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Small Business Contracting Basics from Sterling Part Three

Who May Enter A Contract Part I

Hello again folks, here we are again with Small Business Contracting Basics. Today we will discuss who or what can enter a contract in California. Last time we addressed the issue of what constitutes a contract in California. Today I will address issue of capacity to contract. Business owners need to be able to understand who (or what) is capable of entering into a contract in order to determine the possible ramifications of contracting with people or entities on the periphery. Remember again this is a very basic overview of the law of contracts and I could go into so much more depth on this particular issue. However barring a full CLE (Continuing Legal Education) class on the issue I believe that this short introduction can answer some basic questions that you may have had regarding the contracts and specifically the legal issue of who may enter a contract. I have split this article into two parts for ease of writing (as I am sure anyone who has gotten this far is well beyond the point of needing help with reading this).

Minors

Entering into a contract with a minor (aka a person under 18 years old) has a number of problems for a business. An old adage is that someone who deals with a minor deals at their own peril (true in dating and in contracts). The reason for this is that generally a minor can avoid liability on contracts. However keep in mind that this affects only the ability of a third party trying to enforce a contract against a minor. A minor is still perfectly capable of enforcing a contract against you as a business owner. Therefore, you, as a business owner, are the one who bears essentially all the risk when a contract is entered into with a minor. There are three categories of a contract with a minor (i) contracts that a void with respect to minors, (ii) contracts that a minor can void, (iii) contracts that are actually binding on the minors. Void contracts (in relation to minors) include contracts to delegate power (i.e. the creation of some kind of agency (sigh yes we will get to that soon)), contracts relating to real property or any interest in it (i.e. land), and contracts relating to personal property not in the minor’s immediate possession (i.e. the right to receive wages or something equivalent). This means that if you desire to do anything that is related to the above purposes you had better make sure that the individual you are trying to contract with is above the age of 18. Voidable contracts (in relation to minors) (i.e. contracts that the minor can avoid at their discretion) are any contracts that do not fall into any of the other two categories of either void or binding. These contracts can be disaffirmed or affirmed by the minor at their discretion. A minor may essentially not preform the contract and avoid liability for his/her failure to perform the contract. Contracts that are binding on minors are all of the following, (i) Contracts for necessities that meet the requirements of Family code Section 6712 (I won’t bore you by actually reciting the code section, but do look it up) , (ii) contracts entered into by a minor under express authority or direction of a statute, (iii) certain entertainment contracts that are specifically approved by the family code (make sure to look it up), (iv) contracts entered into on behalf of a minor child by a parent, (v) contracts that have been ratified by a minor after reaching the age of majority ( which is the fancy way of saying 18), and (iv) contracts with emancipated minors. Keep in mind, a minor cannot recover goods that were transferred to an innocent third party purchaser. In English, this means that if you buy a widget from someone who purchased that widget from a minor, the minor will be unable to force the widgets return to them (assuming that you purchased the widget in good faith).

Mentally Challenged Individuals

This is much more of a complicated subject than simple contracts with minors. However, in the spirit of providing you a good overview of the law I will gloss over huge swaths of it so that you can understand just enough. The most general way to think of this is to say that someone who is entirely without understanding or someone who has been determined to be incompetent by a court cannot enter into a contract and any contract entered into with that person is void and therefore totally unenforceable. As an alternative someone who is of unsound mind but not entirely without understanding is voidable and subject to recession (aka cancellation) but then the rescinding party must return the consideration. However, (without going into the complexities) that someone is presumed to be competent to contract and they must provide facts that show their incompetence (assuming they have not been judicially determined to be incompetent). Keep in mind this is a gross oversimplification and this could easily be a whole article in and of itself but a good but of background that might help you.

Intoxicated People

While most businesses are not going to be entering contracts with intoxicated (typically drunk) individuals, if you own a particular kind of business or run into a strange situation this information could come in handy. Again this could be a whole mini article (and might be in the future because it is fun to think of different scenarios) so keep that in mind. Courts have historically not looked favorably on attempts to use intoxication as a defense to contract claims. Which means that you are slightly safer entering into contracts with people who may be intoxicated (still risky so don’t just go for it). Generally keep in mind that contracts with intoxicated people are still voidable based on the theory of constructive fraud (if one person essentially knew the other was intoxicated and took advantage of the situation to get a favorable contract) or unconscionable (again don’t worry too much about that just yet but it is generally very unfair). As a good rule of thumb, if you can tell that the person is drunk or otherwise under the influence of some intoxicant to the point where you have any doubt as to their ability to make good judgments, it is better to wait. Of course it is also just not a good idea to try and take advantage of someone with a contract period.

Concluding Remarks

Hopefully this has been educational to you as a business owner. Issues of contracting and the ability to enter into a contract are very important to understand when you prepare to enter into a potentially lucrative business venture. No one, and I mean no one, wants to have a contract voided merely because they thought that the person they were contracting with had more authority than they thought. Next time in part two of this article I will describe the agency relationship and the capability of business entities to enter into a contract.

Small Business Contracting Basics from Sterling Part Two

Basics of Contract Formation

Welcome back to Small Business Contracting Basics. Today we will discuss the very basics of contract formation law in California. Specifically, what does it take to form a legally binding contract? In very short a legally binding bilateral contract consists of three parts, the offer, acceptance of the offer, and consideration. In order to better business owners it is very important that business owners know when a contract is formed. This issue, like all issues of this series, is not meant to take the place of having a professionally drafted and customized legal contract constructed for your business and does not constitute in depth legal advice. Make sure that even after you have a better understanding of contract formation that you exercise restraint in the use of said knowledge. Nothing tends to put off clients like someone who attempts to “put one over” on a potential client.

Terminology

Before we get into brass tacks, as they say, we need to take an important step in preparation of any contract discussion. That is, we need to define our terminology. Never forget that if you can’t even agree with the other party on what words mean it is a fairly bad sign. In my experience it is almost always better to take the time to lay out a basic understanding of the what you mean when you refer to a “widget” (even if widget is a fairly common technical term) to eliminate the potential for disagreement. So getting down to it, it is generally understood that the following terms have the following meaning when it comes to talking about a contract in a legal sense and therefore I may end up using the following terms in this article. Offeror: is a person or legal entity that makes an offer. Offeree: is a person or legal entity that an offer is made to. Promisor: is a person or entity that makes a promise. Promisee: is the person or entity to which a promise is made. Bilateral contract: is a contract where parties exchange mutual promises Unilateral contract: is a contract (not as commonly seen) is a contract created by an offer than can only be accepted by performance

Offer

An offer is created when the Offeror communicates that he/she is willing to presently enter into a contract with the Offeree, that the communication describes specifically what the contract is, and that the Offeree could reasonably have concluded that a contract on those terms would be created by acceptance. To make this less clear but establish the basis of the California law on the subject, California has adopted the definition contained in Restatement Second of Contracts, section 24: “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” There tend to be more complexities in dealing with offers but they are not generally as common when dealing with business contracts in the modern world. If any of my readers are interested I will be able to address some of the more interesting and esoteric examples in future articles but this should serve as a good baseline for moving forward.

Acceptance

Acceptance is when the Offeree agrees unequivocally to be bound by the terms contained in the offer and communicates the acceptance to the Offeror. Likewise, California has adopted the a more complex definition contained in Civil Code Section 1585 “An acceptance must be absolute and unqualified, or must include in itself an acceptance of that character which the proposer can separate from the rest, and which will conclude the person accepting. A qualified acceptance is a new proposal.” Notice the wording in the very last sentence of the code section above? That is an important concept for business owners to understand when discussing contracts. If the Offeror states that “the price of the widgets is $2,500 with payment up front” and the Offeree then responds that “I accept, if I can pay half up front and half on delivery” there has been no acceptance. This tends to be a point where some individuals get confused especially when dealing with verbal contracts (to be discussed later) often because the words “I accept” are contained in the sentence. However, remember that acceptance must be unconditional and the statement contains that inconvenient “if” that destroys acceptance. The example exchange above is really a “counter offer” where the Offeree has rejected the initial offer and has proposed a new agreement. This is one of the reasons that it is so important to have clarity when dealing with contracts, if this is left unaddressed both sides could have very different ideas regarding what they have agreed or not agreed to do. Again there are so many bits of minutia that could be addressed in this section but for brevity’s sake I will say that we can address those in the future and leave this as a simple and very basic definition of acceptance.

Consideration

Consideration is, in its most basic sense, the benefit that is conferred on the Offeror and Offeree as the end goal of the contract. More specifically California Civil Code Section 1605 defines consideration as “Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise.” If that did not give you the clearest ideas of what specifically constitutes consideration don’t worry, consideration is defined in an incredibly broad sense and just about anything that you can think of can be consideration. An illustrative mental exercise to use when wrapping your head around consideration is to think of what normal people (I’m told) consider a “gift.” Now when you agree to give someone a gift you are, at least on the surface, giving someone something without receiving anything in return. Now an agreement to give a gift is the classic example of an agreement without mutual consideration. Don’t overthink it though and try to worm consideration in there through mental gymnastics a traditional gift does not contain mutual consideration needed for a contract. Generally speaking consideration need not be equivalent to be valid and courts are not typically willing to weigh the relative value of consideration so long as there is some consideration attached to the contract. However, in some instances the court will determine that a contract is “unconscionable” as the result of consideration being so grossly out of proportion as to make it unfair to the party seeking to escape the contract. Don’t worry too much about unconscionable contracts at the moment as I will cover that in more detail in future sections. Consideration must be legal. So no consideration can exist when the exchange of sex, murder, illegal goods, or slavery is used in place of more wholesome consideration like money, goods, or services. This means even if you were contemplating making a contract that used the above unwholesome kind of exchange (free advice, don’t) it would fail in court as lacking in consideration. As a further general note is that written contracts create a very slight presumption that a contract has mutual consideration. Additionally, the burden of showing there is no mutual consideration rests on the party that is seeking to avoid having an agreement considered a legally binding contract. This means, in case you were wondering, if you want to claim that there is no mutual consideration, you will need to bring proof sufficient to show the court you are correct.

Concluding Remarks

Now that we have addressed (in the most basic way possible) the parts required for a contract to be legally recognized as a contract we will be able to move on into more interesting topics dealing with contracts and some of the pitfalls that are associated with small business contracting. Keep an eye out for the upcoming sections on “Capacity to Contract” and “Common Contract Clauses.”

The above is not personalized legal advice and no attorney client relationship is created therefrom.

Small Business Contracting Basics from Sterling Part One

Small Business Contracting Basics from Sterling Part One


Introduction and Questions to Ask Before Drafting
Contracting for small businesses and individuals can be an intimidating and challenging thing to contemplate for the uninitiated. Generally speaking, it is always advisable to have a licensed attorney review important legal contracts before they are signed. Better still to have that same attorney draft the contract or negotiate the terms with the party that you are contracting with. However, there are a number of reasons this can be impractical or impossible. It may be the case that you simply cannot locate an attorney, that the deadline is too tight to bring in another party to add input, or as is sometimes the case, it is simply too expensive to use the services of an attorney to review the contract. This series will explore common contracting issues and provide some things to consider in forming contracts that meet your needs.

Fully Flesh out the Contract


Generally speaking individuals in the United States have the right to contract. This means that if you can think of it there has been a contract created at some time in the past for the exact subject that you are now considering and also an exhaustive amount of litigation dealing with a poorly written contract of that type. I cannot stress enough that poorly thought out contracts can cause many more problems than the subject matter of the contract that you are now contemplating. This means that YOU need to understand a number of things before you ever begin drafting. Specifically, you should ask yourself the following questions before you begin drafting the specific language or consulting an attorney.

  • 1. What goal do you want the contract to accomplish?
  • 2. What could go wrong before you perform the contract?
  • 3. What could go wrong during your performance of the contract?
  • 4. What could go wrong before the other party performs the contract?
  • 5. What are the consequences of the entire contract falling through?

  • You may not have a full grasp of what all of the consequences are depending on how experienced you are in the field and a number of other factors but it is still vitally important to at least try and answer the above questions.The above is not personalized legal advice and no attorney client relationship is created therefrom

    What Goal do You Want the Contract to Accomplish?


    The first question I encourage you to ask yourself deals with the age old philosophical question of “what do I want,” because once you know what you want it will make it that much easier to understand how to get it. Answering the question “what goal do I want the contract to accomplish” can be as easy as “I want to buy a widget for my business” or “I need a new employee” or as complicated as “I want to secure myself from potential copyright liability when I begin designing a customer’s website.” If you have a solid idea what the contract needs to do it will be easier to narrow down the language that you may want to include within the contract. At the very least, knowing the answer to this question will make any search that you perform online or in the law library easier.

    What Could Go Wrong Before You Perform the Contact, During Performance or Before the Other Party Performs the Contract?



    Most people like to think that things will go well but call me cynical (realist) I tend to be a strong believer in Murphy’s laws (http://www.murphys-laws.com/murphy/murphy-laws.html). Generally speaking even if you are a bright-side-everything-will-be-ok kind of person it is always important to consider the negative consequences of your actions and contracts are no exception. For example, say that you intend to purchase widgets (because that is the example always used) in bulk for a set price, because after answering the previous question this is the goal you have set. Now say the loan you intended to use to pay for the widgets falls through, I hope you thought of this as a possibility before you entered the contract because now you may be on the hook for widgets that you cannot pay for.
    Additionally, what happens if the truck the widgets are being transported in blows up, yes not very likely but still it could conceivably happen, I hope you thought of this too so that the contract clearly establish whether or not you have to pay for the widgets that are now scattered over the remains of a burning truck. While you may not always have the option to negotiate the contract, and you will not be able to contemplate all things that could potentially go wrong, if you put in some thought you may find yourself well ahead of the game when it comes to a sticky situation.The above is not personalized legal advice and no attorney client relationship is created therefrom What are the Consequences of the Entire Contract Falling Through? The answer to this question will likely be a determining factor in how thorough, detailed, formal, and extensive the contract will be. This question is all about risk. How much risk you are willing to bear in the formalities (or lack thereof) of a contract should be proportionately weighted to how much the failure of the contract will impact your business or personal life if the worst should happen. If the entire contract falls through or worse yet if the contract fails and a lawsuit will be necessary can you survive without going into bankruptcy?
    If you know how disastrous such failure would be then you are going to treat the contract with an appropriate level of care and make the drafting of the contract easier for yourself or the attorney that you hire to draft the contract. Concluding Remarks If you consider all of the above questions before preparing contracts you will create sharper contracts and possibly think of situations or troubles that you can prevent through clarity in the drafting phase. Thank you very much for reading.

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