One of the most frequent issues potential clients come to my firm with is a problem with a contract, asking, “How is this contract enforceable, I never signed anything, right?”
We’d like to think that a contract is never enforceable until it’s signed, but as you are aware if you’ve been involved in a contract dispute, contract formation can be highly fact-specific and only require documentation in certain circumstances. There are a few concepts to be aware of when negotiating contracts so you can avoid misunderstandings, accidental contract formation and save yourself legal fees.
In general, there are three ingredients to a contract: offer, acceptance and consideration. These seem simple enough. For example, Allison makes an offer to Brian: “I will buy your tractor for $1,000.” Brian says, “Sounds great, I accept.”
Because Allison has made an offer, this constitutes a contract, even without it being written down. Brian has accepted the offer, and they have made promises to each other, known as consideration. The consideration is the valuable something they each are promising: from Allison, $1,000; from Brian, the tractor. It might be smarter to write it down, but an oral agreement for the sale of Brian’s tractor is, for all intents and purposes, an enforceable contract.
Complexity arises, though, in three situations: when the offer and acceptance are unclear, when one party relies on the agreement to their detriment and when real property is involved.
Offer and acceptance each require clear, unequivocal statements of extensions and agreements. It depends on the surrounding circumstances, whether negotiations, conversations or other dealings are actually clear enough to constitute an offer or acceptance.
If you find yourself in a negotiating context, it is an excellent idea for you to clearly and emphatically state your intentions. If you intend to make an offer to buy something, say so! If you want to accept an offer, say so! Whatever way you communicate with your negotiating partner, make it obvious to her what you mean so that down the line, if your deal breaks down, you both agree on what the deal was to begin with. Once you and your negotiating partner have made promises to one another, you’ve arguably formed a contract, regardless of whether either of you wrote it down or signed anything.
If one party relies on the promises of the other and changes his position to his detriment, even before the contract is considered formed, then the contract may still be enforceable under a theory of Promissory Estoppel. For example, Allison, the tractor purchaser, makes promises on which Brian, the tractor’s current owner, would reasonably rely. Brian actually does rely on these promises by spending money or rejecting another offer of purchase. Then, if Allison refuses to buy the tractor, saying there never was a deal to begin with, Brian could still have a way to enforce the agreement against Allison, because he relied to his detriment on her promises.
Finally, if we change the example above to a plot of land rather than a tractor, then we run into what is known as the Statute of Frauds. Under the Statute of Frauds, several types of contract must be written down or else they are absolutely not enforceable.
A contract for the sale of land is one such type of contract. While Allison and Brian are smarter to write down the contract for the sale of the tractor, Brian can refuse to honor his oral agreement with Allison to sell her his whole farm, unless she can produce some written document that Brian signed saying he had agreed to that deal. No Promissory Estoppel can save Allison’s agreement this time. But beware, because nearly any signed written document can suffice, even, historically, a cocktail napkin.
Formation and interpretation of contracts is, of course, much more complex than a short column, but these are a few things to keep in mind when negotiating contracts. Be aware of whether you’re being completely clear with your negotiating partner about what you mean with your offer or acceptance. You may end up bound to the contract anyway if your negotiating partner has relied to her detriment on the agreement. And finally, if you’re buying property, write down the agreement and have the seller sign it, because there is simply no way to enforce an agreement for the sale of land without some writing with the seller’s signature. And if you’re completely lost, call an attorney for help.
Jane Michalakes is an Associate Attorney at The Law Firm of Marla C. Underell, LLC. Reach her at 403-8090 or email@example.com.