Stephen R. Cochell July 18, 2019

Basics of Contract Law

This article is designed to provide non-lawyers and clients with an overview and basics of contract law.[1]

  1. What is a Contract?

All of us enter into contracts either as customers, clients or as business owners. The purpose underlying contract law is to promote certainty and stability in business relationships. Contracts can be oral or in writing. The obvious down side of an oral contract is that it is more difficult to enforce than a written contract and is subject to a judge or a jury determining whether a contract exists and the specific details of who agreed to what, when, and for how much. In Texas, there is a long tradition of “hand-shake deals” being honored, as well as a long tradition of fighting to enforce the hand-shake deal!

In some cases, the parties entered into an oral contract which are partially confirmed by emails or texts. Contrary to popular belief, a verbal contract is just as enforceable as a written contract, although determining the terms of the agreement may be difficult if you have to go to court to enforce the agreement.

Written contracts don’t have to be laced with a bunch of fancy language and frankly, should be short, direct and to the point. It is not unusual for clients to start off with verbal agreements that are then reduced to writing in emails, then letters of intent and perhaps a formal written contract. In any event, if the parties exchanged mutual promises and gave “consideration” for their promises, they can enforce their contract in a court of law.

Consideration in the legal sense generally refers to anything of value promised to another person when making a contract. It can take the form of money, physical objects, services, promised actions, or refraining from a future action. To create a legally enforceable contract, consideration involves involves a bargained for legal detriment incurred by the promisee OR a legal benefit to the promisor. However, a contract cannot be based on a pre-existing legal duty that obligates either the promisor or the promisee to render payment or to perform the already-promised obligation. Even the smallest amount of funds or consideration is sufficient to create a binding contract.

It is always best to formally reduce an agreement to writing because the other party will likely feel morally and legally bound to honor their written promises. The elements of the contract document should always include: (1) the names of the parties; (2) the subject matter of the contract (e.g. products, services); (3) the time and place for performance of the contract; and (4) consideration or payment under the contract. If you miss one of these elements, your contract is likely unenforceable.

  1. Resolving Contract Disputes

There is no set formula for successfully resolving problems that come up in a contract. In many cases, common sense and the plain language of your contract will dictate how you should proceed. This is to provide a general roadmap of informal as well as formal problem solving approaches before engaging in litigation. As a general matter, consider following steps:

  1. Does your contract specifically address the issue, such as payment, delivery or quality of the products or services?

  2. If so, discuss the issue with your vendor or supplier and try to solve the problem on the spot. Confirm the resolution of the problem in writing. Be specific as to timing and details of your agreement.

If you have questions on how to proceed, or your previous methods of addressing contract problems do not seem to work with a particular customer, supplier or vendor, consult a lawyer immediately to obtain guidance. You may have a breach of contract problem, or you may have a legal issue; e.g. an ambiguous contract, unanticipated event, etc, that dictates a business resolution without involving lawyers. As most clients know, it is always best to preserve a business relationship when an issue or dispute can be informally resolved. However, it is advisable to consult counsel on knowing what the strengths and weaknesses of your “case” are before addressing the issues with your vendor or supplier.

  1. Talk to the other party and do it promptly.

Most contract problems are solved by open discussion that may ultimately end with an “agreement to disagree.” Before you get frustrated and say something that you mean but really should not say, disengage. Write a draft of a note and have someone review the note to make sure that it is clear, concise and communicates your concern stating this is the problem and this what I would like you to do to resolve the problem. Avoid inflammatory language or personal comments. If the amount in question or the issue is substantial, ask your lawyer to review your draft note or fax.

Some contracts set deadlines for objecting to certain types of breaches of a contract. Other deadlines are set by statute. In any event, you should promptly discuss your concerns with your supplier or vendor and try to resolve the problem amicably. You can always “fight” if the problem can’t be solved.

  1. Confirm all important communications in writing.

This is particularly true where your discussions were part of a phone or personal conversation. Unfortunately, where money is concerned, many business partners have a short memory or they are so busy that they forget commitments made in the heat of a discussion, and later deny what was said and agreed to. Amendments to a written contract should always be reduced to writing. Oftentimes, it is helpful in email negotiations to emphasize language (that should be) in your contract, that no modifications are allowed unless reduced to writing and signed by the parties or, at least, to the party who is agreeing to be bound.

  1. Enforcing Contract Rights for Breach of Contract.

Almost all businesses, at some point, encounter problems with a vendor, supplier or other party who is breaching a contract to provide products or services. What is a breach of contract and what does an attorney evaluate in determining whether one of the parties to a contract has breached the contract?

We look to establish: (1) the terms of the contract setting out the duties of the parties under the contract; (2) whether the party alleging breach of the contract performed under the contract; (3) the conduct constituting the breach is a failure to perform a contract duty, or an affirmative act by the breaching part; that (4) caused damages to the non-breaching party. In Texas, the beach of the agreement must be material; that is, the breach of a duty must cause damages and be essential to the exchange and bargained for promises between the parties. Most lawyers analyze a contract case from the perspective of “liability” and “damages.” Many lawyers get fixated on liability, proving the terms of the contract, performance and breach, but fail to adequately consider how to prove damages, or to collect on damages after you win the case! You can have a brilliant lawyer win a large judgment, but if the other side does not have assets from which you can executed your judgment, the time and money spent on your lawyer is wasted.

  1. Contract Defenses

The following defenses are summarized and must be analyzed before filing or defending a contract action. Each of these defenses are subject to various exceptions or qualifications that require analysis by your lawyer.

  1. Statutory Requirements: Some statutes make oral agreements unenforceable as a matter of law, such as the Texas Property Code, which requires all contracts for the sale of property to be in writing. Contingent fee agreements between attorneys and clients also require a written fee agreement in addition to various types of securities agreements.

  2. Statute of Limitations: All claims based on breach of contract must be brought within four years of the date of the breach of the contract (not the date of the contract). In some cases, if a party has not discovered the breach of the contract, the breach may be determined as of the date of discovery of the conduct constituting breach. The Courts generally dispose of contract claims if the suit is brought “outside” the statute of limitations period because there is a strong public policy to discourage litigants from waiting to bring their claims or “sitting” on their rights. In some cases, a court will dismiss a case based on an equitable doctrine called “laches” which can be invoked if a party was aware of a contract breach, failed to bring an action and the defendant was unfairly prejudiced by the delay, usually by changing their position and suffering a loss of some benefit under the agreement.

  3. Statute of Frauds: The Texas Business and Commercial Code provides that if an agreement cannot be performed within a year due to the nature of the required acts, the agreement may be held unenforceable. Parties who fail to state a time for performance in their contracts may subject themselves to having a court determine what time would have been reasonable under the agreement.

  4. Capacity: To enforce a contract, the parties must be competent and of age. An individual who lacks mental capacity to contract must act through a guardian or trustee.

  5. Indefinite Terms or Agreements to Agree: In some cases, courts have refused to enforce an agreement because the parties failed to agree on all essential terms of the agreement and, as a result, the entire contract is considered indefinite. These cases often involve parties who want to enter into an agreement and enter into an agreement intending to consummate the transaction in the future. In Texas, an “agreement to agree” or a letter of intent may be unenforceable unless the breaching party refused to negotiate in good faith on the key terms. The Courts generally look to whether the parties believed that they had reached a binding agreement on all essential terms and the remaining terms under the contract were a “formality.”

  6. Lack of Consideration: This defense applies when a party fails to provide or pay the consideration to the other party as part of their agreement. For example, many contracts state: “For consideration received” but, in fact, no money or promise was performed by the party with the duty to act. Consideration

  7. Failure of Consideration: A failure of consideration defense assumes that there was a consideration for a promise in the first instance, but because of some supervening cause after an agreement was reached, the promised performance fails. If there was total failure of consideration for a contract, the Court may order rescission of the contract. If there was only partial failure of consideration, the court will allow the defense, but only to the extent of the partial failure.

  1. Failure to Satisfy a Condition Precedent: A condition precedent is an event that must happen or be performed before a party’s right can accrue to enforce an obligation. For example, if a contract requires mediation prior to filing a complaint, the Court may dismiss the action based on the party’s failure to satisfy a condition precedent.

  2. Illegality or Violations of Public Policy: Courts will not enforce an illegal contract, even if the parties don't object, because enforcement of an illegal contract violates public policy. The doctrine of illegality also includes contracts rendered unenforceable because of some failure to comply with the law or an affirmative violation of a public policy rooted in law.

  1. Waiver: A party may waive their rights to partially or even fully enforce their contract rights. Waiver is an intentional relinquishment of a known right or it can involve a party whose conduct is inconsistent with claiming a right under the contract. The Court will focus on the intent of the party allegedly waiving their contract rights, as evidenced by their written or oral statements, although a party may be found to engage in implied waiver through the surrounding facts and circumstances.

11.Estoppel: This defense, also called detrimental reliance, may be raised when a party has been defrauded and wants to raise the issue in the context of a defense either with or without a fraud counterclaim. Estoppel requires that a false material representation was made regarding the contract with the intention to mislead the other party, who was without knowledge or the means of obtaining knowledge of the facts, and who detrimentally relies on the representations to his injury.

12.Accord and Satisfaction: Essentially, this defense may be raised if the parties previously settled their dispute. An accord is an agreement to discharge or settle a contract or claims made between the parties. The satisfaction occurs when the accord (agreement) is performed.

  1. 13. Release: A release generally refers to a contract that releases a party of an obligation, debt or liability, and requires all the elements of a formal contract: offer, acceptance of the terms of the offer, meeting of the minds, consent of the parties, execution and delivery of the contract with the intention that it is mutually binding on the parties, and consideration.

14.Duress: Economic duress can potentially be established when one coerces another to execute a contract by taking undue or unjust advantage of the person's economic necessity or distress, which renders the contract invalid or unenforceable. Duress requires both the acts or conduct of the opposing party and the necessities of the alleged victim or his fear of what a third person might do. The mere fact that a person enters into a contract with reluctance or as a result of the pressure of business circumstances, financial embarrassment, or economic necessity does not, of itself, constitute business compulsion or economic duress invalidating the contract. Similarly, the victim's plight alone will not suffice; it must be coupled with the bad acts of the transgressor.

  1. 15. Novation: A novation is a fancy term for an agreement, oral or written, to extinguish a valid contract or obligation and discharges the old obligation with a new contract. The existence of a novation focuses on the intention to accept a new obligation in lieu of and in discharge of the old obligation.

  2. Ratification: Ratification requires that a party is fully aware of prior acts of an agent and gives approval of the acts by way of statements or course of conduct, and with the intention of affirming the validity of the prior act. For example, a board of directors can ratify the acts of its agents or officers through a written board resolution.

  3. Setoff & Recoupment: Setoff allows parties that owe each other money to apply their debts to each other even if though their debts are from different transactions. In contrast, recoupment is a demand asserted to diminish or extinguish the plaintiff's demand that arises out of the same transaction forming the basis of the plaintiff's claim. Both setoff and recoupment are counterclaims as well as defenses.

  4. What Happens After you File the Complaint?

Filing a lawsuit is often compared to launching an unguided missile. You know what you’re launching, but you lose control after the missile is launched! Your lawyer is confident about your causes of action, but facts emerge that show that your assumptions underlying your lawsuit could not be shown. In some cases, the party who filed the lawsuit has their claims dismissed by the Court, but the defendant’s counterclaims are then set for trial.

[1] This article is informational only and is not intended as legal advice to the general public.