To Write or Not to Write (a Contract)? Part 1

Does My Contract Need to Be in Writing?

A contract is an exchange of promises that the law will enforce, or a writing containing the terms to which the parties have agreed. Clients often express the feeling that they do not have a contract because there is no writing. One of the most common misconceptions is that a contract does not exist unless there is a written document which both parties have signed. Contracts are typically filled with so much legal jargon that it is a common belief that all of the filler is necessary to create a contract. A contract can be very, very simple. A contract may be created in the absence of any writing. Contracts are also created through a combination of conduct, written and oral statements. A contract may be as simple as “I will clean your house for $50.00 per week.” “Ok.” However, even if the language is simple and the contract short, the legal elements of a contract must exist.    

There are eight basic elements to a contract. Below is a description of each:

Offer

The genesis of a contract is generally an offer by one party to do something, to refrain from doing something, or to pay something. By making the offer, the offeror is expressing a willingness to enter into a contract. There are no specific words or language that must be used in an offer; it must simply be a statement that requires nothing more than acceptance.

Acceptance

Acceptance is one party’s agreement to the terms of the offer. Again the language is not set is stone, but the acceptance must be clear and definite, such as “I agree.” If the party includes any other conditions or new terms in its acceptance, then it is no longer an acceptance, but a counteroffer.

Consideration

Simply put, consideration is the benefit to one party versus the cost to the other party. Without consideration, there is no contract. Consideration is not valid consideration if it is something which a party was already bound to do or to pay.   

Intention to be legally bound

In order for a contract to be formed, the parties must intend to be legally bound. The intention may be borne out by the writing itself or the parties’ conduct.

Legal purpose

The subject matter of the contract must be a legal purpose. Contracts to perform or pay for illegal acts or to obtain illegal items are not enforceable.

Capacity

The parties to a contract must have the capacity to enter into a contract. Age, mental capacity and legal existence are all issues of capacity. When entering into a contract with a corporation, limited liability company or other legal entity, parties should confirm the following: first, the legal existence of the company; second, the authority to enter into the contract; and third, the authority of the signer to bind the company to the contract.

Mutual assent

Mutual assent is also called the “meeting of the minds.” Essentially, both parties must agree to the same thing in the contract.

Certainty of terms

It must be clear from the contract what promises each party is making. The terms must be sufficiently definite to allow for the contract to be enforced. Without some description of the terms and conditions of the parties, the Court will be unable to enforce the agreement against either party.    

One would rightly question whether they could properly form a contract including all eight elements without an extensive writing. The answer is yes. In many cases, you may have a writing and not even know it. The writings that form a contract can be one page which both parties sign, a combination of memos and other documents which are exchanged by the parties, e-mails sent back and forth between the parties, or a combination of these. In addition, the law requires that certain types of contracts must be in writing to be enforceable.

Even when the law does not require a writing, one should consider the practical reasons that a writing should exist. When the parties begin their relationship, there is a spirit of cooperation that exists that won’t likely be present once a dispute has arisen.

A written contract will help avoid the “he said/she said” problem that is central to many disputes. In addition, people remember events differently, time passes and memories fade. From a business perspective, turnover of employees means that those who might be important witnesses may not be available at the time of litigation. A writing that explicitly and succinctly states what each party has agreed to do will facilitate the resolution of a matter.

In the business context, particularly when extending credit to businesses or individuals, many facets should be put in writing: the terms and conditions, authorizations to purchase, credit limits, finance charges and attorneys’ fees, among others. The aim is to reduce the cost and time necessary for your company to collect a debt. A written credit application does just that.

So, does my contract need to be in writing? North Carolina law requires that ten types of contract must be in writing to be enforceable. This is the Statute of Frauds. In North Carolina, the following contracts must be in writing:

• A promise to pay a debt in which the statute of limitations has expired; N.C. Gen. Stat. §1-26.
• Contracts in which one party answers for the debt of another, such as a personal guaranty; N.C. Gen. Stat. §22-1.
• Contracts to sell or convey real property; N.C. Gen. Stat. §22-2.
• Contracts for lease of real property for three years or more; N.C. Gen. Stat. §22-2.
• A promise to revive a debt discharged in bankruptcy; N.C. Gen. Stat. §22-4.
• Commercial loans in excess of $50,000.00; N.C. Gen. Stat. §22-5.
• Contracts for personal property leases greater than $1,000.00; N.C. Gen. Stat. §25-2A-201.
• Contracts for the sale of goods which exceed $500.00; N.C. Gen. Stat. §25-2-201.
• Contracts which limit the right of a person to do business in North Carolina, such as a non-compete clause; N.C. Gen. Stat. §75-4.
• Contracts which, by their terms, cannot be performed within one year; Common law.

The Statute of Frauds does not require that a contract be complicated or lengthy, only that the essential terms be included. For real estate, the essential terms include the parties, purchase price, description of the land and signatures. For leases, the terms include the parties, description of the property, term of the lease and rent to be paid.

The Statute of Frauds also requires that modifications to the above types of contracts also be in writing. Finally, a contract must be signed by the party against which enforcement is sought. If the contract is one of the ten types listed above, the courts will not enforce the agreement if it lacks the signatures of the parties showing approval of the terms.

In conclusion, in best case scenarios, the parties will always put their agreement in writing. While this may not seem feasible, in the business context, it is strongly advised. Documents such as credit applications, purchase orders and the like can accomplish this task if well-crafted. 

This is where your attorney can help you be proactive. A little time and effort spent creating business forms tailored to your business will almost always save a considerable amount of time and expense later.

The foregoing is written for educational purposes only and should not be relied upon as legal advice. It should not be utilized as a substitute for the professional services of an attorney.  If legal advice is required, the services of a professional should be sought.  Please contact Kurtz Law, PLLC for assistance with legal matters.