Steve Harms

Monday, March 17, 2014

Contracts: every business relationship requires enforceable contracts!


A contract generally consists of an offer, acceptance, and consideration. In business, the offer typically consists of a purchase order, and the acceptance is the shipping of the goods or the providing of services named in the purchase order. The consideration is the purchase price. Offer, acceptance, and consideration can be implied depending on the circumstances.

With some important exceptions (such as sales of real property), contracts do not have to be in writing. Although the UCC provides that all contracts over $1,000 should be in writing, UCC 2-201(1), MCL 440.2201(1), there is a notable exception to this rule. Where a seller of goods ships to a buyer and the buyer receives and retains those goods, there is an implication that a contract exists. If the buyer fails to timely return the goods, no writing is needed to imply that the buyer intended to contract for the purchase price of the goods. UCC 2-201(3)(c), MCL 440.2201(3)(c). The UCC also provides for substitutes for a writing or exceptions to the writing requirement where there is a written confirmation between merchants, UCC 2-201(2), MCL 440.2201(2); specially manufactured goods, UCC 2-201(3)(a), MCL 440.2201(3)(a); an agreement admitted in court, UCC 2-201(3)(b), MCL 440.2201(3)(b); and partially performed agreements, UCC 2-201(3)(c), MCL 440.2201(3)(c).

The UCC does not require price terms, delivery terms, or other details for the sale of goods. Past experience of the parties and other statutory default provisions will help to determine most of the terms of a contract, including a purchase price. Therefore, it is fairly easy under the UCC to establish the existence of a contract without having to prove specifically the elements of offer, acceptance, and consideration.

The contract has to be entered into before the goods are delivered or services are provided. For that reason, the purchase order and the documentation before the sale, including the credit application, become the contract between the parties. The credit application is an often overlooked but important document. Credit applications often set forth extremely important terms such as interest rates to be paid should the account become delinquent, personal guaranties to be invoked if the account becomes delinquent, the parties’ agreement concerning full settlement checks, etc. For a sample credit application, see .

A common misconception among business people is that an invoice is a contract. An invoice may contain a description of the goods, shipping dates, and price terms, but it is not a contract. The invoice is prepared and mailed out after the goods are shipped and after the contract is entered into. For this reason, the terms printed on the back of invoices (most companies insist on filling up the back of their invoices with various terms in small print: immediate inspection, immediate return of any defective goods, a return authorization number on any defective goods, and so forth) are generally not enforceable. See Power Press Sales Co v MSI Battle Creek Stamping, 238 Mich App 173, 183, 604 NW2d 772 (1999). Thus, for example, if a customer voluntarily agrees to pay interest on a delinquent account based on the terms set forth in the invoice, that is all well and good, but if the customer later decides not to pay the interest, it is likely that a court will not enforce the interest terms if they are only in the invoice.

The courts will generally enforce contracts that are within the parties’ expectations. If there is a one-sided (unilateral) mistake, the contract is enforceable. However, if there is a mutual mistake, the court will generally not enforce it. For example, if both parties thought that the steel was Grade A worth $57.00 per pound and it turned out, by mistake of both parties, that the steel was Grade B, then the court will not enforce the contract.

Sometimes contracts are purely unilateral. In other words, acceptance of the contract occurs through performance. For example, if someone offers to pay $500 if the contracting party drives a car to California, acceptance occurs when the car is driven to California.

Consideration is difficult to measure and courts often will not bother to measure it at all. If there is the existence of any legal consideration, the contract will most likely be enforced. Thus, if the buyer overpays for a product, a court will not question the overpayment unless there was actual fraud or a mutual mistake.

1 comment:

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