Guest Post by CoWork Springfield Member, Denise Presley, Attorney
Fair AND Enforceable
I’ve been a commercial arbitrator for 15 years. Simply put, my job is to hear both sides of a dispute between two parties to a contract and decide which side wins. Sadly, I often have to rule in favor of the party who behaved badly because they had the law on their side. The purpose of this article is to help you understand how to ensure that any contracts you sign are not only fair, but enforceable under the law.
Let’s start with the basic elements of an enforceable contract.
- The parties must be competent and have the capacity to make a contract.
- The parties must be named, and they must all sign the contract.
- The terms of the contract must be clear. In other words, what are the parties promising to do for each other, and by what date?
- Is there legal “consideration”? You’d be surprised how many contracts are ruled invalid because they lack adequate consideration (usually $) to prove that the parties intended to bind themselves to perform per the terms of the contract. More on that later.
- Some contracts must be in writing.
Who’s competent and has the capacity to contract?
In Massachusetts, you must be 18, you must be of sound mind and capable of understanding and agreeing the terms of the contract. In other words, it’ll be tough to enforce a contract made by a 15 yr old … or a person that’s too sick to actually bargain for the terms in the contract.
The latter is important. There are certain contractual provisions that under the law are against public policy. For example, our Supreme Judicial Court has ruled that contracts that name a state other than Massachusetts as the place where lawsuits must be filed will be against public policy if having to take the dispute to another state would be unreasonable or unjust. So let’s say you sign a two year maintenance agreement to have your high speed printer/copier serviced for $79/ month, but the contract says all disputes under the agreement shall be heard by a court of competent jurisdiction in North Dakota. You can likely challenge an action on the basis of forum non conveniens, but call a lawyer immediately so s(he) can file an answer the complaint in such a way that protects your rights.
Naming the Parties to the Contract
Include the name, state of incorporation (if applicable), and the mailing address of the parties to the contract. Generally, only the parties named and signing the contract can be bound. If your business is incorporated, a limited liability company, or a limited partnership ALWAYS sign in the name of the entity, i.e., THE ABC GROUP, a Massachusetts corporation, By Its President, Mary Jones. This way, the debt belongs to the corporation- not you personally. Some companies will ask the officer of a corporation to personally guarantee the debt. Actually, the better your credit history is, the more likely you can avoid providing a personal guarantee. You might also try to offer prepayment of the 1st year, which is plenty of security.
BTW, never contract to perform work that you are not legally allowed to do. I’ve been disappointed by having to rule in favor of a party that avoids paying a contractor because s(he) was not licensed to perform the work. But it happens all the time. In those cases, the only thing the contractor can recover is the cost of any goods and services provided. Happily, the law doesn’t allow the other party to be unjustly enriched.
At a minimum, the contract must clearly set forth the names of the parties, what each party is agreeing to do, and by when. However, the level of detail depends on the complexity of the contract i.e., what’s reasonable and customary in a particular industry. John Doe agrees to pay Landlord Holyoke, Inc., $500/ month, payable in US dollars on the first day of the month to rent office number 110a for a term of one year. Once both parties sign the written agreement, they have an enforceable contract. But few office leases are that simple. Forty five page documents governing the details of the relationship are not unusual. Before you sign the contract, always read each provision, think about what can go wrong, and agree on how the parties will handle problems- in writing.
In short, Consideration is the inducement for the parties to enter into the contract and evidences their agreement to incur a legal obligation to one another. For example, Sally Davis agrees to pay Charles Barker to replace the tile in her 80 sq ft kitchen, labor and materials included for $1,600. Here, the consideration is $1,600 in exchange for the replacing tile. Once Mr. Barker replaces 80sf of tile in Ms. Davis’ kitchen, she has a legal obligation to pay him $1,600. Obviously, there’s a few details missing (i.e., the actual size of the kitchen, what kind of materials, start/finish dates) but this is only an example of consideration. When a contract lacks ‘consideration’ the contract will not be enforced.
Also, the parties must agree that the consideration is adequate. Normally, the contract will contain words like: “$1,600, the adequacy of which is acceptable’ … or, ‘the parties agree the consideration will be $1,600”. Moral consideration is not adequate. For example, while installing the tile Mr. Barker noticed a minor leak in Ms. Davis’ kitchen and fixed it. Morally, most people would think Ms. Davis would be required to pay him more money. After all, if he had stopped and called a plumber to fix the leak she would have paid hundreds more. But he’s only entitled to $1,600 unless he can show that Ms. Davis was unjustly enriched by his efforts and he couldn’t have delivered on his promise to install the tile properly without fixing the leak.
The Statute of Frauds
Oral contracts are valid, but they can be hard to enforce. It’s always better to put contracts in writing to ensure there’s no misunderstanding between the parties. In fact, in Massachusetts, some contracts must be in writing. They include (i) contracts to sell goods and services in excess of $500, (ii) a promise to pay the debts of another, (iii) a promise to do something based on a promise of marriage, (iv) agreements to sell-lease-license real estate, (v) contracts that involve performance that won’t be completed for more than a year, or (vi) getting an executor- administrator- or assignee to pay for a breach of contract out of his or her own pocket. I’ve had arbitrations where there was a clear breach by a party who said ‘yeah, I breached, so what’. If you breach a contract, the first thing your lawyer will do is ensure that it’s even enforceable.
Five Simple Rules:
Contract law is complicated, but you can save yourself a lot of grief if you remember this:
- If you’re handed a contract that has writing on the front and back … read the back. That’s where the risky provisions are. [These are called ‘adhesion contracts’.]
- Never sign a contract without knowing what it’ll cost if you can’t honor it (breach or default).
- The non-breaching party has a duty to mitigate his/her damages. In other words, s(he) has to try to find someone to take on your responsibilities. The contract must contain this provision.
- If there’s a mandatory arbitration clause, agree on who pays the costs. You might have a great case, but if you can’t afford to file a claim, you’re SOL.
- Can you assign the contract and what’s involved in doing so? Let’s say you’re a sole proprietor and you get sick, but a friend or relative is willing to take over the business. Can you assign the contract?
Okay, 6 rules … know who you’re doing business with. Check with the Better Business Bureau for complaints, local court filings, Yelp and any other sites that might give you a sense of who you’re dealing with.
If you’d like help with your own contracts, you can reach Denise here.