Contracts
What Is a Contract?
What is the difference between an agreement and a contract? The difference rests with the ability to enforce the terms and conditions of the parties’ agreement through the judicial system. Contracts comprise that subset of agreements between individuals and/or business entities which are, in fact, enforceable in a court of law.
Some agreements are not enforceable. An example is a contract which violates the statute of frauds. With respect to the sale of goods, Article 2 of the Uniform Commercial Code requires there be a writing signed by the party sought to be held accountable in order for such a contract to be enforced.
There are other agreements which in order to be enforceable contracts must be in writing: those include, but are not limited to:
- real estate contracts,
- real estate commissions agreements,
- agreements to pay the debt owed by another person and
- agreements which according to their terms are not to be performed within one year.
The Problem with Verbal Agreements
Other agreements which are unenforceable are what are known as “parol agreements.” These are agreements which are outside of the express written agreement between the parties. When sought to be introduced at trial, such agreements or understandings are referred to as “parol evidence” and generally precluded under the “parol evidence rule.” The parol evidence rule in summary form is that evidence of prior or contemporaneous understandings or agreements will not be considered by a court where they seek to modify or alter “clear and unambiguous” terms of a contract. Much argument in contract litigation usually centers around what the terms of the contract are. This tends to make the parol evidence rule one of the most important contracting principles of all. It is the subject of frustration of many parties who raise agreements outside of the written terms of the contract. However, there are some very limited exceptions to the parol evidence rule.
Contract Litigation
Because contracting is the means by which businesses facilitate transactions between them, contracts and contract litigation is wide-spread in litigation between businesses. It is probably the most common type of dispute between companies. The contractual disputes take many forms and are found in countless unique situations. Some of the most common include commercial loan agreements, leases for both real property and equipment, purchase contracts, service agreements, personal guarantees and asset purchase agreements. In each of these are numerous unique variations depending on the contracting language used.
Contract disputes normally arise when two parties have contracted and one party has performed while the other party has breached in some way or another. In fact, probably most often, a contract dispute stems from a service rendered for which the defendant has not paid. However, contract disputes are not limited to that type of situation. Sometimes, rather than monetary damages (or in addition to) a party will seek an order from the Court to compel the other party to perform as promised (refered to as “specific performance”). Because such a remedy requires the court to oversee the party compelled to perform, courts are reluctant to grant such a remedy. In other situations, there is a bona fide dispute as to what the contract language is and one party or another will seek a declaratory judgment from a court to define the terms of the contract.
Contract Terms
Attorney Fees
There are some important terms in contracts or which can be used in contracts which business owners and contract negotiators should be aware of. One of the most important is an attorneys fees provision. Generally, in the United States parties are responsible for their own attorneys fees and costs of bringing litigation (unless there is a statute or contract providing otherwise). Parties can agree, however, that a party if required to bring a breach of contract action will be entitled to recover its costs and attorneys fees should it prevail. These provisions have a certain power to them in terms of both preventing breaches and stimulating earlier more economical settlements if a dispute arises.
Only Terms in Writing Apply
A second important provision is an integration clause. These simply acknowledge that the written document comprises the entire agreement between the parties. These will assist in preventing any purported verbal agreements on the side being enforceable, particularly when combined with a clause which requires any modification to be in a signed writing. These types of provisions will also go a certain distance to prevent alleged fraud claims with respect to entering into a contract.
Other Important Terms
Other key provisions, particularly when dealing with interstate, and even more so, international contracts, are venue and choice of law provisions. Venue provisions in contracts dictate where an action must be brought. Consider a Michigan business contracting with a London company. It may be unclear where the action may have to be brought. It may, in fact, have to be brought in London. If the Michigan company is the non-breaching party, it certainly would rather have the ability to bring the action in Michigan. A choice of venue provision most often will be enforced and that permitted. In addition, the Michigan company will want Michigan law to apply, given its familiarity with Michigan law. A choice of law provision can be used to accomplish that goal. The parties may opt for a venue provision which favors alternative dispute resolution and require the parties to arbitrate a dispute as opposed to litigate. In the international context choice of venue, choice of law and arbitration provisions are highly important and the subject of much negotiation.
