This article by Stuart Adams appeared in Louisville Computer News August, 2001
In the last chapter we talked about some things to avoid in the process of entering into a contract with a customer or vendor. In this one, weíll talk about some things to include in your documentation of contractual relations. First, of course, you must determine if you have such "relations." While you may think you do, some may disagree. After all, politicians in Washington are not the only ones who deny under oath that theyíve had relations.
Letís start with our own basic investigation of these "relations." Any analysis must begin with the question of whether or not all the essential elements of a contract are present. As weíve seen in a previous chapter, it is often possible to wander into a contract without knowing it. Likewise, itís possible to feel certain you have a binding contract, only to later learn the painful lesson that your "contract" holds about as much water as a sieve.
WHAT KIND OF RELATIONS ARE YOU HAVING?
A contract, like anything else you build, must have at least a basic foundation. In contract law, this is typically described as consisting of four elements. Letís imagine, for the sake of illustration, that weíre going to build a table in our workshop. This table will represent a basic contract. Our table will have four legs, representing the four elements of a contract. When we construct these legs, we will have a foundation for our table. Fortunately, we donít have to worry what the legs of our table look like, nor whether they are of equal length. We only have to be sure they are sturdy enough to hold the weight of whatever is placed on the table.
The first element, or leg, of our contract is the existence of a binding offer. Simple as this seems, there are tons of law books dealing with cases where the courts have interpreted a scenario in which one party feels they have acted upon an offer to enter into a contract, only to learn the court felt the "offer" was not sufficient to bind the offering party. ln my experience, this problem often occurs when parties are in the early stages of negotiations and one party is either over eager to "close" the deal or a party communicates in a way which induces or allows the other to believe a firm offer has been made.
Early contract cases on the issue of whether an offer was binding or not, often dealt with newspaper or pamphlet advertisement of the prices or quality of goods offered for sale. Case law developed along the lines that these mere advertisements lacked sufficient completeness to be considered binding. Clearly, a mere statement of price or quality left essential elements of the deal unspecified. Other matters, such as the quantity to be purchased, place of delivery or pick-up, time of payment and receipt of goods, all were sufficiently essential to render their absence indisposable to establishing a complete contract. Few offers were ever determined to last forever. Offering a shipment of perishables, such as bananas, logically would be limited by the time of ripeness, so the concept of expiration, as well as revocation of an offer, came into existence as a legal theory.
The existence of an offer alone, certainly does not create a complete contractual relationship. If I offer to take you to lunch, this alone will not create a sufficient legal obligation to allow you to make me honor my words, keeping in mind that a contract, of course, may generally either be in writing or oral. Some contracts, however, are enforceable only when they are in writing, pursuant to statute.
LETíS INDUCE SOME HONESTY
Real estate contracts, for instance, carry special significance under the laws of most jurisdictions. The statute of frauds, a souvenir from merry old England, was created to reduce incidents of perjury in contract cases. When Parliament enacted the Statue for the Prevention of Frauds and Perjuries in 1677, several of the twenty five sections of the Statute were designed to make enforcement of certain types of oral promises unenforceable. Although none of these sections dealt with me offering to take you to lunch, if I had offered marriage or to enter into a contract which could not be performed within the course of one year, or, of course, dealt with real estate, this law might very well prevent you from taking me to court to enforce what otherwise might have been an enforceable obligation.
The idea seemed to be that certain types of contracts were either so important or so likely to "induce" some people to perjure themselves, that by enacting a law which prevented these types of contracts from being enforced unless they were evidenced by a document, perjury would at least be reduced in such disputes. We all have an idea how well that worked. Thank heavens Iím a lawyer. Almost every state in the Union has enacted some portion of this old English law into statute. Litigating whether or not the statute even applies in various situations has provided several semesters of tuition for my kids and paid at least a few months of office phone bills. Where, other than in the law, can the words of Lord Nottingham and other members of Parliament provide the fuel to keep the lights burning, centuries later, in a country they never saw, and all with arguably little impact on the problem of perjury?
Having digressed into one of the many areas of exception to enforcement of contracts, lets return to our little contract table. So far, it only has one leg and a monopod is not particularly useful to many, aside from photographers and surveyors. We need more legs. Looking at our offer, we easily come to the issue of acceptance of our contract. We know an offer can be shaky, but acceptance of that offer starts to strengthen our foundation.
To constitute an acceptance of an offer to enter into a contract, the acceptance must match all the essential terms of the offer. For example, if you "accept" my offer to take you to lunch, but want to bring along a coworker, I may properly consider that you have rejected my offer and I may withdraw it. Sound silly? Maybe not.
Maybe in my example, I am the boss and you are an employee. Perhaps I am asking you to lunch to discuss the issue of potential theft of trade secrets from my company and I want to talk to you privately, away from the workplace, so I can ask you if you think your coworker is guilty of the theft. Obviously, we were not on the same wave length on this matter. You still have no ability to take me to small claims court to squeeze a lunch out of me (please feel free to divert your thinking on this point from the visual image I am otherwise trying to build in this chapter), since there is not yet a legally enforceable contract. Weíre getting there, however.
THE VULCAN MIND MELD
My little lunch example actually relates to two legs for our table. First, you can hopefully see that an acceptance can either match or differ from an offer. Matching is good, if you are trying to form a contract. Varying your acceptance from the offer in any material way can be deemed a rejection of the offer and could lead to you buying your own lunch this time.
Second, the lunch brings up the contract element of the "meeting of the minds," as courts and lawyers often call it. This is an element, as when parties both think they are going to lunch together, which can either make the meal a pleasant get together or derail it entirely. If one of us was Mr. Spock, from Star Trek fame, we could link minds and each of us would fully understand what the other was thinking. Without this handy Vulcan talent, sometimes we can only guess what was on the mind of the other in a contractual relationship.
A meeting of the minds means we both agree that at least the basic considerations necessary to accomplish a transaction of the sort we have here, have been established and affirmed by the parties. Matters such as price, terms of payment, quantity, delivery date and place should be covered. If they are not and they are relatively obvious and typically necessary to such a transaction, the contract may be deemed unenforceable because of the lack of a meeting of the minds. Letís presume we both agree Mr. Spock may join us for lunch, so now, at least, with three legs our lunch wonít necessarily slip off of our tripod table. We need to have a firmer table, however, so letís get our fourth leg in place.
The last basic element of an enforceable contract is mutual consideration. No, Iím not talking about each of us being polite and holding the door for the other as we enter our restaurant for lunch. Iím talking about you doing something for me in return if I buy your lunch. This does not necessarily mean you have to buy me a lunch at the same time and of equal value. It simply means that I get something of fairly reasonable value in return for what I give you.
That may mean you buy me some kind of lunch later. It could be that you give me the name of anyone you suspect may be playing fast and loose with the companyís trade secrets, or it could be something of much greater or even lesser value. This is the proverbial "benefit of the bargain." Some people bargain well, and others poorly. Sometimes it is strategically astute to make what would see to the untrained eye to be a bad bargain. After all, he, or she, who laughs last, sometimes has the best laugh.
MUTUALITY MAY BE IN THE EYE OF THE BEHOLDER
In the final analysis, mutuality of consideration pretty much means that if a judge or jury would not think it out of the question for you to agree to buy me a cheeseburger today, upon the condition that I buy you an expensive lunch tomorrow at the best restaurant in the area, we have sufficient mutuality of consideration for the court not to attempt to intervene in our agreement. I may be really hungry today and I may have left my wallet at home. Maybe money is not an object to me, but the absence of my wallet and the grumbling of my stomach leads me to look favorably upon this deal. Why should anyone look further than our mental competency in making such a deal, presuming we are both adults, no one has a gun to the head of the other, the meal does not involve eating some endangered species, or some other illegality?
We now have the four legs for our table to stand upon: a binding offer; acceptance matching the offer in all material respects; mutuality of consideration; and a meeting of the minds on all the essential elements of the transaction. There are, of course, always those pesky exceptions to every rule. Many learned law professors have written treatises on the subject of those exceptions and I commend those learned treatises to you for some light reading. Space, fortunately, prevents me from wandering too far again into that realm. There are some simple exceptions, such as those in some states prohibiting enforcement of contracts regarding a wager, or requiring that the subject matter of the contract not be deemed frivolous, an interesting concept, perhaps deserving treatises of its own.
Having built our little table, it should at least serve as a foundation for something other than that cheeseburger. Here, however, is where more danger lurks than in an uncooked hamburger patty. The only thing in contract land worse than entering into a "deal" and later finding out you canít enforce it from your end, is to enter into an enforceable contract you wished you hadnít.
WATCH YOUR FORM
Lots of lawyers will consider me crazy, but I encourage my clients to use contract forms they have found on the Internet and in many other places. Doing "form work" is usually considered "gravy" in the practice of law, presuming you can charge a lot of money for drafting a form for a new client which you have already come up with for another client. This is something, like writing a particularly good or useful script if you are a software developer, or developing a template, macro or anything else, which can be reused profitably. I didnít used to feel that way, but actually, many of the forms now available online are quite good.
I will typically encourage my clients, if they ask me to draft a contract, to try to come up with their own "essential terms," which are important to them in making the contract work for them. I will also suggest they look around their office or do some of their own research, to look for the format and useful language which might be found in other peopleís contracts, so they can pass that on to me.
By doing this, I have a better chance of getting the work out quickly and on target the first time. What may pass as an acceptable contract in one industry, may be totally offensive in another. Some types of business traditionally use a short form agreement. As much as I would like to use plenty of those twenty dollar words I learned in law school, if I drew up a fifty page contract for this particular situation, my client might either think I was an idiot, a crook trying to gouge them, or that I just liked to use many pages of phrases such as: WHEREAS, PARTY OF THE FIRST PART AND PARTY OF THE SECOND PART HAVE DECIDED TO PART, etc. None of this would help my client nor be likely to induce them to come back to me later on that million dollar deal.
By getting at least a "flavor" of what is standard in the industry, as well as what language or ideas are of major concern to my client, Iím able to save my client money, since my time is reduced by not having to reinvent the wheel, and I can pass this on to my client. Iím always happy to come up with my own ideas, but only when I canít come up with at least a review of what is already out there.
I like forms for another reason. When some people use them, they forget they may have been designed for somebody else at another time, in another place, and perhaps even with some other issues not relevant to the present situation. This often leads to disaster, which, of course, is my middle name. What looks like a great form contact, which verifiably came from the document assembly factories of one of the international giant law firms, may have totally failed to deal with your particular delivery issues, your unique warranty concerns, or your conditions precedent to the successful implementation of your recommended products. Que the lawyers.
If you think I like forms, you wonít be surprised how much I love checklists. I have checklist for everything my firm does more than once. In fact, we probably have checklists for things we may never have done. Aside from avoiding malpractice and attempting to assure quality control, checklists are another way of speeding up the delivery of quality service. Whether you are drawing up your own contracts, using forms you plagiarized off the Internet, or are asking me to draw up a unique contract for you, it should be helpful to draw up a list of the essential terms which are mandatory to conclusion of a profitable transaction. Itís simply too easy to get bogged down in the WHEREAS clauses, forgetting the nuances which make the deal work favorably for you. If this sort of a checklist would help you in drafting a great contract, imagine how much it may help your lawyer, who typically will have relatively less understanding of the "deal," at least at the beginning.
You should also remember, that magic language from one contract, may not necessarily fit well, or be enforceable, in another type of agreement. The variation may seem fairly subtle. Letís take a "standard" non-compete agreement, for instance. Presume you find a form with non-compete language you like. Should you just look at what it says and insert it if you like it and it seems to accomplish what you want? Go baby, go!
Letís say you want to hire a great software sales person, but have to send them to quite a bit of expensive training, and give them access to sensitive company data. Gee, I better get a five year world wide non-competition agreement, so they canít go to a competitor after I hire him or her. Although a non-compete may be perfectly legal in Kentucky or Indiana, you might want to consider where else it might have to be subjected to judicial scrutiny. In California, they might lynch you if you tried to enforce a non-compete. In New York, a fairly recent opinion, referenced in an earlier chapter, now pushes a trend by those courts to hold that anything over six months in the IT industry is tantamount to unenforceablity. Instead of getting a great block, you get tackled yourself.
This is, in fact, why some people use lawyers. That five year term you found in the contract form may have involved the sale of a business, where courts are more prone to allow longer terms for non-compete agreements against departing owners. The world wide competition exclusion may have been justifiable because of special circumstance, such as the existing international clientele of that employer. Your company, on the other hand, may be drafting a contract with your janitor, who likely will not have access to any trade secrets, nor have the ability to take away your clients because of personal contact with them.
"Little" mistakes like that can definitely lead to some parts of the non-compete agreement being held unenforceable, or even having the entire agreement fall apart. It also might not account for the necessity of the contract to be in both French and English, if it is to be honored in Canada, nor for any of the other of the multitude of treaties, statutes, ordinances, codes, and, regulations which might come into play. After all, why spend all this time and effort building a stable platform for your business deals, if youíre going to kick one of the legs out when you get up? Doing your homework, by plotting out the mandatory elements which are necessary to make your deal work, as well as checking out what is already in use in your industry, will get you closer to your goal. Getting the review of others you trust, such as your attorney or accountant, should go a long way to helping your realize the rewards of your efforts.
© 2001 by Stuart Adams This is the 16th installment in the Authorís online book. Your comments and input would be appreciated in helping the author make this an "organic book," which will continue to grow and adapt to change, just as any business itself must do. E-mail your comments and suggestions to the author at by clicking on the link below: