Month: April 2016

The SignatureConfirm service empowers you to write and send electronic copies of contracts to clients and partners – among others – and to receive validated e-signatures indicating their assent.

We do not provide pre-written contracts to users, nor are we involved in contract negotiations.  As such, it is important that users learn the basic mechanics of contract formation so as to minimize potential conflict between the contracting parties and to help ensure that contracts sent through the Service are valid and enforceable under the law.

Contract Formation – The Fundamentals

In every state, the mechanics of contract formation are based on the same basic elements: in order for a valid contract to be formed, there must be mutual assent to the terms of the agreement, and the contracting parties must each incur some kind of bargained-for detriment (in legal circles, known as consideration) as a consequence.

As this terminology may be a bit unfamiliar and confusing at first glance, let’s break these terms down into simpler component parts.

Mutual assent is an umbrella term that covers the process of offer and acceptance between contracting parties.  In the offer and acceptance process, the ultimate goal is for the contracting parties to reach an “agreement of the minds.”  This back-and-forth is the fundamental building block of contract formation.

Offer

An offer is put forth by the offeror.  An offer must indicate the willingness of the offeror to bind himself or herself to the terms of the contract.

Acceptance

Acceptance of the offer is made by the offeree.  Similarly, an acceptance must indicate the willingness of the offeree to bind himself or herself to the terms of the contract.  In a standard bilateral contract, the offeree must also communicate their acceptance to the offeror.

Intention and Communicating Acceptance

As stated above, acceptance requires an expressed intention – a willingness to bind oneself to the terms of the contract – and this can sometimes present an issue in oral contracts and other types of contracts where it is not entirely clear that the offeree has expressed a clear willingness or intention to accept the terms.

By using SignatureConfirm to send contracts, however, clarity of intent is maximized.  Offerees are sent a signature code which enables them to read the contract and sign with their digital signature, thus giving an objective indication of their intent to bind themselves to the contract.  The acceptance is also communicated expressly.

Mirror Image Rules and Consistent Terms

Offer and acceptance is often seen as an organic, back-and-forth process.  The first and most important piece of this puzzle is understanding the common law mirror image rule, which applies in California and New York, among other states, and applies primarily to non-merchant sellers.

For merchant sellers, the Uniform Commercial Code (UCC) usually applies in a sale of goods, with a different set of rules and expectations.

Under the mirror image rule, for an acceptance to be valid, it must indicate a willingness to accept the terms of the offer exactly.  If any of the terms differ, then the acceptance will be considered a counter-offer instead.

Suppose, for example, that a man wants to sell his old television set to an online buyer.  The two parties are discussing this potential sale over a series of emails.  The seller offers the television set for $150.  Perhaps the buyer compliments the seller and shows a clear interest in purchasing the television set, using language that favors the sale, but with one important change: the buyer will purchase the set for $100.  Ultimately, the buyer’s response was not an acceptance, but was a counter-offer.  The seller is not required to deliver the television set to the buyer for $100.  The seller may, however, agree to the counter-offer, and in doing so, would therefore end the back-and-forth by accepting this counter-offer.

Worth noting is that only relevant terms need to be matched under the mirror image rule.  Missing terms may be supplied by a court in certain limited circumstances, as well.  In the above example, if the buyer had accepted the pricing and delivery terms, but indicated that for the sale to go through the seller would have to say “hello” when they exchanged the goods, this modification term would likely be considered irrelevant.  The buyer’s reply would therefore be an acceptance, and not a counter-offer.

Consideration is a negotiated detriment that is being promised as part of the contractual exchange.  Consideration can be quite varied, but it must be a reasonable, bargained-for detriment.  In simpler terms, proper mutual consideration is the exchange of something of value.

Consideration can be a simple promise of monetary payment (promising to give $1,000 in exchange for a person’s services, for example) or a promise to perform services for someone in exchange for an item of value, or something complicated like agreeing not to sue someone (which you might be legally entitled to do) in exchange for a monetary settlement.

Crucially, consideration must be given by every party in a contract.  If there is no consideration, then the contract will not be valid.  Gifts are therefore not proper consideration.  Whether you use SignatureConfirm to send your contract or not, you cannot create a valid contract in which only one party suffers a detriment.

Invalid Contracts

Keep in mind that there are several factors that will render your contract invalid if they are proven.  They are legal incapacity, illegality, and duress, misrepresentation, and undue influence.

Legal Incapacity

A contract is invalid if one of the contracting parties did not have the legal capacity to agree to its terms.  This incapacity may be a consequence of age, mental disability/illness, or intoxication at the time of acceptance.

A minor is legally enabled to enter a contract, but is uniquely allowed to void their contract unilaterally.  This can make it especially risky to contract with a minor.

Mental incapacity does not mean any mental disability or issue.  A contracting party may have a mental disability or illness that does not necessarily affect their capacity to contract.  Basically, a party is not legally capable of entering a contract if their mental state renders them incapable of understanding the nature, meaning, and effect of the contract and its terms.

Whether a party’s intoxication at the time of contract formation affected their capacity to contract depends on the level of intoxication and the circumstances at the time.

Illegality

A contract is invalid if the purpose of the contract is illegal.  For example, if two parties contract to share the spoils of a robbery, and one of the parties refuses to share the spoils, the contract cannot be enforced against the violating party.

Duress, Misrepresentation, Undue Influence

Manipulating or otherwise inducing a party to enter into a contract through unreasonable, unethical means (for example, abusing one’s position as a nursing home employee to unduly influence seniors at the home to change the beneficiaries of their estate plan), will make the contract invalid.

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Though the law varies between jurisdictions, certain fundamental rules apply to contracts in all states.  Understanding the mechanics of contract formation helps to minimize conflict between parties and exposes the parties to less risk further down the process.

The Statute of Frauds – The Importance of Written Contracts

In most jurisdictions of the United States, oral contracts are valid and enforceable under the law.  As a general rule, contracts do not have to be put into writing to be rendered legally enforceable.  Despite their broad legality, however, oral contracts are quite often less-than-ideal arrangements, plagued by an ambiguity that is simply not present in written contracts featuring explicit, detailed provisions.  The ambiguity intrinsic to oral contracts can cause serious conflict in the long-term as expectations shift without a written reference point.

Suppose, for example, that two parties enter into an oral contract for the purchase of an old television for $300.  Perhaps the two contracting parties met and discussed the terms at a neighborhood barbecue.  They shook hands and verbally agreed to the deal.  Now, suppose that the buyer refuses to purchase the television for $300 a week later.  She will only purchase the television if the seller lets it go for $100.  Of course, the seller may have incurred his own damages at this point – the seller may have gone out and already purchased a new television on the basis that he had contracted to sell his old television for $300.

The seller most likely has a breach of contract claim, but because the contract at-issue here is an oral contract, recovering his damages will be somewhat more difficult.  The succeed in his claim against the buyer, the seller will have to prove that the oral contract was, in fact, for $300.  This can be difficult given the clear lack of evidence.

Even though oral contracts are generally enforceable, they are not always legally valid and enforceable.  The law of your jurisdiction may impose a written requirement in certain circumstances, thanks in no small part to the intrinsic ambiguity and evidentiary difficulties presented by oral contracts.  This written requirement is commonly governed by a set of regulations known as the Statute of Frauds, and the laws are different from state to state.  In the state of California, for example, the statute of frauds is described in California Civil Code section 1624, which details specific circumstances in which a written contract is necessary.

As oral contracts suffer from ambiguity, expectation shifts, and a lack of clear evidence, they present ample opportunity to parties attempting to engage in fraudulent activity.  Though the statute of frauds in your jurisdiction may appear to be somewhat limiting – even costly, at first – its purpose is to protect contracting parties from fraudulent activity that might otherwise result in serious financial damages with no proper recourse.  It is therefore beneficial for contracting parties to understand the statute of frauds in their jurisdiction, and its ramifications.

Circumstances Governed by the Statute of Frauds

Though the application of the statute of frauds may differ substantially from state-to-state, there are certain common circumstances that are broadly covered between jurisdictions.

These include circumstances in which:

• the provisions do not allow for completion of the contract within one full year;

Suppose that a homeowner hires a carpenter to remodel his house.  The homeowner wants the carpenter to take his time carefully designing, constructing, and outfitting the remodeled home, and as such, demands that the remodeling take place over eighteen months (so that the carpenter is forced to be careful and thoughtful in doing the work).  As the terms of the contract can only be completed in excess of a year, the contract will most likely be governed by the statute of frauds in their jurisdiction and will have to be in writing.

• the contract accounts for a sale of goods worth in excess of some minimum agreed upon value;

In California, for example, the sale of goods worth in excess of $500 is covered by the statute of frauds.  The minimum value is quite low in many states, so be careful not to accidentally sidestep the statute of frauds.

• the contract involves the purchase, transfer, or lease of real property;

Transactions involving real estate/real property tend to be significant in dollar terms, or significant in terms of duration.  Further, many real estate transactions involve non-expert parties.  The application of the statute of frauds in such cases is meant not only to prevent fraudulent activity, but also to help minimize conflict between the parties and to help clarify the terms of the agreement.

• the contract involves one party taking on the debts of another;

Statute of Frauds requirements

Written contracts are easier to enforce, and the process of writing a contract is useful in that it clarifies the essential terms of the contract for both parties.  As such, the use of written contracts is smart policy, regardless of whether the statute of frauds is applicable.  Still, the statute of frauds is a good starting point for understanding the essential requirements of a proper written contract.

In order to satisfy the statute of frauds in California, an agreement must be:

1. a) written, of course;
2. b) identify the contracting parties and the subject matter, such as the furniture in an agreement with a carpenter to custom build a table;
3. c) express the material terms and conditions, or put simply, the relevant terms of the agreement, such as cost, quality, and time expectations; and
4. d) be signed by both parties (with certain exceptions for the sale of goods).

Ultimately, a contract should be written in clear, explicit terms, leaving little room for interpretation.  Both parties should be well-appraised of their obligations under the contract, and should evidence their agreement to the terms with their signatures.

What happens if you fail to comply with the Statute of Frauds?

It is worth noting that a failure to comply with the statute of frauds will not necessarily void the contract.  The statute of frauds, when it applies, simply makes contracts voidable.

Voidable?

A voidable contract is one that is not void unless one of the contracting parties decides that they do not want to continue under the terms of the existing agreement.  This gives the parties a bit of flexibility when both parties are happy with their arrangement, even if the contract does not satisfy the statute of frauds.

For example, suppose that two parties orally contract for a sale and delivery of goods worth in excess of $10,000.  Technically speaking, the statute of frauds applies to this transaction.  The parties should have entered into a written contract.  If both parties are satisfied with their arrangement, however, then they need not void the contract.  In fact, moving forward with the oral contract as-is may be a better decision than voiding the contract from a commercial perspective.

What if one of the parties would like to void the contract?

If one of the parties would like to void the contract (assuming that the contract is voidable under the statute of frauds), they are free to do so, unless they have already accepted partial performance of the contract.

Suppose that one of the two contracting parties in our previous example are unsatisfied.  The receiving party for the goods decides to void the contract.  If the receiving party has already accepted and paid for some of the goods, however, then they may be unable to enforce the statute of frauds.  This partial performance exception is designed to prevent certain contracting parties from manipulating the statute of frauds voidability loophole for financial benefit.

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Written contracts are unequivocally superior to oral contracts, in both a practical and legal sense.  Entering into a written contract helps to ensure that the terms of the agreement are clear, explicit, and well-understood by the contracting parties, and sets firm expectations moving forward.

From a legal standpoint, entering into a proper written contract will avoid running afoul of the statute of frauds, and will guarantee that solid evidence is available to the courts (as to agreed upon terms) in the event of a dispute.