The Complete Guide to Contract Law & Negotiation
This guide to Contract Law explains concepts around contracts clearly and concisely, in an informal style and for ease of reading and understanding. This guide refrains from including complex textual footnotes. Instead, our focus was on contract law concepts.
Our goal was to provide a guide for business owners and entrepreneurs who want to ensure both that the deal gets done right and that they stay out of court, or at least the losing end of a business dispute.
Anyone who cares about the art and craft of the business deal and its careful balancing of risks and rewards will enjoy this highly readable guide to most of the essential aspects of contract law. This guide is written for the business owner and entrepreneur as a handy reference and blueprint for creating successful business deals and relationships and avoiding unnecessary problems and liabilities.
Below you will find the content for contract law divided into small chapters based on specific topics and insights. Just click on the section you want to see, and you will be directed to that particular part on the page.
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The Complete Guide to Contracts is intended to provide in-depth information on contracts and contract negotiations from a business perspective only. It is not intended to be a substitute for or equivocal to legal advice which must be based on specific facts and given in the context of an attorney-client relationship. For case-specific legal advice, contact our legal team at Phillips | Kaiser here.
The Basics of Contract Law
Contracts are, in their most distilled form, an enforceable agreement between parties to do as they say they will do. In essence, it is a form of ensuring truth-telling and cooperation. Without this essential trust-building mechanism for incentivizing and enforcing promises and agreements, the velocity and scale of human cooperation could never have built the societies we live in today.
Many of the rights and privileges we enjoy today, often received in exchange for some sort of socially acceptable behavior, form the basis of the social contracts we make with those around us.
Formation of all contracts consists of five universal elements:
CONSIDERATION AND MUTUALITY OF OBLIGATION
COMPENTENCY AND CAPACITY
Many contracts also require a written instrument of some kind of paper as a kind of proof of the contract.
Every contract begins with an offer. An offer must be communicated clearly and with terms that are clearly defined and include essential elements such as price, quality, or quantity for example. Without these defining elements, an offer isn’t valid and doesn’t exist.
After an offer is made, the next step in the formation of a contract is acceptance. If an offer is not accepted, all parties go back to the negotiating table.
Acceptance must be clearly communicated by the accepting party to the party making the offer. It is important to note that ignoring an offer or just not responding does not constitute a valid acceptance of the offer. Failure to reject does not entail acceptance.
The concept of consideration, not to be confused with mutuality of obligation, is a little different than one might expect. Consideration is, in general, the price of the contract. While typically this is expressed in a money amount, this needn’t be the case. Parties can also trade items or services of similar value in which they both benefit. An architect, for example, can trade his design services to an accountant for financial services. An artist can trade an original work of art to a jeweler for a piece of custom jewelry. Mutuality of obligation simply states that all parties must be bound to perform their responsibilities.
All contracts must be mutually agreed upon by the parties involved. In legal parlance, this is often known as a “meeting of the minds” wherein each party’s objective perception of what the contract entails matches. In essence, each party must be agreeing to the same thing. If there is no mutual agreement, no “meeting of the minds,” there is no contract.
Parties that enter into a contract must have the legal capacity to do so. You cannot, for example, enter into a contract with a minor. Furthermore, each party must have been competent when the contract was made. They must have the legal capacity and be mentally competent. You cannot, for example, enter into a contract with someone who is incompetent or has been adjudicated to be of limited mental capacity.
A Brief History of Contract Law
Most modern legal thought on contract law is heavily influenced by ancient Greek and Roman thought. Plato’s treatise The Laws touches upon the essential procedures for canceling contracts.
The Romans went on to build upon advancements made by the Greeks. They subdivided the Greek conception of the general contract into discreet categories each with their requirements. They created, for example, four different types of consensual agreements and four different types of contracts that dealt with property rights.
In the middle ages and throughout the industrial revolution, the development of contract law closely paralleled the development of trade. The famous Magna Carta, for example, guaranteed European merchants and traders "safe and secure" exit and entry to England "for buying and selling by the ancient rights and customs.” In many ways, a clear, codified, and centralized system for dealing with and developing contract law was essential for the proliferation of trade. So the more people traded, the more contract law was established and extended.
By the 16th century, English judges had already declared "a promise on a promise will maintain an action upon the case.” This set the stage for modern contract law to emerge. An 18th-century English judge and politician put it aptly when he said, "the law of merchants and the law of the land is the same." And indeed, this continues to be the case today.
Modern American Contract Law is deeply rooted in traditional English Common Law, and in the Graeco-Roman thought that preceded that. Samuel Williston, the editor of the very first Harvard Law Review, authored and published the influential “Law of Contracts” in the early 1920s. This legal treatise has become the foremost authority on the topic of contract law. Upon Williston’s work is built the Uniform Commercial Code and Restatement (Second) of Contracts which form the basis of modern contract law today.
The Place of Contract Law Today
Together with property law, contract law undergirds the international system of globalized capitalism and trade that exists today.
Property law prevents sovereign actors from expropriating the wealth of private actors.
Contract law prevents other private actors from appropriating value.
While the rich body of work regarding contract law theory continues to expand, the central importance of contract law remains. It is essential for the enforcement of promises and the enforcement of bargains, without which no business can occur.
Hidden Hazards of Contracts
The Invisible Dangers of Contracts
When it comes to contracts and contract law, even the slightest miscommunication such as a missing word or an errant comma, can and does result in lawsuits that can cost millions of dollars in damages and attorney fees.
Even lawyers themselves, as well as entrepreneurs and business owners not fluent in contract law, can make seemingly minor or inconsequential mistakes that result in substantial financial losses or irreparable damage to a business’s reputation.
Commercial contracts, for example, are extremely unforgiving. Mistakes in contracts can often be dealt with readily between amenable parties, such as in this "tiny $25 Million Mistake." However, things can get ugly and expensive when one or both parties are at odds. It is then that the only thing that matters is what is written in the contract.
A case involving Oakhurst Dairy in which a misplaced comma resulted in a $5 million settlement.
A case in which a single letter typo in a dense, 732-page offering plan cost Extell Development Company and the Carlyle Group tens of millions of lost revenue.
In 2013, Bertha, the world's largest tunneling boring machine and responsible for the Alaskan Way Viaduct replacement tunnel project in Seattle came grinding to a halt after overheating. Contract disputes due to vague language in the contract over who would be responsible for the repair led to repair and delay costs estimated at over $480 million!
Hidden Legal Hazards
A good lawyer who is an expert in contract law is necessary to minimize the risk of your contract being the next bullet point. They not only craft contract language, but also test contract language to the breaking point.
The greatest legal hazard when it comes to contracts is, as it turns out, overconfidence. Certainly, entrepreneurs and business owners are more often than not right to assume that they are the smartest people in the room. They alone know the product or service, their company, their industry, and the goals of the contract in question. However, business acumen does not translate into legal insight. Many business people overestimate their ability to competently negotiate commercial agreements and underestimate the many hidden legal hazards.
"It is not what is in the agreement that worries most legal experts, it is what is NOT in them."
--- CRAIG KAISER, ATTORNEY
Another great hazard is the tendency to look at the relationship behind the contract only in the context of the moment. At that moment, the parties may have a great "meeting of the minds" on the relationship and they feel no need to take great care in documenting it. Too often though, as time goes on, the initiators of the contract have retired or moved on, memories have faded, or business realities have changed the business landscape. It is then that all will look to the contract very coldly and often with unfamiliar eyes for their rights and obligations.
While most good faith negotiators do not intentionally include legal pitfalls and loopholes (although some do), it is important for non-lawyers to realize that contract drafting traps are often invisible to the untrained eye. A single misplaced comma or the inclusion of or omission of a single word could spell the difference between a fair and robust commercial agreement and one that is destined to fail.
As many contract experts will note, it is not what is in the agreement that worries most legal experts, it is what is NOT in them.
Things such as remedies for breach, rights of termination, the transfer of intellectual property, and other legal obligations may often be overlooked or underestimated by entrepreneurs and business people through no fault of their own. They just haven’t been trained and are not expected to see the nuances of a contract. Expert contract lawyers are prepared to see those hidden legal hazards, and that’s why a good contract lawyer is essential.
Business and Legal Synergy
While it may not be a good idea for business people to draft commercial or business contracts themselves, that does not mean they do not have an important role to play in the creation, testing, and execution of legal contracts.
Instead, business people must be at the negotiating table with lawyers to avoid any hidden pitfalls. Often, only the business person understands and possesses the technical, economic, and business logic and minutia of a business relationship. By leveraging the business mindset in collaboration with lawyerly expertise, together business people and contract lawyers will be best able to craft a robust and comprehensive commercial contract. The business person points the way, and the contract lawyer or lawyers find the safest legal path to get there.
It's All About Minimizing Risks
The hidden dangers of contract law can sometimes be difficult to envision in a real-world setting. Even the best-trained lawyers and most meticulous legal professionals might miss the best wording of an issue from time-to-time. While the stated goal of any contract lawyer or law practice is to help their client seamlessly navigate contract law, the actual goal is a simple exercise in risk management.
Contract lawyers are experts in the dangerous and nuanced waters of contract law. They are also good at identifying risks inherent in the relationship and helping the client think through which party is best suited to bear that risk, including the cost of doing so. Therefore, it makes sense to obtain the services of these legal experts in order to avoid hitting an unexpected iceberg and sinking your business.
In real-world applications, this might look like writing, reviewing, executing, revising, editing, and litigating contracts. Some typical examples of what that might look like include:
Helping a buyer or purchaser of goods and services review a standard seller’s contract.
Most sellers have a standard contract drafted months or years ago by a contract lawyer that they present to buyers. An example of this is an architectural design firm presenting a developer with a standard AIA contract that has been edited in critical areas that may be an advantage to the seller.
Helping a seller of goods or services draft a standard contract that ensures a fair exchange of value.
As in the previous example of an architecture firm, a contract lawyer can help the architectural practice draft a standard agreement for the delivery of services or update an existing one.
Because buyers are often at an informational disadvantage, contract lawyers can help protect their interests in contract negotiations.
An example of this is a contract lawyer specializing in construction law who makes revision requests to an architecture firm’s standard contract for architectural services. Rather than a single site visit, the construction lawyer amends the contract to require three site visits in order to ensure the utmost quality per their client's interests. The goal of the construction lawyer is to protect their client’s interests.
These are but a few real-world scenarios highlighting the hidden dangers, and latent opportunities, of negotiating a contract without competent, expert legal counsel.