Minnesota Law
Minnesota Contract Law
- Contract Law
Contract Law
This chapter summarizes the elements of a contract, who can enter into contracts on behalf of a company, factors that may affect validity of a contract, and recovering damages if a contract is breached. One should always read and understand a document before agreeing to be held to its contents. Before a businessperson enters into a contract with major implications, he or she should consult an attorney experienced in the subject matter of the contract.
Contract Components
Offer
The first step to a contract is an offer. An offer is a statement, written or spoken, by a party of his or her intention to be held to a commitment upon acceptance of the offer. Many a business owner has gotten into a legal dispute because, during negotiations, a customer believed an offer had been made when the businessperson believed the parties were still only discussing possible options. A businessperson should carefully consider whether his or her statements or the statements of other parties constitute offers. There are a number of factors to look at to determine whether a statement constitutes an offer.
- Is the person making the offer serious? A business executive who jokingly states that he or she will sell a successful business in exchange for a good bottle of single malt scotch is not making an offer. On the other hand, a business executive who writes up an offer on a bar napkin may be perfectly serious. A court will look at the context in which the statement was made to determine whether it was a valid offer.
- Does the statement show a willingness of the party to be held to its contents? A person requesting a price quote or opening negotiations is not making an offer. An advertisement is usually viewed as an invitation to an offer rather than an offer itself.
- Does the statement contain definite terms with regard to the subject matter? Is the subject matter identified, are parties identified, is the price set, are quantities determined, and is time for performance stated? There should be enough information contained in the statement that, if needed, a court would be able to enforce the contract or determine the damages.
Acceptance
The second requirement for a valid contract is acceptance of the offer. In order for an acceptance of an offer to be effective, it must be made while the offer is still open. In some situations, the company making the offer gives a definite time frame (My company will sell you this computer software for $2000 but you must decide whether to buy it within two days). Other ways an offer may end include: the person making the offer withdraws the offer, the person who receives the offer rejects it, or reasonable time passes after the offer is made. If the subject matter of the offer is destroyed before acceptance, the offer terminates.
Unless an offer specifies otherwise, an offer can be accepted though the mail. An important rule known as the "mailbox rule" says that an acceptance is effective once it is put in the mailbox. If the offeror attempts to withdraw the offer after the acceptance is mailed but before it is received, the person accepting the offer can hold the offeror to the contract. For this reason, anyone making an offer should be aware that it might be accepted, by means of the mailbox rule, before the offeror knows of the acceptance. This can cause problems for the original offeror if he or she assumed the offer was rejected and found another buyer. To avoid possible confusion, some businesses will specify in an offer that acceptance of the offer is only effective upon receipt of the acceptance.
If a person changes the conditions of an offer in responding to the offer, the offer is rejected and the changed conditions constitute a counteroffer (I want to buy the software, but I will pay only $1500 for it). In this scenario, the person who made the original offer can respond to the counteroffer by accepting or rejecting it, or proposing yet another offer.
There are two ways a person can accept an offer, either by promising to do something, or by performing the desired act. In the first type, a customer promises to pay $2000 for computer software. This is a bilateral contract. In the second type, a business owner offers a contractor $1000 to replace ceiling tiles and the contractor replaces the tiles; the contractor accepted the offer by performing the act requested. This is a unilateral contract.
Consideration
Consideration is a legal concept which describes something of value that is given in exchange for a performance or a promise to perform. The presence of consideration distinguishes contracts from gifts. Consideration can be a promise to do something there is no legal obligation to do, or a promise to not do something there is a legal right to do. Promises to exchange money, goods, or services are forms of consideration. All parties in an agreement must give consideration in order to create a contract, but courts typically do not look at the adequacy of consideration unless there is evidence of some type of wrongdoing by the party benefiting most from the contract.
Defenses to Contract
Legality of the Contract
Although two persons may exchange an offer, acceptance, and consideration, if the subject matter of the contract is illegal, an enforceable contract does not exist. For example, if a person offers to pay another person money for illegal drugs, this is a void contract.
Capacity of the Parties
In order to be bound to a contract, the parties must be competent to enter into the legal arrangement. Underage persons, persons who are mentally ill, and intoxicated persons are usually not bound by the contracts they enter. However, a minor may have the option of enforcing a contract.
Agency
A business may challenge the validity of a contract by alleging that the person who signed for the company was not an agent of the company and therefore had no authority to act on the company's behalf. Agency is the legal status in which one person, the agent, has authority to conduct business for another party, the principal. Unless their businesses are very small, most business owners must rely on other people to conduct business and enter into contracts on behalf of their businesses. Because principals are bound by contracts entered into by their agents, business operators should be familiar with the laws of agency.
An agent's authority to enter into contracts on behalf of the business can be actual, implied, or apparent. Actual authority is authority that the principal has intentionally given to an agent who has accepted it. The clearest example of creating actual authority is when a business owner hires someone to negotiate purchases for the company. Implied authority results because of the agent's relationship with the principal or the principal's business, from custom, or by acquiescence. For example, a principal might not have intentionally authorized an employee to make credit purchases for the business, but if the principal has repeatedly paid off debts incurred by the employee, he or she may inadvertently have created implied authority in that employee. Apparent authority can result when the principal acts in a way that would cause third parties reasonably to assume that the agent had authority. For example if a business owner is aware than an employee is claiming authority to act on behalf of the business, the principal may have an obligation to clarify that the employee is not authorized to enter into a contract on behalf of the business.
Mistake, Duress, and Fraud
A mutual mistake by both parties to a contract on an important issue makes the contract unenforceable. However, a mistake by only one party does not necessarily make the contract void.
Duress is the use of force or pressure by one party to make the other party agree to the contract. The force does not have to be physical -- one could be put under mental duress. The use of duress makes the contract voidable by the party under duress.
Fraud is the intentional misrepresentation of an important issue of the contract. The presence of fraud in a contractual proceeding makes the contract voidable by the party upon whom the fraud was perpetrated.
Statute of Frauds
Contracts, in many instances, do not have to be in writing to be legally binding. However, a rule known as the Statute of Frauds requires that some contracts must be written to be valid. Contracts involving the sale of real estate, contracts concerning the sale of goods worth more than $500, contracts that cannot be performed within one year, contracts to pay off someone else's debts, leases for more than one year, and contracts concerning a marriage must be in writing.
Parol Evidence Rule
Although not a defense to a contract, the parol evidence rule may affect the contents of a contract and how a contract is enforced. The parol evidence rule applies once parties have come to a final, written contract. Once there is a final, written contract between the parties, the parol evidence rule forbids the introduction in a court proceeding of any previous agreements between the parties on the subject matter of the contract. The parol evidence rule permits the judge or jury in a contract dispute to look only at the written contract and not at any previous discussions between the parties. The impact of the parol evidence rule is that all factors that are important to the agreement and that have been decided by the parties should be stated in the final, written contract. The parol evidence rule does not forbid the introduction of subsequent agreements between the parties.
Contract Termination
A contract also may end because of a breach. A breach occurs when a person does not fulfill his or her responsibilities as promised in the contract. A breach may be minor or major. A minor breach is one that affects small, minor details of the agreement and may not affect the outcome of the contract. However, a major breach is one that does affect the subject matter of the contract and may affect the outcome of the contract. This is also known as a breach of a material issue. When there has been a breach in a contract, the question of damages is raised.
Damages
Money Damages
In most cases when an injury results from a contract breach, the injured party receives money damages. The court places the person in the position he or she would have been in if the contract had been performed. For example, if a business owner contracts with a roofer to put a new roof on a warehouse for $50,000, the roofer might stop in the middle of the job and refuse to finish the new roof. If the business owner finds another roofer to finish the job at an additional cost of $15,000, the damages are $15,000.
Although a person is normally entitled to the money difference between what was promised and what it costs to complete the promise, the injured party must mitigate to collect damages. Mitigation means the injured party takes reasonable steps to limit the extent of the injury and finish the job. In the previous example, the business owner must make reasonable efforts to find another party to finish the roof and must take reasonable steps to protect inventory in the warehouse from exposure due to the lack of a roof. If the business owner refuses to look for another roofer and consequently inventory in the warehouse is ruined, the breaching roofer will probably be able to successfully defend against paying for the cost of the ruined goods.
Specific Performance
There are some situations in which money damages are inadequate. Typically in a contract involving the sale of land, awarding money damages for a breach does not put the nonbreaching party in the same position he or she would have been if the contract had been fulfilled. Because real estate is unique, one cannot simply go out and buy property that is the same as originally contracted. In a case such as this, the court may order the breaching party to perform the duties required by the contract. This remedy is called specific performance. Specific performance courts only order in the rare cases in which the subject matter of the contract is unique, and it is difficult to put a monetary amount on the damage incurred as a result of the breach. Specific performance is not awarded in personal service contracts. In the previous example, the court would not order the original roofer to complete the job.
Liquidated Damages
In an attempt to set a monetary damage amount in a case in which it may be difficult, the parties may include a provision that specifies the amount of damages in event of a breach. Such predetermined damages are called liquidated damages. An example is when a company puts down earnest money for space in a mall and later decides not to open a store at the mall. In a real estate contract with a liquidated damage provision, the business owner may forfeit the earnest money to the mall owners as a damage award.
Rescission
In most contract disputes, a court puts the nonbreaching party in the position he or she would have been in if the contract had not been breached. However, there are times when the court may place the party in the position he or she was in before the contract was executed. This remedy is known as rescission. In cases in which there was a mutual mistake on the subject matter of the contract, the parties may be returned to their positions before the contract. If the parties have exchanged goods or money, those items are returned to the other party. This remedy may also be selected in cases in which one party intentionally misrepresents a material fact.
Mandatory Arbitration and Forum Selection
Parties may also choose to include a forum selection clause in a contract. A forum selection clause stipulates that any legal action stemming from the contract will be brought in a particular court and that a particular jurisdiction's laws will govern. With a forum selection clause, an Minnesota business might be able to insure that it could defend itself in an Minnesota court applying Minnesota laws against any lawsuit arising from the contract. Such a clause could save the Minnesota business time and money should any disputes arise.