Contract Elements – Contract Formation
by: Fran Przyblewski
An introduction to contracts
The term “contract” can sound a bit ominous to many people. Because of this, salespeople often use the term “agreement“, instead of the word “contract” because it is less intimidating. However, whether you are signing an agreement or a contract, it still boils down to the same thing. They are by any definition, a contract under law and regardless of what you call it, they will both be treated as equal and both are subject to contract law under the legal system.
It may sound like fairy-tales to kids and grandkids that some of us have grown up in houses where you never locked the door, where you settled a deal with a handshake… and got what was promised to you.
Unfortunately, that’s just not the way it is anymore. You almost never know the merchant or his parents and you can seldom get anyone to give you a referral. Therefore, deals that are cooked up and sealed with a handshake may be difficult to challenge.
You do have to realize though, that contractors are in the same boat. Everyone who has been in business for long has run into the nightmare client for whom they have completed all the work that was specified, only to find out that the client expects more… and more. Then they want to wait to pay or suddenly cannot afford it, or just refuse to pay. Occasionally, clients will even try to sell a house and run from debts or refuse to pay because of some ridiculous objection. Hence… the contract.
Contracts are critical for just about any business deal. There are in fact three kinds of contracts, a verbal contract, an implied contract, and a written contract.
For the most part and to a limited extent, verbal contracts are just as valid as a written contract. Some states may however, impose limitations on the verbal contract if the value of it exceeds a certain dollar value or the term of the contract is over a certain period of time. In other words, holding someone to an agreement to provide a service ten years down the road or a multi-million dollar verbal agreement would probably be very tough in most states.
The problem with verbal contracts are that they are often very hard to prove, especially if they are very complicated or have no independent witnesses. The parties themselves may not even recall the exact details to which they agreed. Therefore, if neither side can can show a written contract, judges are often forced to apply “fairness” or other governing state laws. The problem with “fairness” is that at least one person won’t consider it “fair.
In general, try to avoid verbal contracts. Anyone that wants you to agree to something but won’t put it into writing, just isn’t worth the time. And they are very likely out to scam you.
Every item or service that is sold has an implied contract associated with it. Implied contracts (sometimes referred to as implied warrantees) are not written contracts but they are developed by state law. In legal circles, this is referred to as “fitness for a particular use” or a “merchantability clause”.
Example – it is reasonable to assume that when you buy a computer, it will turn on and be able to perform certain tasks. If it doesn’t meet the typical and/or reasonable expectations of a normal person, you have legal rights the merchant has a legal duty to rectify the situation or refund your money.
There is only one exception to the implied contract rule. That exception is that if an item is sold “As Is”, there are no warranties of any kind. The “As Is” statement is meant to inform the consumer that there are or may be defects and that any and all warranties are void.
If you were to purchase a computer marked “As Is” and it did not work properly, you probably have very few legal rights to a remedy.
Whenever possible, try to obtain a written contract. Then you can check to make sure that all promises that have been made are included in the final deal. Written contracts will not only spell out what the merchant is supposed to do and the price, but also let you know what is required of you.
Written contracts vary significantly but there are common elements in all of them. Here are the most important ones:
Name, Address, Phone Numbers and License & Registration Numbers, if any: This may seem like a no-brainer, but the address should not be a post office box, but a street address. You cannot serve legal papers to a post office box. If your contractor won’t give you a physical address, go elsewhere.
Start and Completion Dates: Establish both in writing. These are very important, as a slow start or drawn out completion can be very aggravating or cost you money or other problems. It is not unusual, however, for the contract to have some language about delays due to “weather, acts of God and material delays” or statements regarding delays caused by other (including you) that are beyond their control.
Contractor Guarantee: Contractors will usually give some kind of guarantee on their work. This clause should state what is guaranteed and when it expires.
Detailed Description of Materials and Products: Brands, models, colors, etc. should be detailed. The rule of thumb is that the descriptions of the products and materials should be detailed enough to order from.
In other words, a description of “Kenmore dishwasher” would not be enough. You need to know which Kenmore dishwasher is to be installed. Stating that the transmission is to be replaced is not adequate. Is it new, rebuilt, or from salvage? Original equipment manufacture (OEM) or replacement.
Techniques: When applicable, the technique as to how materials will be applied should be detailed. For example, a painting contract should state whether the paint will be sprayed or applied with a brush and roller.
Statement on Product Warranties: It should be spelled out who is responsible for servicing products under warranty. Copies of product warranties should be attached as part of the contract.
If there is a warranty on parts, does it include replacement labor as well? A warranty on a $15 gallon of paint doesn’t account for much if you have to pay a contractor $250 in fees to apply the paint.
Payment Information: This is crucial and should include the following: the price, or how the final billing amount will be calculated; the payment schedule; and deposit requirements.
Change Order Stipulation: It should be included in the contract that changes from the original contract will be put in writing, with all costs clearly stated.
Permits and Fees: If your job requires permits, the contract should state that all necessary permits have been obtained and copies should be attached to the contract.
Insurance: Copies of the contractor’s insurance coverage should be attached to the contract.
Settlement of Disagreement: The contract should also specify how you and your contractor would settle any major disagreements, be it mediation, arbitration or litigation.
Contracts should be dated and signed by both the homeowner and the contractor. If any changes to the contract occur, both parties should initial them.