As a business owner, you probably enter into contractual relationships every day. Many of you deal with written contracts on a fairly regular basis. However, do you understand the basic concepts of contract law and what makes a legally binding contract? Do you know what to look for when reviewing contracts prepared by the other party, or your own attorney that make it a legally binding contract?
Under Wisconsin contract law, legally binding contracts, whether oral or written, require three basic components: offer, acceptance, and consideration. An “offer” requires that one party offers to provide something of value to another party, which is then “accepted” by that other party. “Consideration” is what the two parties are obligated to exchange with each other as part of the contract. Consideration must be something of value, and the consideration must be mutual, i.e. both sides must provide something of value under the contract. For example, an agreement whereby a party agrees to pay you $1,000.00, without receiving anything in exchange, is by definition not a contract.
Typically, consideration takes the form of money paid in exchange for the provision of goods or services. This holds true for multi-million dollar transactions between international conglomerates, and when you take your car in for repairs by a mechanic. One corporation agrees to pay millions of dollars for another corporation to develop specific software or some other product, and you pay your mechanic to replace your spark plugs. In either case, there is an offer, acceptance, and consideration, and therefore an enforceable and legally binding contract. Keep in mind, however, that legally binding contracts may require consideration other than money, for example when two parties agree to exchange parcels of real estate.
Under Wisconsin contract law, all contracts also come with an implied duty of “good faith and fair dealing” on the part of both parties to the contract. While this is admittedly a rather broad phrase, in essence it means that, once an agreement has been reached, both parties have an obligation to make reasonable efforts to fulfill their respective obligations, and to avoid taking actions that would hinder the performance of the contract.
Parties to contracts have the right to enforce them in courts of law. Generally, the remedies for breach of contract take one of two forms, either specific performance or monetary damages. Specific performance is an equitable remedy most often awarded in cases involving real estate transactions, and consists of the Court ordering the breaching party to fulfill its obligations, i.e. “specifically perform” the contract.
In most cases, the remedy for breach of contract is money damages, usually in the form of “consequential” damages. Consequential damages are those damages that flow naturally from one party’s breach of a contract, and can include the cost to replace a product that was never delivered, the cost to repair a defective product, and any resulting lost profits. However, consequential damages must be “reasonably foreseeable” at the time the contract was created in order to be recoverable.
With certain exceptions, oral contracts may be just as valid and legally binding as a written contract. As an attorney, I recommend that whenever possible, contractual obligations be set forth in a written document signed by both parties. As a general rule, courts are required to look only at the written contract itself to interpret the parties’ obligations, unless there is some ambiguity in the contract. In the absence of a written agreement, or when an ambiguity exists in a written contract, the court may look to extrinsic evidence, including the testimony of the parties, to determine their intent. In other words, the judge or the jury will be determining the fate of the parties, as opposed to the parties themselves. Therefore, written contracts that clearly define the obligations of the parties are almost always preferable to oral contracts.
I will close with a suggestion. Never ignore the “boilerplate” language that you often find at the end of contracts. While these provisions may seem like an afterthought added by the attorneys to make the contract longer, they are often of vital importance, specifying among other things where written notices (for example, terminating the contract) must be sent under the contract, to where a lawsuit must be filed and what jurisdiction’s laws will govern the contract. While it is important to review the detailed provisions of the contract, it can be just as important to understand the “standard” provisions at the end of the contract.