| A CONTRACT DEFINED
Q. What is a contract?
A. A contract consists of voluntary promises between competent
parties to do, or not to do,
something, which the law will enforce. These are binding promises, which
may be oral or
written. Depending on the situation, a contract could obligate someone
even if he or she wants
to call the deal off before receiving anything from the other side. The
details of the contract
who, how, what, how much, how many, when, etc. are called its provisions
or terms.
In order for a promise to qualify as a contract, it has to be supported
by the exchange of
something of value between the participants or parties. This something
is called consideration.
Consideration is most often money, but can be some other bargained-for
benefit or detriment
(as explained more fully below). The final qualification for a contract
is that the subject of the
promise (including the consideration) may not be illegal.
Suppose that a friend agrees to buy your car for $1,000. That is the promise.
You benefit
by getting the cash. Your friend benefits by getting the car. Since it
is your car, the sale is
legal, and you and your friend have a contract.
It is common for the word "contract" to be used as a verb meaning
"to enter into a
contract." We also speak of contractual relationships to refer to
the whole of sometimes
complex relationships, which may comprise one or many contracts.
Q. May anyone enter into a contract?
A. No. In order to make an enforceable contact, people have to
be able to understand what
they're doing. That requires both maturity and mental capacity. Without
both of these, one
party could be at a disadvantage in the bargaining process, which could
invalidate the
contract.
Q. What determines enough maturity to make a contract?
A. In this sense, maturity is defined as a certain age a person
reaches - regardless of whether
he or she is in fact "mature." State laws permit persons to
make contracts if they have reached
the age of majority (the end of being a minor), which is usually age eighteen.
Q. Does that mean minors may not make a contract?
A. No, minors may make contracts. But courts may choose not to
enforce some of them. The
law presumes that minors need to be protected from their lack of maturity,
and won't allow,
for example, a Porsche salesman to exploit their naivete by enforcing
a signed sales contract
whose real implications a young person is unlikely to have comprehended.
Sometimes this
results in minors receiving benefits (such as goods or services) and not
having to pay for them,
though they would have to return any goods still in their possession.
This would apply even to
minors who are emancipated - living entirely on their own - who get involved
in contractual
relationships, as well as to a minor who lives at home but is unsupervised
long enough to get
into a contractual fix.
Parents who give their children access to home computers hooked up to
the Internet
should consider the situation that may arise if a child uses their credit
card information online.
This includes information that may be stored in the computer or at a website
that recognizes
your home computer and, of course, doesn't know that a minor is the actual
"shopper." From
the point of view of the website owner, the parent is the customer, and
you may have a hard
time avoiding liability for a contract (such as for the purchase of merchandise)
that your
children have entered into using your Internet identity.
Also, a court may require a minor or the minor's parents to pay the fair
market value (not
necessarily the contract price) for what courts call necessaries (what
you would likely call
"necessities"). The definition of a "necessary" depends
entirely on the person and the situation.
It probably will always include food and probably will never include CD's,
Nintendo
cartridges or Porsches. Minors who reach full age and do not disavow their
contracts may then
have to comply with all their terms. In some states, courts may require
a minor to pay the fair
value of goods or services purchased under a contract that minor has disavowed.
Q. When does mental capacity invalidate a contract?
A. While the age test for legal maturity is easy to determine,
the standards for determining
mental capacity are remarkably complex and differ widely from one state
to another. One
common test is whether people have the capacity to understand what they
were doing and to
appreciate its effects when they made the deal. Another approach is evaluating
whether people
can control themselves regardless of their understanding.
Q. May an intoxicated person get out of a contract?
A. Very often someone who is "under the influence"
can get out of a contract. The courts don't
like to let a voluntarily intoxicated person revoke a contract with innocent
parties this way -
but if someone acts like a drunk, the other party probably wasn't so innocent.
On the other hand, if someone doesn't appear to be intoxicated, he or
she probably will
have to follow the terms of the contract. The key in this area may be
a person's medical
history. Someone who can show a history of alcohol abuse, blackouts, and
the like, may be
able to void the contract, regardless of his or her appearance when the
contract is made. This
is true especially if the other party involved knows about the prior medical
history. The
reasoning goes back to mental capacity, and whether a person is able to
exercise self-control.
Capacity
We've discussed the fundamental requirements for competence to make
a contract - maturity
and mental capacity. Of course, it should go without saying that there's
an even more
fundamental requirement: that both parties be people. In the case
of a corporation or other
legal entity, which the law considers a "person," this could
be an issue. A problem in the
formation or status of the entity could cause it to cease existing
legally, thus making it
impossible to enter into a contract. In that case, however, the individuals
who signed the
contract on behalf of the legally nonexistent entity could be personally
liable for fulfilling the
contract.
Historically, the law has had other criteria for capacity. Slaves,
married women and
convicts were at one time not considered capable of entering into
contracts in most states.
Even today, certain American Indians are regarded as "wards"
of the U.S. government for
many purposes, and their contract-law status is similar to that of
minors. |
Q. Do I need a lawyer to make a contract?
A. If you satisfy the maturity and mental capacity requirements,
you don't need anyone else
(besides the other party). But it probably is a good idea to see a lawyer
before you sign
complex contracts, such as business deals or contracts involving large
amounts of money.
Q. Must contracts be in writing?
A. Many types of contracts don't have to be written to be enforceable.
An example is
purchasing an item in a retail store. You pay money in exchange for an
item that the store
warrants (by implication, as discussed later) will perform a certain function.
Your receipt is
proof of the contract. And, in fact, with some important exceptions (discussed
below) virtually
any transaction agreed to orally could be enforceable.
As with a written contract, the existence of an oral contract must be
proved before the
courts will enforce it. But as you can imagine, an oral contract can be
very hard to prove - you
seldom have it on video. An oral contract is usually proved by showing
that outside
circumstances would lead a reasonable observer to conclude that a contract
most likely
existed. Even then, there is always the problem of what the terms of the
oral contract were.
The courts typically look only to unrefuted (uncontested) testimony to
help them "fill in the
blanks," and are hesitant to add words or terms to any written document.
Q. Are there any advantages to putting a contract in writing?
A. Although most states recognize and enforce oral contracts,
the safest practice is to put any
substantial agreement in writing. Get any promise from a salesperson or
an agent in writing,
especially if there already is a written contract - even an order form,
printed receipt, or a
handwritten "letter of agreement" or "understanding"
-- covering any part of the same deal.
Otherwise that order form or other paper probably will be regarded by
the law as a complete
statement of all understandings between the parties. Anything not in that
written contract
would be deemed not to be part of the deal.
Writing down the terms of a good-faith agreement is the best way to ensure
that all parties
are aware of their rights and duties - even if no party intends to lie
about the provisions of the
agreement.
Q. Does clicking a "YES" or "I AGREE" box
on a computer screen at the bottom of a screen full of contractual terms
constitute a written contract?
A. The overwhelming consensus of the courts is that it does.
This applies when the "click
box" is part of a software package that you may download from the
Internet or even off
discs that you purchase. A few years ago courts agreed that even without
click boxes, the
terms of a software license (see below) were an enforceable written contract,
even though
you could not have read the terms before you bought the package. This
was called a
"shrink wrap" license, since plastic shrink wrap prevents store
browsers from opening up
boxes containing software. Now most software comes with a click box that
also requires
you to affirmatively agree to the terms of the license by clicking. The
software won't load
unless you do so. Similar click boxes are used for registration at certain
websites and for
other Internet benefits that businesses may offer. They are usually enforceable.
Law Evolves to Meet E-Commerce Demands State and federal law is adapting
to the new world on electronic commerce. All 50 states have passed laws
relating to electronic commerce, and there is a new Uniform Electronic
Transactions Act that some states have adopted.
In addition, most consumer protection laws apply online as well, often
supplemented
in the states by laws aimed specifically at Web merchants. These often
require the web
merchant to prominently post the legal name of the business, its return
and refund policy, and
the street address where they conduct business. Sometimes procedures for
resolving
complaints must be included as well.
Other laws deal with protection of privacy online, including the collection
and use of
personal information for marketing purposes. Special guidelines apply
to selling stock over
the Web.
Any company maintaining a website would be well advised to check with
their lawyers
about the rules and laws that apply—and to be aware that the legal
framework is highly likely
to continue to evolve.
Q. Which contracts have to be in writing?
A. Under statutes (laws passed by legislatures) in most states
called "statutes of frauds," the
courts will enforce certain contracts only if they are in writing and
are signed by the parties
who are going to be obligated to fulfill them. In most states, these contracts
include:
• any promise to be responsible for someone else's debts--often
called a surety contract or a
guaranty; one example would be an agreement by parents to guarantee payment
of a loan
made by a bank to their child;
• any promise, made with consideration, to marry (though this rule
has been eliminated in
many states);
• any promise that the parties cannot possibly fulfill within one
year from when they made
the promise;
• any promise involving the change of ownership of land or interests
in land such as leases;
• any promise for the sale of goods worth more than $500 or lease
of goods worth more than
$1,000;
• any promise to bequeath property (give it after death);
• any promise to sell stocks and bonds.
Some states have additional requirements for written contracts. These
statutes are
designed to prevent fraudulent claims in areas where it is uniquely difficult
to prove that oral
contracts have been made, or where important policies are at stake, such
as the dependability
of real estate ownership rights.
The last few years have seen a trend in many states away from concrete
list above and
toward allowing claims that traditionally had to be based on written contracts
to be maintained
even without a writing. So if you are facing a serious financial issue
and fear that the statutes
of frauds could prevent you from recovering, a lawyer may be able to help
you.
Q. What are the rules regarding signatures?
A. A signature can be handwritten, but a stamped, photocopied,
or engraved signature is often
valid as well, as are signatures written by electronic pens. Even a simple
mark or other
indication of a name may be enough. Furthermore, if there is sufficient
evidence of
trustworthiness, many states now permit e-mail from a specific account
to be regarded as
"signed." Other states have set out specific requirements for
electronic mail signatures, and a
worldwide standard may eventually be established. (You can find out the
latest developments
in this area at http://www.abanet.org/scitech/ec/isc/dsg-tutorial.html.)
What matters is whether
the signature is authorized and intended to authenticate a writing, that
is, indicate the signer's
execution (completion and acceptance) of it. That means that you can authorize
someone else
to sign for you as well. But the least risky and most persuasive evidence
of assent is your own
handwritten signature.
E-Signature Bill Becomes Law
A new federal law gives online signatures the same legal validity
as a signature in pen and ink
for most—but not all purposes. The bill, which is expected to
further e-commerce, will permit
consumers to sign a mortgage or insurance contract online, as well
as perform other tasks,
such as opening a brokerage account.
The law assures that a contact shall not be denied legal status simply
because its
signature is electronic, but a safeguard is that most contracts and
documents must be capable
of being reproduced for later reference if they are to be enforceable.
However, no one is obligated to accept electronic signatures, and
certain kinds of
documents are specifically exempted from the law. These include wills,
codicils and
testamentary trusts, adoptions, divorces or other family law matters,
notices of foreclosures or
evictions from one’s primary residence, and cancellation of
health or life insurance benefits. |
Q. Do contracts have to be notarized by a notary public?
A. In general, no. Notary publics or notaries, once important
officials who were specially
authorized to draw up contracts and transcribe official proceedings, act
now mostly to
administer oaths and to authenticate documents by attesting or certifying
that a signature is
genuine. Many commercial contracts, such as promissory notes or loan contracts,
are routinely
notarized with the notary's signature and seal to ensure that they are
authentic, even where this
is not strictly required. Many technical documents required by law, such
as certificates of
incorporation, must be notarized if they are going to be recorded in a
local or state filing
office.
In Consideration
The doctrine that consideration is a central element of a contract
is of relatively recent origin.
Until the last few centuries, elaborate formality rather than consideration
was the chief
requirement to form a contract. The necessary formalities were a sufficient
signed writing, a
seal or other attestation of authenticity, and delivery to whomever
would have the rights under
the contract. A seal could be an impression on wax or some other surface,
bearing the mark of
a notary public or other official. The vestiges of the seal remain
in some contracts, where the
initials "L.S." (for the Latin locus sigilli, "place
of the seal"), or simply the word "seal" is
printed to represent symbolically the authentication of the contract's
execution. Even today,
traditional Jewish wedding contracts are made on these formal bases:
a writing, an attestation
by witnesses, and delivery. |
Q. Do both sides have to give consideration?
A. Yes. There's a crucial principle in contract law called mutuality
of obligations. It means
that both sides have to be committed to giving up something. If either
party reserves an
unqualified right to bail out, that person's promise is not enforceable.
Q. What is an offer?
A. Offer and acceptance are the fundamental parts of a contract,
once capacity is established.
An offer is a communication by an offeror of a present intention to enter
a contract. (The
offeror is the person making the offer.) It is not simply an invitation
to bargain or negotiate.
For the communication to be effective, the offeree (the one who is receiving
the offer) must
receive it. In a contract to buy and sell, for an offer to be valid, all
of the following must be
clear:
• Who is the offeree?
• What is the subject matter of the offer?
• How many of the subject matter does the offer involve (quantity)?
• How much (price)?
Let's say you told your friend, "I'll sell you my mauve-colored Yugo
for one thousand
dollars." Your friend is the offeree, and the car is the subject
matter. Describing the car as a
mauve Yugo makes your friend reasonably sure that both of you are talking
about the same
car (and only one of them). Finally, the price is $1,000. It's a perfectly
good offer.
Q. Is an advertisement an offer?
A. No. Courts usually consider advertisements something short
of an offer. They are an
"expression of intent to sell" or an invitation to bargain.
The section on consumer law later in
this section discusses this further.
Give and Take
A contract can only come about through the bargaining process, which
may take many forms.
This article discusses the definitions of consideration, offer, and
acceptance. All the principles
discussed here will have to be present, in some form, in any contract. |
Q. Does an offer stay open indefinitely?
A. Not unless the offeree has an option, an irrevocable offer
for which the offeree bargains
(discussed below). Otherwise, an offer ends when:
• the time to accept is up - either a "reasonable" amount
of time or the deadline stated in the
offer;
• the offeror cancels the offer;
• the offeree rejects the offer;
• the offeree dies or is incapacitated.
An offer is also closed, even if the offeree has an option, if:
• a change in the law makes the contract illegal;
• something destroys the subject matter of the contract (see below).
Q. What is an option contract?
A. An option is an agreement, made for consideration, to keep
an offer open for a certain
period. For example, in return for fifty-dollar consideration today, you
might agree to give
your friend until next Friday to accept your offer to sell her your Yugo
for $1,000. Now you
have an option contract, and you may not sell the car to someone else
- even for
$1,200without breaching that contract. Selling an option puts a limit
on your ability to revoke
an offer, a limit that the optionee (the option-holder) bargains for with
you.
Q. What constitutes the acceptance of an offer?
A. Acceptance is the offeree's voluntary, communicated agreement
or assent to the terms and
conditions of the offer. Assent is some act or promise of agreement. An
easy example of an
assent might be your friend saying, "I agree to buy your mauve Yugo
for one thousand
dollars."
Generally, a valid acceptance requires that every term agreed to be the
same as in the
offer. Thus, if the offer requires acceptance by mail, you must accept
by mail for the offer to
be effective. If there's no such requirement, you just have to communicate
your acceptance by
some reasonable means (not by carrier pigeon or smoke signals but by telephone,
mail, or
maybe facsimile). On the other hand, an assent that is not quite so specific
but is crystal-clear
would also suffice - such as, in the Yugo example, saying, "It's
a deal. I'll pick it up
tomorrow." Once again, the standard is whether a reasonable observer
would think there was
an assent.
Q. Can silence make up an acceptance?
A. In most cases, the answer is no. It isn't fair to allow someone
to impose a contract on
someone else. Yet there are circumstances where failure to respond may
have a contractual
effect. Past dealings between the parties, for example, can create a situation
in which silence
constitutes acceptance. Suppose a fire insurance company, according to
past practice to which
you have assented, sends you a renewal policy (which is in effect a new
contract for
insurance) and bills you for the premium. If you kept the policy but later
refused to pay the
premium, you would be liable for the premium. This works to everyone's
benefit: If your
house burned down after the original insurance policy had expired but
before you had paid the
renewal premium, you obviously would want the policy still to be effective.
And the insurer is
protected from your deciding not to pay the premium only after you know
what claims you
might have.
Q. Can acts make up an acceptance?
A. Yes. Not only words, but any conduct that would lead a reasonable
observer to believe that
the offeree had accepted the offer qualifies as an acceptance. As discussed
above, the act of
clicking "YES" or "I ACCEPT" on a computer screen
can constitute acceptance of an offer.
Another example: Suppose you say, "John, I will pay you fifty dollars
to clean my house on
Sunday at nine o'clock a.m." If John shows up at nine o'clock a.m.
on Sunday and begins
cleaning, he adequately shows acceptance (assuming you're home or you
otherwise would
know he showed up).
To take another example, you don't normally have to pay for goods shipped
to you that
you didn't order (a later section will discuss this in more detail). But
if you were a retailer and
you put them on display in your store and sold them, you would have accepted
the offer to buy
them from the wholesaler and you would be obligated to pay the invoice
price. You otherwise
would only have to allow them to be taken back at no cost to you. Sometimes
this is called an
implied (as opposed to an express) contract. Either one is a genuine contract.
The Reasonable Person
Throughout this and any other law book, the word "reasonable"
will appear many times. Very
often you'll see references to the "reasonable man" or the
"reasonable person." Why is the law
so preoccupied with this mythical being?
The answer is that no contract can possibly predict the infinite number
of disputes that
might arise under it. Similarly, no set of laws regulating liability
for personal or property
injury can possibly foresee the countless ways human beings and their
property can harm other
people or property. Since the law can't provide for every possibility,
it has evolved the
standard of the "reasonable" person to furnish some uniform
standards and to guide the courts.
Through the fiction of the "reasonable person," the law
creates a standard that the judge
or jury may apply to each set of circumstances. It is a standard that
reflects community values,
rather than the judgment of the people involved in the actual case.
Thus a court might decide
whether an oral contract was formed by asking whether a "reasonable
person" would conclude from people's actions that one did exist.
Or the court might decide an automobile accident case by asking what
a "reasonable person" might have done in a particular traffic
or hazard situation. |
Q. When is the acceptance effective?
A. The contract usually is in effect as soon as the offeree transmits
or communicates the
acceptance - unless the offeror has specified that the acceptance must
be received before it is
effective, or before an option expires (as discussed previously). In these
situations, there's no
contract until the offeror receives the answer, and in the way specified,
if any.
Q. What is the "meeting of the minds"?
A. This term describes an offer that the offeree accepts in all
its critical or material terms. This
phrase also implies that both parties understand (or reasonably should
understand) these terms
in the same way. The "meeting of the minds" is a useful phrase
to help determine in your own
mind whether you ever got past the bargaining stage of negotiations.
Q. Is an "agreement to agree" a contract?
A. Generally not, because it suggests that important terms are
still missing. Rarely will a court
"supply" those terms itself. An agreement to agree is another
way of saying that there has not
yet been a meeting of the minds, although the parties would like there
to be.
Q. Can a joke be the basis for a contract?
A. It depends on whether a reasonable observer would know it's
a joke, and on whether the
"acceptance" was adequate. In our Yugo example, you probably
couldn't get out of the
contract by saying, "How could you think I'd sell this for $1,000?
I meant it as a joke!" On the
other hand, if someone sued you because you "backed out" on
your "promise" to sell her
France for fifteen dollars, the joke would be on her - no one reasonably
could have thought
you were serious.
Q. What is a condition?
A. People often use the word "condition" to mean one
of the terms of a contract. A more
precise definition is that a condition is an event that has to occur if
the contract is to be
performed. In our earlier example, your friend might have said, "I'll
buy your mauve Yugo for
one thousand dollars only if you can deliver it to me by tonight."
At this point, you are still
negotiating; there is no contract. But if you reply, "It's a deal
I'll be there tonight," you have a
contract, with a condition of delivery by tonight. If you fail to deliver
the car by tonight, you
have breached the contract. (Breaches of contract and what you can do
about them are covered later.)
Conditions can be after the fact, too. You may make the payment for decorating
a room in
your house conditional on your complete satisfaction. If the contract
didn't state that, though,
it would only guarantee you normally acceptable work.
Neither party is required to agree to a condition that comes up during
the bargaining, and
the one who wants it may have to pay extra for it. When a condition is
put into negotiations,
you have to decide whether it's worth it to you, considering the risks
and costs of not having it.
In this respect, a condition is the same as any other term, such as price
or quantity.
The most common conditions include those in real estate sales contracts
requiring that the
sale be conditional on the buyers obtaining financing or selling their
present home, or on an
acceptable home inspection report.
Q. How much consideration, or payment, must there be for a contract
to be valid?
A. There is no minimum amount. A price is only how people agree
to value something, so
there's no absolute standard of whether a price is fair or reasonable.
The courts presume that
people will only make deals that they consider worthwhile. So if you want
to sell your car to
your friend for one dollar instead of $1,000, you can do it. (But don't
sell it for $1,000 and just
report a one dollar sale to the state to avoid paying the full sales tax.
Many states have systems
in place to check for just such abuses.) An exception may be found if
the consideration given
is so out of line with what is being received that it would "shock
the conscience of the court."
The idea of unconscionability will be discussed later in this section.
Q. Does consideration have to be money?
A. No. Consideration is any promise, act, or transfer of value
that induces a party to enter a
contract. Consideration is a bargained-for benefit or advantage, or a
bargained-for detriment
or disadvantage. A benefit might be receiving $10. First dibs on Super
Bowl tickets might be
an advantage. A disadvantage may involve promising not to do something,
such as a promise
not to sue someone. For these purposes, even quitting smoking, done with
the reasonable
expectation of some reward or benefit from someone else, is a detriment:
Even though it's
good for your health, it took effort that you otherwise would not have
made.
For example, you could agree to give your car to your friend in exchange
for his promise
that he'll stop letting his schnauzer out late at night. Your friend is
giving up what is
presumably his right to let his dog out any time he wants. In return,
you are giving up your car.
Other types of valid considerations include a promise to compromise an
existing dispute.
Q. Does the consideration have to be a new obligation?
A. Yes, because someone who is already obligated to do something
hasn't suffered any
detriment: Suppose you agree to have a contractor paint your house this
Thursday for $500.
Before starting, though, his workers strike for higher wages. He tells
you on Wednesday night
that he settled the strike but now the job will cost $650. You need the
house painted before
you leave for the North Pole on Friday, and there's no time to hire another
contractor, so you
agree to the new price. But the new agreement is not enforceable by him.
He already had to
paint your house for $500. He should have figured the possible increased
costs into the
original price. You didn't get anything of benefit from the modified contract,
since you already
had his promise to paint the house. Therefore, you only owe $500.
Q. Does that mean I can't renegotiate a contract?
A. No, it only means that no one can force you to renegotiate
by taking advantage of an
existing agreement. In the previous example, you might have decided that
the painter deserved
more money than you had originally bargained for. More realistically,
you might have agreed
that he would do some work not included in the original contract. You
could want to use the
contractor later, or you might feel that he does the best job at any price.
(Considerations like
these allow many sports stars to renegotiate their contracts.)
Keep in mind that whenever you get involved in a deal, you are taking
a risk that it might
be less beneficial for you than you planned when you agreed to the contract
terms. The other
party doesn't have to ensure your profit, unless the two of you included
that in your bargain.
Q. Is a promise to make a gift a contract?
A. Not if it truly is only a promise to make a gift, because
a gift lacks the two-sided obligation
discussed above. But if the person promising the gift is asking for anything
in return, even by
implication, a contract may be formed. The key, again, is consideration.
Q. What if someone makes a promise without consideration, but
I rely on it?
A. Remember that consideration may be a disadvantage to one party.
From that idea, the law
has developed the concept of promissory reliance - that a contract may
be formed if one party
reasonably relies on the other's promise. That means that he does more
than get his heart set
on it. He has to do something he wouldn't have done, or fail to do something
he would have
done, but for the promise. If that reliance causes some loss, he may have
an enforceable
contract.
Suppose that rich Uncle Murray loves your kids. On previous occasions
he has asked you
to buy them expensive presents and has reimbursed you for them. This past
summer, Uncle
Murray told you he would like you to build a swimming pool for the kids,
and send him the
bill. You did so, but moody Uncle Murray changed his mind. Now he refuses
to pay for the
pool, and claims you can't enforce a promise to make a gift. The pool,
however, is no longer
considered a gift. You acted to your detriment in reasonable reliance
on his promise, by taking
on the duty to pay for a swimming pool you would not normally have built.
Uncle Murray has
to pay if you prove that he induced you to build the pool, especially
if this understanding was
consistent with many previous gifts. Remember, however, that you still
have to live with your
Uncle Murray.
Q. May someone else make a contract on my behalf?
A. Yes, but only with your permission. The law refers to such
an arrangement as agency. We
couldn't do business without it. For example, when you buy a car, you
bargain and finally cut
a deal with the salesperson. But she doesn't own the car she's selling
you. She might not even
have a car. She is an agent, someone with the authority to bind someone
else - in this case, the
car dealership - by contract. The law refers to that someone else as the
principal.
To take another common example, real-estate brokers typically act as your
agent when
you sell a home. As the principal, you generally establish the terms or
range of terms he is
authorized to accept. (For example, "I'll sell if they will come
up to one hundred thousand
dollars and agree to close the sale by July.") Then your agent goes
into negotiations on your
behalf.
As long as agents do not exceed the authority granted them by their principals,
contracts
they make bind their principals as if the principals had made the contracts
themselves. If
something went wrong with the contract, you would sue the principal -
not the agent - if you
couldn't resolve the dispute in a friendly manner. An agent normally does
not have any
personal obligation.
While acting on behalf of principals, agents are required to put their
own interests after
those of the principal. Therefore, they may not personally profit beyond
what the principal and
agent have agreed to in their agency contract. That means they cannot
take advantage of any
opportunity which, under the terms of the agency, is meant to be exploited
for the principal.
Q. What happens when an agent does exceed the authority granted
by a principal?
A. That depends on the circumstances. Suppose an agent exceeds
her authority, but the person
she's dealing with reasonably doesn't understand that she's exceeding
it. If the principal knew
(or reasonably should have known) that the agent has exceeded her authority
in similar
circumstances, but has done nothing about it, the principal may be bound
by the contract
negotiated by the agent. On the other hand, if the principal is not aware
of the agent's actions
exceeding her authority, they will only be enforceable against the principal
if it was reasonable
for the other person to believe the agent was acting within her authority.
For example, suppose the teenage boy wearing a service station uniform
who fills your
gas tank and checks your oil - and who appears to be an agent, to some
limited degree, of the
service station - offers to sell you the whole service station in trade
for the sleek mauve Yugo
you are driving. It's not reasonable for you to assume he has that power
when common sense
tells you he can only sell you his boss's gasoline and oil for a fixed
price.
In contrast, if an insurance agent wrote you an insurance policy from
his company that
exceeded the policy amount he was authorized to write, but the insurer
never told you this,
you would be acting reasonably to assume he was authorized, and you probably
could collect
on a claim above his limit.
Agents Who Exceed Their Authority
On occasion, while making a contract, an agent might exceed the authority
granted by the
principal. An example might involve an automobile salesperson who
signs a contract on
behalf of a car dealer which, without the dealer's authority, gives
the customer a warranty for
40,000 extra miles. In that case, the dealer might very well be bound
by the contract. |
Q. May I transfer my duties under a contract?
A. Yes, unless the contract prohibits such a transfer. The law
refers to a transfer of duties or
responsibilities as a delegation. If, however, someone contracts with
you because of a special
skill or talent only you have, you may not be able to transfer your duty.
Such cases are quite
rare. There are arguably no car mechanics who are so good at tuning an
engine that they may
not delegate someone else to do it for them unless they specifically promise
to do it
themselves. On the other hand, if you hire well-known entertainers to
perform at your
wedding, they may not send other entertainers (no matter how talented)
as substitutes without
your permission.
Q. May I delegate my rights?
A. A delegation or transfer of rights, called an assignment,
is more flexible than a transfer of
duties. For example, you may wish to transfer the right to receive money
from a buyer for
something you have sold. Generally, a contract right is yours to do as
you wish with it, as long
as you didn't agree in the contract not to assign the right. You can sell
it or give it away,
though most states require you to put an assignment in writing, especially
if it is a gift.
There are exceptions to the rule that assignments may be made freely.
If an assignment
would substantially increase the risk, or materially change the duty of
the other party to the
contract, the contract may not be assignable, even if its terms contain
no explicit agreement to
the contrary. Such an assignment would be regarded as unfairly upsetting
the expectations the
other party had when he or she entered the contract.
For example, suppose you made a contract for fire insurance on a garage
for your Yugo.
Then a notorious convicted arsonist and insurance cheat contacted you
upon release from
prison and asked you to sell the garage and assign your rights under the
garage's fire insurance
policy to the arsonist. You would probably be in for a disappointment,
even if the insurance
policy didn't prohibit assignment. Since the insurer made its decision
to insure in part based
on your solid citizenship, insuring the arsonist would greatly increase
its burden by taking on a
risk it never anticipated.
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