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.
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
Competency 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 valid acceptance of the offer. Failure to reject does not entail acceptance.
The concept of Consideration, not to be confused with the 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 dollar 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 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.
The rules that govern each aspect of a contract are known as Contract Law, which we will discuss in-depth in this guide.
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 a “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.
Contract Drafting Strategies for Commercial Contracts
Quality Commercial Contracts Aren't Achieved By Luck
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.
Following are a few of those cases:
- A case involving Oakhurst Dairy in which a misplaced comma resulted in a $5 million settlement.
- In 2014, the famous Caesar’s Casino fought a $450 million dollar, no holds barred war with investors that turned on the word ‘and’.
- In 2007, Rogers Communications of Canada, the nation’s largest cable provider, won a lawsuit over a contract worth $1 million dollars (Canadian) which all hinged on the placement of a single comma.
- 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!
“It is not what is in the agreement that worries most legal experts, it is what is NOT in them.”
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 business 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.
Why Should You Hire A Contract Lawyer?
7 Reasons To Hire A Contract Lawyer
How Contract Law Affects Business
Contract law affects all businesses, small and large, from single-person proprietorships to multinational corporations. The “legal glue” binding businesses together can be embodied in contract law.
Contract Law & Business: The Big Picture
Businesses provide either a service or a product.
That means they must engage in transactions from purchasing materials, selling goods, and rendering services. Each one of these transactions is backed by a contract that states whether goods or services are being bought or sold and for what price.
Contracts are the ultimate legal tool for ensuring that goods and services are delivered in a predictable and legally enforceable way. Business contracts set the rules by which businesses must abide. More importantly, well-written contracts will clarify expectations and minimize any chance of misinterpretation or misunderstanding.
Without contract law, many business transactions would be extremely difficult to execute or impossible to pull off.
Society itself would cease to function without a clearly defined and enforceable social contract. Even from humanity’s earliest days, we recognized the necessity for the existence of contracts to engage in basic societies.
Contract law is essential.
The following are six ways a well-written contract can benefit your business.
6 Important Ways Contracts Benefit Businesses
- Clearly define expectations.
- Provides clarity in business relationships.
- Provides security and peace of mind (certainty and predictability).
- Enforceable through the legal system.
- Provides recourse in the event of a disagreement.
- Protects both parties.
Clearly define expectations
Contracts describe each party’s responsibilities.
Who is responsible for providing what goods or services, for what price, at what standard, and when.
A written contract can provide a trustworthy basis for what each party can expect from a transaction, thereby reducing the chances of misunderstandings or conflicts.
Generally, it is bad business to be in conflict with customers, suppliers, partner firms, or other companies. By clearly spelling out the expectations of a particular transaction, contracts help businesses avoid getting bogged down in disagreements.
Provides clarity in business relationships
Hand-in-hand with defining responsibilities, contracts also clearly identify each party involved in a transaction and their relationships with each other.
Provides security and peace of mind (Certainty and Predictability)
The number one predictor of a healthy business climate is stability and predictability.
Contracts and contract law provide both by ensuring that future promises are kept and obligations fulfilled.
For example, a company that enters into a contract with a customer to ship a predetermined amount of product on a regular schedule will have the freedom to plan for the future.
A company that sells its product day-to-day and month-to-month without a contractual guarantee of purchases will not be able to plan for growth or make long-term strategic decisions.
Enforceable through the legal system
Contracts are nothing more than promises that can be enforced by some higher authority.
In business, promises that cannot be enforced are worthless, since there are no consequences or remedies for breaking those promises. Furthermore, for a transaction to proceed, all parties must trust that each party will fulfill its obligations.
Contract law provides an easy shorthand for strangers or unaffiliated businesses to trust each other without having to spend many years building trust.
Provides recourse in the event of disagreement between parties
Contracts help businesses avoid conflict by setting out the terms of a transaction.
However, in the event of a disagreement, professionally-written contracts also provide measures and guidelines for conflict resolution or remedies for a breach. This can help businesses avoid lengthy litigation in court and suffering damages without recourse or remedy.
Protects all parties
Ultimately, contracts provide companies with a measure of legal protection from being harmed when a party breaks its promises.
Contract law protects all businesses, and the entire economy, by providing a basis for trust and predictability in the marketplace.
How Contract Law Can Directly Affect Your Business
While the majority of business owners and entrepreneurs would prefer not to delve into the inner workings of contract law, owners need to understand how contract law could directly affect their business.
Generally, contract law comes to the fore during business negotiations, transactions of payment, and during the execution and fulfillment of duties and obligations.
The creation of the contract itself plays a pivotal role during the negotiation and deal-making phase of any business negotiation. Contracts can be written with favorable terms that provide the most benefit for one part or another. With the right legal professional drafting the contract, the business owner can better direct negotiations for their use.
Once all parties have agreed to a contract, the contract then acts as a legally-binding record of each party’s duties and responsibilities. If a promise is not kept, or a breach of contract occurs, the contract can provide legal recourse as well as conflict resolution procedures.
Finally, during the conveyance of services, contracts act as a roadmap, clearly defining what goods and services should be provided before the contract can be considered fulfilled.
As you can see, contracts play an essential and pivotal role in business and even affect day-to-day operations. The legal implications stemming from entering into a contract can have farreaching consequences, and should not be taken lightly. Whether you are considering entering into a contract, drafting a contract, or, potentially, breaching the terms of a contract, it is essential to consult with a knowledgeable contract professional first.
Agreement vs. Contract
In the business world, the terms “agreement” or “mutual understanding” are often used as synonyms for “contract”. After all, when business people come to an agreement or mutual understanding on the terms of execution of a particular deal, they are often referring to a contract.
However, this common but imprecise language can have serious legal consequences. From a legal standpoint, a so-called “agreement” or “understanding” is not enough to constitute an enforceable contract. That means that relying on agreements and understandings alone, particularly verbal agreements can open up your business to serious legal risks.
What is an agreement?
An agreement is often described as a “meeting of the minds”. In legal terms, this means two or more parties have come to a mutual understanding of their duties and obligations as well as the future performance of those duties and obligations.
It is important to note that an agreement, or a meeting of the minds, does not automatically result in the creation of a contract. Agreements in and of themselves do not make a contract. However, a so-called binding agreement or an enforceable agreement is considered to be a contract.
While non-contract agreements, such as verbal agreements, do not tangibly state terms and conditions, some legal rights may still apply. There are, for example, many occasions where the substance of an email conversation has been deemed strong enough to constitute an actual, enforceable contract. Likewise, a simple verbal agreement can become a binding agreement, or contract, by virtue of being “completed,” or, in other words, as based on the parties’ actions. This simply means that all the terms and conditions agreed upon have been met as based on the parties’ actions.
Finally, while not all agreements are considered contractually binding, almost every agreement dispute can be taken to court. Even a conflict over verbal agreements can be litigated. If this occurs, it is important to have a knowledgeable contract lawyer by your side as the actions and conduct of parties involved will be used to determine the case. You may also need to retain every possible piece of evidence, including texts, calls, emails, and letters, in order to help build a winning case.
What is a contract?
A contract is a type of binding agreement that can be enforced. Unlike a more general agreement, a contract will be much more specific in how it identifies each party’s duties and obligations will be fulfilled and, if need be, remedies for lack of performance of the contract. While a contract need not cover every term of the agreement to be binding, it must create sufficient mutual obligations between private parties that are enforceable by the law.
For a contract to be considered a valid contract, there must be mutual assent, an expressed offer and acceptance, and adequate consideration.
Agreement vs Contract: What's the difference?
It is crucial to keep in mind that an agreement and a contract are two very different terms that should not be confused or used interchangeably. One helpful way to remember the difference is to think of the term agreement as a general term with no legal ramifications. Meanwhile, a contract is a type of agreement that has significant, binding legal ramifications. Two parties can come to an agreement or a meeting of the minds. However, without a contract to legally bind the two parties to fulfill their duties and obligations, an agreement is nothing more than a mutual understanding that cannot be enforced. A contract, however, is enforceable.
A contract is a type of agreement. However, not every agreement is a contract.
For example, if you and your friend mutually decide to grab drinks together after work, the two of you are in agreement. Both parties have come to a mutual understanding or meeting of the minds to consume beverages after work. This is an agreement. However, it is not a contract because neither party is legally obligated to grab drinks. If your friend decides to skip drinks after the fact of the agreement, while demoralizing, is not something that can be litigated successfully in a court of law.
Do I Need An Attorney for A Non Disclosure Agreement?
If you’ve ever crossed your heart and hoped to die as a child in regards to a secret, then you have a basic understanding of what a contractual Non Disclosure Agreement (NDA) is.
In essence, a non disclosure agreement is simply a legally binding promise that you or the party you represent will keep a secret.
By signing a non-disclosure agreement, you enter into a confidentiality agreement with another person or party.
A standard non disclosure agreement always consists of five essential elements:
1. A definition of confidential information
This essentially lays out what information or data will be kept secret and confidential.
2. A description of any information that can be excluded from confidentiality
A good NDA will define what information is confidential and describe what situations will cause certain information to no longer be considered a secret. For example, a standard clause in many NDAs is that publicly released information will no longer be considered confidential.
3. Obligations and responsibilities
NDAs always layout the receiving parties’ obligations to secrecy. Usually, this includes specific prescriptive recommendations such as destroying information after it is no longer needed (i.e., shredding papers) or not storing digital information on unapproved devices.
Well written NDAs will include a period for which the information will remain confidential. This timeline of secrecy could be for perpetuity or until some other trigger, such as a public announcement, is met.
5. Standard contract clauses and language
No fair contract is complete without all the standard contract clauses and language designed to reduce legal risks and exposure.
Situations That Require A Non Disclosure Agreement (NDA)
A Non-Disclosure Agreement can be used anytime confidentiality must be respected.
Non Disclosure Agreements can be signed between individuals, organizations, or between an organization and an individual.
A Non-Disclosure Agreement is also used by rich and famous individuals to ensure a degree of personal privacy.
Beyond personal privacy, non disclosure agreements are a handy and essential tool for businesses. NDAs help businesses maintain their competitive advantage over other companies by protecting trade secrets. Common reasons to employ a non disclosure agreement include keeping trade secrets about practices, processes, and ingredients.
NDAs are vital to any organization’s trade secret strategy, including other methods of ensuring confidentiality, such as patents, non-compete agreements, and non-solicitation agreements. For example, Coca-cola employs all of these confidentiality strategies to ensure the secrecy of their classic recipe.
A non disclosure agreement in a business is often used in these five ordinary circumstances:
1. Product discussions
Most businesses jealously guard information related to the development and production of their products. That’s because disclosing their products could result in competitors overcoming the company’s competitive advantage and breaking their revenue streams. As a result, a non-disclosure agreement may be used if a specific organization’s product is being discussed with outside parties.
Business negotiations can be fraught with potential trade secret or patent infringement risks. For example, an airplane manufacturer negotiating a deal with part suppliers will want to ensure that the vendor partner does not intentionally or unintentionally share secrets about their aircraft design to a competitor. Even if the negotiations do not result in a long-term relationship, the airplane manufacturer will want to enter into a non disclosure agreement to prevent suppliers from spilling their secrets.
3. Proprietary information
In the modern era, information is king. Many businesses participate in the knowledge economy where what you know, and data, can be even more valuable than what you produce. As a result, organizations should always take special care to protect their priceless and efficiently transmittable knowledge using a non-disclosure agreement. Some companies often, for example, ask employees to sign a non disclosure agreement to protect proprietary business information.
4. Partner or investor presentations
There are many situations in which sensitive data may need to be presented to partners or investors in an organization. This can include board meetings, shareholder calls, or any number of acts of information sharing. While sharing crucial information is necessary for the running of a company, these data transference events can also result in the leaking of sensitive information. A Non-Disclosure Agreement helps to tighten up information security by legally obligating attendants of presentation and meetings to maintain secrecy.
5. Performance of services
Most enterprises must often rely on the performance of service contracts by partner companies and third-party vendors to do business. For example, a marketing agency may hire freelance graphic designers to help produce an advertising campaign for a Fortune 500 corporation. The corporation will most likely require the marketing agency to sign a Non Disclosure Agreement to protect its product before launching their marketing campaign. Likewise, the marketing agency will need freelancers to sign an NDA to ensure that disclosures on their end are also kept to a minimum during their services’ performance.
Do I Need An Attorney For A Non Disclosure Agreement?
Only a well-designed and built dam will keep out the water. One leak and the whole system could be compromised. Likewise, when it comes to protecting business secrets or maintaining legal confidentiality, it only takes one loophole or oversight for your entire confidentiality strategy to collapse.
Legally speaking, businesses and organizations are not required to involve the services of an attorney to draft or sign a non disclosure agreement. Companies can draft their own language or even download an NDA template from the web. However, taking a do-it-yourself or template-based approach to contract law can produce inferior results.
The best NDA contracts that offer the most comprehensive confidentiality protections will be tailored to each organization’s particular needs. Involving an experienced contract lawyer in the drafting and implementation of NDAs is crucial for ensuring that your confidential information and trade secrets are actually respected and that any breaches of a non disclosure agreement can be legally addressed.
NDAs are an effective and proven way to ensure business confidentiality between two parties.
However, they aren’t bulletproof.
To ensure the maximum protection of your proprietary information and products, it is essential to bring a knowledgeable and experienced contract lawyer on board. Not only can a contract lawyer draft an effective NDA for you, but they can also review NDAs by other organizations to minimize legal exposure.
Is A Verbal Contract Binding?
Types of Contracts
The best contracts are written contracts.
Not only does a written contract provide physical evidence in the event of a dispute, but written contracts are also more enforceable than a verbal agreement in court.
Written contracts avoid much of the inherent uncertainty and confusion associated with unwritten agreements by spelling out each party’s expectations, duties, and responsibilities in plain text.
What Is Considered a Verbal Agreement?
A verbal agreement remains a popular method of establishing and facilitating an exchange of obligations between parties.
Generally, whether a verbal agreement establishes a valid transaction depends on the level of trust between parties, the value of the goods or services in question, and the clarity of expectations of each party.
For example, a homeowner who is close friends with a contractor may engage in a verbal agreement with the contractor to repair a broken fence in return for a beer. As long as the services are delivered per the agreement, the verbal agreement may be considered a legally binding contract.
Furthermore, because of the existing trust between the parties and the relatively low value of services rendered, a verbal agreement may likely be what is appropriate in this situation. There may be no need to draft a written contract between friends to facilitate the exchange of contractor services for a beer.
While a verbal contract (or verbal agreement) is often sealed with a physical handshake, that does not always have to be the case. As long as a so-called “meeting of the minds” has occurred, along with other elements of a traditional contract, such as an accepted offer and an exchange of consideration, then a verbal agreement may be considered done. As long as the preconditions have been met, the “deal” is considered agreed upon. It can be sealed with a handshake, a verbal agreement, a toast, or any number of other forms of communication.
A verbal agreement may come in many forms (such as a discussion with words, an email exchange, or voice recordings, or even a handshake). But, the commonality is that the agreement is not in a written contract form.
The difficulty with a verbal agreement becomes painfully obvious in the event of a disagreement or conflict.
Is a Handshake Agreement, Verbal Contract, or Verbal Agreement Legally Binding in Texas?
Contract law may differ from one region or state to another. In Texas, a verbal agreement or handshake contract can be legally binding depending on the facts.
However, it is imperative to note that while a verbal contract may be legally binding, it falls on each party to prove the existence through facts of a verbal contract in the event of a disagreement. This is where things can get messy.
The essential preconditions of a legally binding verbal contract (or verbal agreement) are as follows:
- An offer is made.
- An offer is accepted.
- There is a “meeting of minds” between all parties involved.
- An exchange of value, or consideration, occurs.
If these four conditions are met, the verbal contract or verbal agreement can be considered legally binding.
It is also important to know that while a verbal contract may be considered to be legally binding in Texas, not all oral contracts are legal. Under Texas law, the Statute of Frauds lays out a list of agreements that can only be considered legal if made in writing.
Contracts that must be in writing in Texas include:
- Agreements for the sale or transfer of real estate or land.
- The leasing or commissioning of oil and gas drilling operations.
- Copyright agreements.
- Any agreement where the terms may outlast the life of a party.
- Any agreement that will take longer than one year to perform.
- Any agreement worth more than $500.
- Marriages and divorces.
- Surety contracts (agreements to pay another person’s debts).
As you can see, the Texas Statute of Frauds covers a lot of ground. In the business world, many if not most agreements will likely need to be written.
Potential Handshake or Verbal Contract Weaknesses
A verbal contract has many inherent weaknesses compared to a well-written formal written contract.
A verbal contract:
- Lacks clear and concise documentation of duties and responsibilities.
- Has no spelled out remedies for breach of contract.
- Requires careful documentation of communications to establish proof of existence.
- Risks the parties not having fully thought through and discussed all the important details and the tougher points of the parties’ intentions.
- Is not considered legally binding for agreements listed under the Texas Statute of Frauds.
How to Handle A Verbal Contract (and Disagreements)
The precise line between when to make a handshake agreement (or verbal contract) or enter into a more formal contractual relationship backed by a written contract can be difficult to ascertain. However, in general, it is better to err on the side of caution and have a written contract.
If there is a lack of trust between parties, or a lack of history, a written contract is recommended. In other words, if you don’t think or aren’t sure that another party will deliver their end of a bargain as agreed upon, chances are you will want a written legally binding contract.
Likewise, if an agreement is worth a lot of money, it is also important to protect all parties and the integrity of the transaction with a written contract, which clearly outlines and spells out the terms of the agreement. In both these cases, you should not depend on a verbal contract.
If you do choose to engage in a verbal contract with another party, it is important to maintain thorough written records of communications and facts that can be used to demonstrate a verbal agreement was made. This can include text messages, emails, and phone call logs.
This type of documentation goes both ways. If you do not want to be held liable for breach of contract, you should not agree to anyone or anything, verbally or through any other forms of communication, such as email.
When it comes to a verbal agreement, you should watch out for signs of Affinity Fraud.
Affinity fraud is an all too common type of investment fraud in which one party tries to convince another party to make a financial investment without proper legal documentation in the form of a written contract.
Typically, the scammer is someone the victim trusts or shares a common identity group with, such as a common heritage, religion, or family roots.
Fraudsters will leverage their trust or even lean on the supposed existence of a verbal agreement to pressure victims to make financial payments. To avoid future confusion or falling victim to affinity fraud, it is crucial to take the role of a written contract seriously. This is especially true when the reputation or finances of your business are at risk.
For business transactions, we recommend employing a written contract drafted by a contract lawyer. This will be the best form of protection and peace of mind from future confusion, conflict, litigation, or fraud.
Is It Legal To Use An Alias or A DBA In A Contract?
Many companies and individuals do business under a name that is not their official legal name. As opposed to their legal name, the name they choose to operate under is known as an alias, trade name, or DBA (Doing Business As).
Think of an alias, or DBA, as a nickname or nom de guerre separate from their official legal name.
In a contract, you will often see this written explicitly as “…company or individual ‘A’ doing business as a company or individual ‘B.’ This explicit description of legal and business names is known as a Doing Business As (DBA) statement.
While it is legal to use an alias in a contract in some situations, companies must be cautious about how and when they employ a DBA. Even inconsequential mistakes could lead to confusion, lawsuits, and an invalidated business contract.
What is the value of an alias or DBA?
DBAs and business aliases have many important benefits that make registering attractive to business owners.
DBAs are an important tool for businesses to avoid name confusion, preserve privacy, and for sole proprietorships to gain access to a business bank account, to name a few.
One of the primary reasons businesses choose to file for a Doing Business As is to operate under a less confusing or more consumer-friendly name. A franchisee of a local car dealership, for example, may want to operate under a more recognizable name rather than the legal name of their business entity.
“Company ABC” may wish to file for a DBA for “South Houston Ford Dealership.” Not only is this name more convenient and consumer-friendly, but it can also make contractual language involving Company ABC’s dealership operations much less confusing.
Filing for a Doing Business As is an easy and inexpensive way to set up a business alias without incorporating a brand new LLC or corporation.
Killing The Negotiation
8 Fatal Mistakes In Contract Negotiations and How To Improve
5 Things To Keep In Mind When Using An Alias or A DBA in a Contract
An alias can be an opportunity to legally do business with customers and partners while avoiding any potential name confusion. This is particularly useful when there are other companies in the same state with similar legal names, or the legal name of the company is long or difficult to pronounce. It is important to keep the following items in mind when drafting a contract in which aliases will be used:
1. Always sign the contract with your company’s full, legal name.
The only legally permissible and sufficient signature must include the name and title of an authorized signatory, the full legal name of the company, and the company’s DBA.
For example, a legally sufficient signature may look like:
John Doe, CEO, Company ABC doing business as Corporation 123.
It is essential to list your company’s legal name in the signature to ensure that you are signing on behalf of the company and not in an individual capacity. Furthermore, a DBA alone is not considered to be a sufficient signature.
2. Always introduce the parties by their legal names at the very beginning of the contract.
Referring to a business by its DBA in a contract is a great way to reduce confusion and make the contract more readable. However, it is extremely vital to always first introduce all parties involved initially by their legal names.
Well-written agreements where a party wishes to use a DBA will first employ a Doing Business As statement when introducing each party involved in the contract in one of the opening paragraphs. For example, you might write, “Company ABC hereby referred to as Corporation 123”. Including a written statement definitively connecting the legal name of an entity with the name it is operating under will help prevent any confusion and potential contract disputes.
3. It is legally acceptable to refer to your business by its DBA name rather than its legal name --- - with a few important caveats that business owners and proprietors must keep in mind.
The contract must introduce the parties by their full legal names in the opening paragraphs, and signatures must also be signed with each party’s full legal name.
However, when it comes to the contract’s body text, a DBA or alias is perfectly acceptable.
4. Specify in the contract when to use the legal name and when to use a pseudonym.
Tax documents are tied to a person’s or employer’s legal name and identification. Distinguishing between your legal name and DBA for payments will make bank transactions and tax reporting to the IRS much more seamless. Both the bank and the IRS will attempt to match payments with a person or company’s legal identification.
Failure to specify or clearly connect financial transactions with a legal name could result in delayed payments or an IRS audit.
5. Before you start using an alias or DBA in contracts, you must register the name through the proper channels.
If you or your business want to operate under a different name than your legal name, you must register the new name (DBA) with the proper local and state authorities.
In Texas, sole proprietors, corporations, limited liability companies (LLCs), limited partnerships (LPs), and limited liability partnerships (LLPs) seeking a DBA must typically file for a DBA with the County where they conduct business.
Is a Text Message a Contract or Legal Document?
Business communications occur over various mediums, including writing, emails, orally, or even through text messages.
Today, electronic modes of communication, such as text messaging or Short Service Messaging (SMS), are now the dominant means by which we correspond and share information.
We rely on text messaging and other forms of informal electronic communication to do everything from setting up lunch meetings to finalizing a contract’s details.
Unfortunately, informal electronic communications, such as text messages, can also confuse when a formal contract has been executed and regardless of whether or not said contract is actually enforceable.
Can A Text Message or SMS Be a Contract or Legal Document?
To get to the bottom of whether or not text messages may constitute a legal document or a legally enforceable contract, it is important to understand the basics of what a contract is.
A contract is an agreement that creates legally enforceable obligations between two or more parties. Failure to perform or carry out the duties and obligations specified in a contract results in a breach of contract that must be legally remedied. Remedies for a breach of contract include, for example, general damages, consequential damages, reliance damages, and specific performance. In general, an aggrieved party may sue to enforce the contract, obtain monetary damages, or secure other remedies.
Remember, the essential preconditions of a legally binding contractual agreement are as follows:
- An offer is made.
- An offer is accepted.
- There is a “meeting of minds” between the parties involved.
- An exchange of value, or consideration, occurs.
If these four conditions are met, then a contract can be considered to be legally binding. This means that with the right language, and certain actions by the parties, a chain of text messages may also become a legally binding contract.
But there’s more.
Many states such as Texas explicitly list out agreements that can only be considered legal if made in writing. These can be found in a state’s Statute of Frauds.
Agreements included in a state’s Statute of Frauds, such as a real estate transactions or copyright agreements, must be in writing to be considered a valid, legally binding contract.
However, a so-called written contract needn’t be consummated with an actual pen to paper or certain circumstances. According to the ESIGN Act of 2000, contracts signed electronically are just as valid and legally enforceable in court as paper and ink agreements.
What this means is that text messages, in certain instances, may be treated just like a written contract. Texts can be used to negotiate and even accept bilateral as well as unilateral contracts. This is already common practice in the world today. If you have ever received a text message that included a term of service and confirmation of assent, chances are you too have entered into a contract via SMS.
Examples of elements found in text messages that could be treated as legal documentation or even a legally binding contract include:
- Checking an agreement box (Clear assent)
- Replying “Yes” (Clear assent)
- Replying with an affirmative (Clear assent)
- Replying “I Agree” (Clear assent)
- Clicking a form link that leads to an accepted method of assent (Clear assent)
- Providing an E-signature via SMS (Clear assent)
- A text message containing term language (Actual notice)
- A text message with a link to terms of service (Actual notice)
- Text indicating contractual obligations (Actual notice)
Case Law For Text Messages As Bilateral Contracts
It is common for text messages to be used for unilateral contracts.
For example, when a consumer signs up for a service, the service provider might send terms of the contract via text message, which the consumer can unilaterally accept.
However, according to case law, text messages can also be used to both negotiate and accept bilateral contracts if there is relevant language included in the messages. This means that text message contracts, like written ones, are a genuine phenomenon.
When considering the legality of text message contracts, the courts will typically defer to case law. Case law is simply the historical body of legal decisions made in the past. Courts will typically look to existing case law to determine new cases and new decisions.
In an important 2016 case, St. John’s Holdings, LLC vs. Two Electronics, the court determined that text messages can indeed be considered valid legal documents.
According to the case, St. John’s Holdings and Two Electronics had negotiated terms for a purchase and sale of real property via text message. Per the language included in text messages sent by Two Electronics, St. John’s Holdings signed a Letter of Intent (LOI) and even wrote a payment check for the agreed-upon sum. However, Two Electronics later decided to sell the real property to another third-party and refused to honor St. John’s Holding’s payment and LOI.
The Massachusetts Land Court, which presided over the case, ruled that the documents, language, and LOI included in the text message conversation between St. John’s Holdings and Two Electronics satisfied the writing requirements of the Massachusetts Statute of Frauds.
Real estate transactions are required by the state’s Statute of Frauds to be written. The court essentially ruled that text messages fulfill this legal requirement, putting text message conversation on par with inked documents.
The Massachusetts Land Court ruled that the two documents in the text message, the payment of the funds, and the LOI were enough to satisfy the Statute of Frauds’ writing requirement.
So what does this mean for you and your business?
5 Text Messaging Legal Best Practices
1. Think before you send.
Now that we know some text conversations can be treated similarly to written documents, it is important to think twice before texting during business negotiations. Remember, if the text conversation contains all the contract elements (offer, acceptance, consideration, and legality).
2. Include qualifying language.
To ensure that your text messages will not be construed as a legal contract or contract document, it is important to include qualifying language. An example of a qualifying language is: “…subject to a fully executed contract”.
3. Save and back up text messages.
Because text message conversations can be used as evidence that a contract exists or that a contract has been breached, it is important to save and back up all of your messages.
4. Treat texts as if they are admissible in a court of law.
When engaging in a business deal or transaction, it is important to treat texts as potential legal evidence and documentation, no matter how casual. That means to compose your texts carefully, with clear language and no room for doubt.
5. When in doubt, consult a contract lawyer.
Unintentionally entering into or creating a contract via SMS can have potentially damaging consequences. To reduce any legal liabilities and create ironclad contracts that are enforceable, it is advisable to seek contract experts, such as a contract lawyer.