Contracts: making them and breaching them

CONTRACTS

Part 1

Nothing in this blog post constitutes legal advice. It is posted merely for informational purposes only. For specific questions about a specific contract, or a breach thereof, the reader is encouraged to seek private legal counsel to whom all of the facts may be divulged. Nothing here gives rise to an attorney-client relationship or privilege.

Almost all Americans enter into contracts every day. When you swipe your credit card at the gas pump, when you click “I Agree” at the bottom of a terms of service page online, when you drive a car down the road, when you enter into a mortgage, when you buy a car, etc., etc. With almost anything in life there is a discernible contract involved. Simply put, a contract is a legally enforceable agreement between two or more parties. I’ll unpack that last sentence a bit. A legally enforceable agreement; meaning one cannot have a contract for something that is illegal. Between two or more parties: meaning one cannot make a contract with oneself, and that each party could be an individual, organization, corporation, public entity, or society writ large.

Contracts have three general components. 1. Offer, 2. Acceptance, 3. Consideration. Offer and acceptance are pretty straight forward, I offer to sell you a car, you accept. Consideration is more complicated and is the thing that is negotiated, and why the offer is made in the first place, i.e. money, goods, or services that equal the value of the car, or at least the value of the car to me, the seller, and you the buyer. Consideration, again, the thing exchanged between the contracting parties, can be almost anything, and it doesn't necessarily have to be commensurate with the general understanding of the value of the things exchanged. For example, I may have received a piece of sports memorabilia from the estate of my long lost uncle. It happens to be from a team or a sport that I don't particularly care for so I post the item for sale in an online forum. You may be a rabid fan of that particular team, so the item's value to you is astronomical and to me it is merely passing. I want to get the most money I can out of the deal, and since I have the item and you desperately want the item, I can hold out for a larger than market value price for the item because of its value to the niche market. When one sells a car the average person looks up the value, given the age and condition in Kelly Blue Book, but that can only give market prices depending on the particular market. If I'm selling a 1984 Ford Mustang in the general marketplace its value may be a few hundred dollars, but to enthusiasts for mid 80's Ford Mustangs its value may well be slightly, or significantly higher. All that is to say that consideration is fungible, and there may not be a set cost for any given good or service.

So long as the items, services, or money contracted for are legal, there is little one cannot do in a contract. In legal terms this is known as freedom of contract. At the outset, the law in America was to allow full freedom of contract (if that person happened to be a land owning white male). Over the centuries we, as a society, and as a legal profession, have put limits for what one can contract. For example, in many states there are usury laws, stating that a person may not be charge above a certain percentage in interest to borrow money. Of course organized crime has a foothold in illegal loan sharking where they charge huge interest rates to people who cannot get a loan by conventional means. Here enters the payday and title loan industry that charges huge percentages, but because itis determined to be a short term loan, the percentages are forgiven and there is a form of collateral, be it a paycheck, or a vehicle. Other contracts we might consider unconscionable if the terms are so onerous, and there is such unequal bargaining power, that the party agreeing has no or little ability to challenge the terms, these are also known as contracts of adhesion. It is very difficult to have a contract thrown out for being unconscionable. If, for example, you are trying to get a loan, and the terms are so bad as to be considered unconscionable, you are always free to walk away and seek a loan from another lender. So, given that there are almost always other service providers, lenders, or sellers, the individual has some rather significant bargaining power just by means of industrial competition. Those are only two of the hundreds of ways the ability to freely enter into any contract have been limited, and for the most part those limitations are intended to protect people against what one may be willing to do in desperate situations by allowing another to take advantage.

So aside from certain terms, conditions, or situations where the courts or legislatures have stepped in to limit full freedom of contract, one is almost able to enter into a contract for anything. As insignificant as agreeing to pay such an amount by signing your credit card receipt for a pack of gum, to getting a mortgage to purchase a home, all are contracts. Businesses, non-profit organizations, and public entities enter into contracts on a large scale all the time with each other and with individuals.

For individuals the most typical contracts that give rise to disputes are leases, contracts for the sale of a vehicle, and contracts with cell phone providers. Each of those, in a descending order, are contracts over which you have less and less of an ability to negotiate actual terms rather than just using your power as a consumer and walking away. The owner of a property for lease has an obvious need to get the space rented out and generating money, so a renter may ask for certain provisions allowing pets, or providing for more notice if the landlord needs to enter the premises, or anything you can get the landlord to agree to in the terms of the lease. For those concessions the landlord may impose a late fee if rent is late with less of a grace period, or that the tenant take on certain regular maintenance. While every term of the lease is technically up for negotiation, the landlord is still in a position of power in those negotiations, and probably has a greater ability to walk away from the transaction if asked for too much. It is very easy for either party to breach the terms of a lease without realizing it. You, as a renter, or as a property owner, should know the specific provisions of every lease entered into to keep track of any potential breach by the other party, and to know when you yourself may be in breach. Leases, like a number of contracts come with certain protections called “implied warranties” that apply to all of them, cannot be waived, and as the term “implied” implies, do not have to be expressly granted in the lease itself. Terminating a lease must also be done within the terms of that lease, and one party cannot unilaterally terminate a lease without owing some form of performance or damages to the other party (usually payment of the remainder of the term of the lease less any amount covered by re-letting the property). For more on leases please see a forth coming blog post on landlord/tenant relationships.

Contracts for the sale of vehicles are pretty straight forward, with little room to negotiate actual terms outside of the price for the vehicle, the interest rate paid to finance the vehicle, or what the warranty will cover. But those are still points of negotiation that will keep the contract out of the unconscionable realm.

Many people don’t understand the contracts that they have with their cell phone provider, and that is simply because many people don’t read them beforehand. And, when upgrading to a new phone, or upgrading the operating system on a current phone, a consumer will simply click on the “I Agree” button, and continue with the installation. No one reads updates in terms of service, but everyone is expected to do so. By clicking “I Agree” the consumer is agreeing that they have read, understand, and agree to those terms. An argument that tries to negate that will simply fail unless there is a change in the law that no one expects to be on the horizon.

So, a person finds himself in a contract and discovers that the other party is in breach of a term of that agreement, usually payment of consideration or performance of whatever act is called for, but it could be anything. What’s the next step? If your answer was to file a case in either small claims court or a court of general jurisdiction, you are probably wrong. Most consumer contracts have mandatory arbitration agreements that are stuck somewhere around the 27th paragraph on page 13, in those arbitration agreements the consumer is agreeing to be bound by the decision of an arbitrator that is paid by the company against which the dispute is brought, and has signed away his rights to seek redress in the courts. If such is the case, then there is very little that can be done. As it stands in the United States, and in particular, the State of Indiana, mandatory arbitration provisions are upheld. For aggrieved parties other than consumers, you may have the ability to go straight to the courthouse, but if it is a lease, or any other contract where a person or entity has a contractual right to remedy the breach beforehand, the aggrieved party will first have to provide notice of the breach and give the other party a chance to remedy that breach.

In closing out this first part on contracts I want to point out that once there is a breach of a contract penalties for the breach of that contract are legally allowed to begin to accrue. Missing a single mortgage payment is a breach of that contract, but there are federal laws and regulations that allow homeowners a bit of leeway in the enforcement of that breach. In the specific case of a mortgage, once the case is in foreclosure, there are federal programs available for homeowners that should definitely be taken advantage of, but no one is automatically entitled to a mortgage modification, or some other debt relief or loss mitigation plan because of an inability to pay. The same goes for leases. Failure to pay will always be a valid cause for eviction in the State of Indiana, if there are other problems with the condition of the leased property, the means to go about redressing those problems is in the court, not by self-help (by self-help I mean withholding rent).

And finally, if there has been no breach, but one of the parties sues the other for a breach, expect that case to be dismissed and for some form of sanction for wasting the court’s time. 

Nothing in this blog post constitutes legal advice. It is posted merely for informational purposes only. For specific questions about a specific contract, or a breach thereof, the reader is encouraged to seek private legal counsel to whom all of the facts may be divulged. Nothing here gives rise to an attorney-client relationship or privilege. The author is licensed to practice in the state of Indiana. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, client or otherwise, should act or refrain from acting on the basis of any content included herein.