When Will a Promise or Statement Be Considered a Binding Contract?
Are there any instances in which a contract could exist even though the parties did not complete the deal?
If one party makes a statement or a promise that causes another party to rely on that statement in such a way that he or she is financially injured by that reliance, then a court will enforce the statement or promise as if it was a completed contract. The court does not need to find an agreement or consideration in order to enforce the promise like a contract.
The idea of giving a remedy against a person who has broken his or her promise appeals to most people. However, the "detrimental reliance" of the promisee (the person to whom the promise is made) on the promise must be reasonable and foreseeable by the promisor (the person who made the promise) at the time of his or her statement. If the promisee took action that the promisor could not have anticipated, the promisor is not required to live up to the promise.
Example: John tells Doris he will pay her $3,000 to take care of his children for the summer. Doris cancels her less lucrative summer employment in favor of John's offer, but at the last minute John takes in a foreign exchange student who will do the work for free. Doris may be able to receive damages from John for the lost earnings she suffered by relying on his promise.
But, if John tells Doris he will pay her $3,000 to take care of his children for the summer and Doris drops her health insurance coverage because she assumes John will cover her, her assumption is not based on a promise made by John. Therefore, Doris can not get damages from John for her increased medical expenses.
What Contracts are Required to Be in Writing?
Most contracts can be either written or oral, but some agreements must be in writing in order to be binding. The following types of contracts need to be executed in writing:
real estate sales;
agreements to pay someone else's debts;
contracts that take longer than one year to complete;
real estate leases for longer than one year;
contracts for over a certain amount of money (depending on the state);
contracts that will last longer than the life of the party performing the contract; and
a transfer of property at the death of the party performing the contract.
An English law from 1677, the "Statute of Frauds," provides the basis for current written contract requirements. The goal of written contract rules remains the same as ever-to avoid fraud by requiring written proof of the underlying agreement. This legal goal makes sense as a practical objective as well.
Although other types of contracts may be oral, it is advisable to "get it in writing" to insure both parties understand their obligations. If court enforcement is required, a written contract shows the parties' obligations and avoids a "he said, she said" dispute. It is easier to check with an attorney prior to signing to see whether a contract is valid than it is to enforce a poorly-drafted agreement after problems arise.
How Can an International Contract Be Illegal?
Courts will not enforce contracts that are illegal. An illegal contract either specifies prohibited goods or services, or requires illegal activity in order to fully perform its terms. Since international business by its nature involves multiple layers of law, contracts that would be perfectly legal in one country may be illegal in another and unenforceable in that country's courts.
Example: Gus and Marshall enter into a contract for the sale of hemp. While this contract is perfectly legal in countries that allow the cultivation and sale of hemp, the hemp would be an illegal subject of the contract if Gus took delivery of the hemp in a country that outlawed the product or tried to sue Marshall for breach of contract in such a country.
Illegality of performance can also negate a contract. If a contract for the sale of goods originating in Ireland requires that the shipment include a NAFTA certificate of origin, at least that clause of the contract is illegal and void. The goods are Irish, and cannot legally receive a NAFTA certificate of origin.
Intervening illegality can also affect contract validity. If a contract is legal in its terms when made, but subsequent laws outlaw performance or subject matter, the parties may have to abandon the contract. If possible, the illegal provisions can be severed from the agreement and performance can go forward. Otherwise, the parties are released from the contract. Both sides should check with their attorneys to make certain their obligations under the agreement are finished.
The variety of laws that may apply to international contracts heighten the possibility of illegality. Competent legal advice regarding the status of a contract's terms will help businesses avoid these difficulties.
Must a Mortgage Be in Writing?
Although many contracts are enforceable whether written or oral, contracts that involve a transfer of real estate are deemed important enough that they are required, under the Statute of Frauds, to be in writing to be enforceable. The Statute of Frauds originated in England in 1677, and has been subsequently adopted in some variation in all states. As relates to mortgages, the purpose of the Statute of Frauds is to prevent a creditor from fraudulently contending that a debtor granted it an unwritten mortgage when in reality none existed.
There is an exception to the Statute of Frauds, called the part performance doctrine, under which an unwritten mortgage is deemed to arise by operation of law or is deemed enforceable even though unwritten. A mortgage will arise under this doctrine only when money is lent for the purchase of the specific real estate on which a mortgage is to be granted. If the money is lent and the borrower does not follow through with a mortgage as promised, an equitable mortgage can arise in favor of the lender by operation of law.
However, simply lending money does not constitute sufficient part performance to take an unwritten security arrangement out of the Statute of Frauds. The money has to be lent specifically for the purchase of the real estate on which the mortgage is to be granted. In cases where the loan proceeds are to be used for purposes other than the purchase of the real estate at issue, the lender will have to look to assets other than the real estate to satisfy a judgment on the defaulted loan.
Even where the part performance doctrine requirements for imposition of an equitable mortgage are met, it is highly advisable to get the mortgage in writing. First, oral testimony as to the mortgage agreement is subject to clouded recollections and intentional fabrication. On the other hand, a written mortgage speaks for itself and should avoid a credibility contest in court. Also, by definition, an unwritten mortgage is unrecordable. Therefore, other parties can record liens and mortgages on the real estate at issue subsequent to the initial loan. This can result in the holder of the unwritten mortgage losing the repayment priority to which he or she is entitled by virtue of the earlier loan.
Do All Construction Contracts Have to Be in Writing?
Not necessarily. All states have a law (generally known as the "statute of frauds") that requires certain types of contracts to be in writing. As the name suggests, the statute is designed to prevent fraudulent claims, especially in the case of large contracts.
If contracts listed in the statute of frauds are not in writing, they cannot be enforced. Construction contracts sometimes fall within the terms of a state's statute of frauds and therefore must be in writing.
For example, in Florida, the following types of contracts that might involve construction projects must be in writing:
credit agreements (i.e. construction loan financing);
contracts that cannot be performed within one year (major construction projects may fit this bill);
contracts for the sale of goods over $500 (any contract involving expensive construction materials); and
contracts for the sale of real property (contracts involving the sale of improved real estate).
In addition, written contracts for construction work frequently include clauses requiring that any modification of the original written agreement must also be in writing and stating that the written contract constitutes the entire agreement of the parties. Courts will generally uphold and enforce these clauses to defeat an owner or contractor's claims that there was a separate oral agreement that changed the terms of the written agreement.
What is "Consideration" and How Much is Required?
Generally, the courts will not reform a contract because one party made a bad bargain. Consideration is the value bargained for by the parties, and most decisions indicate there is no reason to inquire into a party's motivation for giving another party an incredible deal. In a famous legal quote, a single peppercorn was considered adequate consideration.
Having said that, consideration must meet other requirements. The consideration must be an exchange for the bargain in question; past consideration is no good.
Example: Suppose XYZ Corp. employs Dave under a contract for one year for $100,000. Six months later the president notes that Dave does not seem happy in his job. The president offers Dave $20,000 more to stay for the full term of the contract. At the end of the year, Dave asks for the extra $20,000. There is no enforceable contract for the extra incentive pay. Under the original contract, Dave was already obligated to work for XYZ Corp. for a full year. The extra pay is not supported by new consideration; Dave is not giving anything that he did not previously agree to.
But, if the $20,000 was offered to Dave to take on extra responsibilities or to work Friday nights, and he did, there would be additional consideration that would support the change to the contract.
Do Construction Contracts Require Consideration?
Like all contracts, construction contracts require "consideration" in order to be enforceable. Consideration can consist of money, as well as agreeing to do something that you don't have to do.
Example: I agree to pay you $2,300 to paint my house. My agreement to pay you $2,300 is the "consideration" (what I give up to get what you promised) that makes this contract enforceable.
A promise that is made without the expectation of anything in return is known as a gratuitous promise. Such a promise is not generally enforceable because there is no consideration.
Example: I promise to seal your driveway the next time I seal mine; you don't agree to do anything for me in return. My promise to seal your driveway is unenforceable because you haven't provided me any consideration.
In the construction context, consideration may be an issue when a prime contractor is forced by a supplier to pay more than the existing contract amount with the supplier for a given item.
Example: A general contractor agreed to buy a trash disposal system from a subcontractor. Relying on the subcontractor's bid, the general contractor was awarded the contract. After the award, the subcontractor demanded a higher price, which the general contractor agreed to pay. The court found that the agreement to pay the higher amount was unenforceable because there was no consideration.
What is "Specific Performance" as a Legal Remedy?
"Specific performance" is a specialized remedy used by courts when no other remedy (such as money) will adequately compensate the other party. If a legal remedy will put the injured party in the position he or she would have enjoyed had the contract been fully performed, then the court will use that option instead. The most common reason courts grant specific performance is that the subject of the contract is unique. When a contract is for the sale of a unique property, mere money damages will not remedy the purchaser's situation.
Example: Rina offers to buy Beth's house and Beth accepts, but later decides to keep the property. Real estate is considered to be unique. Since there is no other piece of property or house exactly like Beth's, Rina may be entitled to specific performance on the contract. Beth would be compelled to go through with the sale.
Courts will enforce specific performance only if the underlying contract was fair and equitable. Other commodities that courts have found to support specific performance include works of art, custom-made products, and goods in short supply.
Is the Bidding Process the Same for Private and Government Contracts?
No. Construction contracts may fall into one of two basic categories:
(1) public contracts, where the party requesting bids is a government agency; and
(2) private contracts, where none of the parties to the bidding process is a government agency.
The bidding process in connection with public contracts is generally very formal, with a raft of existing rules and regulations that must be strictly followed in order to emerge with the winning bid.
In connection with private contracts, the bidding process is less formal and not generally constrained by detailed government-imposed rules and regulations. In the private sector, the owner or prime contractor requesting bids has wide latitude in setting its own rules for soliciting bids, and in selecting among the various bids submitted. However, this latitude in the private sector is not completely unbounded. In connection with major projects, it is wise to have a construction lawyer review bid solicitation documents for compliance with state and local laws and customs.
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