In today's business world, contracts are central to defining a company's expectations, obligations, entitlements, and relationships with others. Contracts—whether oral, written, or implied—often detail business agreements and relationships, including those with customers or clients, employees, suppliers, distributors, vendors, investors, lenders, and even competing businesses. When the terms of a contract are violated or under dispute, a business's interest can be quickly and significantly threatened. Whether attempting to enforce a contract or handling cases of contract breach or interpretation, a business can find itself in a compromised position where its interests are at stake. If you are involved in a contract dispute, it is wise to seek the professional counsel of an attorney who can evaluate your case to determine your best course of action.
What is a contract?
A contract is a formalized agreement between two or more parties with regards to a specific subject. Contracts can be used to solidify numerous types of business-related matters, including, but not limited to:
Terms of employment
- Employee benefits (see ERISA litigation for more information)Second list item
- Independent contractor relationships
- Dispute settlement
- Ownership of intellection property
- Non-competition and non-disclosure arrangements
- The sale of goods, property, intangible assets, or real estate
What are the Elements of an Enforceable Contract?
For a contract to be considered enforceable by law and, thus be upheld in contract litigation, the contract must usually involve the following:
Mutual Consent—A "Meeting of the Minds"
To be considered valid and enforceable, a contract must involve mutual understanding of the contract terms by all parties involved.
Offer and Acceptance
A valid contract must involve an offer from one party to another party that accepts that offer. For example, an employer offers health insurance that involves a monthly premium payment of $100 and the employer accepts that offer.
Counter-offers are not considered an acceptance, but rather a rejection, of contractual terms. For example, if a property buyer offers to pay $100,000 for a condo and the seller counter-offers by asking for $150,000, a valid contract involving the sale of this property has not been established.
(i.e. the mutual exchange of something with value)
For a contract to be valid, the involved parties must exchange something of value. For example, in the case of property sales, the seller receives the money and the buyer receives property.
Note that the validity of mutual consideration may be challenged on the basis of (1) it is erroneous (e.g. one party offers to another what it was already obligated to provide) or (2) there was a failure of consideration (e.g. the received consideration was essentially worthless). However, these conditions may not automatically allow a party to escape the contractual agreement resulting from bad negotiation.
For example, if the seller of a property agrees to sell their property for $150,000 and later gets an offer of $200,000, the seller cannot go back on the original agreement on the basis that the property was really worth more than he originally agreed to accept.
Performance or Delivery
For a contract to be valid and enforceable, the action detailed in the contract must be completed. For example, if the seller agrees to sell his property for $150,000, s/he must actually deliver by handing over the property to the buyer. Likewise, the buyer must actually give the $150,000 to the seller.
In most cases of "breach of contract" litigation, the plaintiff will claim they performed all the above duties of the contract, while the other party failed to perform in one or more of these areas, in terms of obligations and duties. For example, a claimant may argue that they provided something of value (i.e. the condo), accepted an offer of $150,000 and gave over the property to the buyer, but that the buyer failed to pay the full $150,000.
In addition to the four elements described above, the following factors may be involved in the enforceability of a contract:
Good faith: Within all contracts is the implicit term that all parties are acting in good faith. If a party to a contract fails to act in good faith, contract litigation can help the injured party to obtain compensation for the resulting losses.
For example, if a seller of a "mustang" knows the buyer thinks he is buying a car but the seller really intends to provide a horse, the seller is not acting in good faith.
Oral contracts: While oral contracts may be honored in some situations (e.g. both parties admit to the existence of oral contract terms), it is often very difficult to prove the existence of such a contract. For this reason, it is always a good idea to get contractual agreements on paper.
Violation of Public Policy: For a contract to be valid, it must not violate public policy. For example, a contract involving the sale of illicit materials (e.g. drugs, bootleg DVDs, illegal weapons) it cannot be upheld in a contract litigation case.
Now that we have covered the elements of valid contracts and what is necessary to have your contract upheld in contract litigation, it is important to understand how to avoid getting into contract disputes to begin with. If you are in a situation where contract disputes have already developed, please skip on to our section about your legal rights. You may also contact our qualified contract litigation attorneys to learn more about your legal rights and options.
How to Avoid Contract Disputes
No party to a contract wishes to enter contract disputes, which are often costly and time consuming. Fortunately, actions can be taken to minimize the likelihood of contract disputes. The following are a few ways that experts recommend to avoid contract disputes.
Interpreting contractual terms
Countless contract litigation cases involve misinterpretation of the contract's terms. For example, one or more parties may misinterpret work specifications or schedules. Likewise, design or performance specifications may be vague or interpreted differently by involved parties.
To avoid contract disputes over misinterpretation of the terms, parties should look for areas of the contract that may be weak, unrealistic or unclear and ensure that the other party/parties fully understand, accept and can meet these terms. Similarly, it is wise to clarify the language of the contract and ensure that all language is understood. For example, one would want to look for language that opens a loophole or an additional contract provision that may be easily overlooked.
Work instructions are another common source of contract disputes. Contractors and clients often disagree over the entitlements provided to the contractor, such as adjustments made to the price or work schedule. Moreover, a client may claim that a contractor violated the contractor because over misinterpretation of the contract or authorization of work from a third party.
To avoid work instruction related contract litigation, a contractor should submit requests for any amendments to work schedule, pay, work terms, or other stipulations. These requests often take the form of a "request for equitable adjustment" or REA.
Defaults and Waivers
Another potential source of contract litigation is the claim by a customer that a contractor has defaulted in performing specific terms that the contractor claims were waived by the client.
To avoid this problematic scenario, a contractor who wants to establish a waiver should have the customer confirm in writing that a specific obligation is not required and that the contractor may continue to perform their duties with reliance on these waived terms.
While these ways of avoiding contract disputes may be relevant and useful with certain types of contract negotiations, for others these may not apply. To learn more about how to avoid a contract dispute, you should contact the Firm to learn about your rights.