieved party can obtain restitution on quasi-contractual grounds if a benefit has been conferred, the recipient of the benefit is aware that the benefit was received and under the circumstances it would be unjust to allow retention of the benefit without requiring the recipient to pay for it.
What should you do in a contract dispute?
For a high value contract, you would ideally work with an attorney to prevent many types of disputes that could have been anticipated by negotiating and carefully reviewing the contract before execution. If a dispute is brewing (for example, if you are asking yourself whether and how to get out of the contractual relationship), you should consult with an attorney as quickly as possible.
How a party communicates its dissatisfaction with a contractual relationship heavily affects where the chips will fall in the event that the dispute goes to litigation. An attorney can help you get the most out of your communication with another party by researching applicable statutes and case law to recommend your strongest path forward. The attorney might recommend negotiating with the other party for a settlement or the attorney might advise you that you have an immediate legal right to terminate the contract without liability for damages.
If you receive notice that the other party is dissatisfied with the contractual relationship or has already filed a lawsuit in court, then it is important to obtain qualified legal representation as well.