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4 Common Misconceptions about Contracts

June 19, 2013

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Many of my clients are sophisticated business people and professionals. Despite counting many medical doctors and PHDs on my client roster, I still hear some legal theories that are flat out wrong.

I’ll examine some common ones that apply to contracts:

1. A contract needs to be in writing.

For most contracts, this is just plain wrong. There are limited exceptions- contracts governed by the Statute of Frauds- the most common example being the sale of real estate.

Here is what we learn the on the first day of Contracts class in Law School: A contract is a legally binding agreement requiring offer and acceptance and consideration. No need to write that down.

Of course, writing a contract clears up much of the confusion that surrounds a verbal exchange that would qualify as a binding contract. That’s why there is almost no litigation about written contracts.

Ok, that’s totally false, most litigation involves contract interpretation. However, a clearly written document helps clear up many of the disputes that surround contract litigation. Imagine if every contract dispute started with- What do you say? And, then, what did she say? We’d never get out of court.

Conclusion: Writing a contract is highly advisable, but not absolutely necessary (except in some cases e.g. sales of estate).

2. An unsigned contract is as good as no contract at all.

One could certainly make this argument is court and in some cases it might prevail. However, if one negotiates a contract, acts like it has been signed (e.g. performs some or all of the duties assumed under the contract), the counterparty to the contract is going to have an excellent argument that the contract should be treated as if it is signed.

Conclusion: Sign your contracts and make sure your counterparty does, but don’t think that a missing signature will change the facts on the ground.

3. It is illegal to break a contract.

It isn’t illegal to break a contract. Anyone can break (or breach in lawyer-speak) a contract and deal with the consequences.

Let’s say I sign a contract to supply the local bar (Moe’s) with 10 keg of beer for the weekend. On Thursday, another bar comes to me and offers me twice the price for the beer. I can sell the beer to the second bar and deal with the breach of my supply agreement to the first bar.

Moe’s will probably sue me for damages and I’ll have to deal with that. I’m not saying this is a smart move or good business. But, it isn’t illegal. The law does not prohibit it.

Conclusion: You can legally break contracts, but you’ll have to deal with the consequences.

4. A contract is all the legal protection one needs.

That would be great. But, here’s the thing: enforcing a contract is tough business. First, you have to file a lawsuit, serve the defendant and win in court. Then, the defendant has to have the money to pay you. All this time, you’ve spent money on attorneys and this process can take years.

You’ve heard the expression: “That contract wasn’t worth the paper it was written on”. That can happen.

Conclusion: By all means use a contract, but don’t fail to consider the other risks that a contract simply can’t cover.

Avrum Aaron, Esq., is the COO of Legal Outsourcing Partners, LLC.

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From → Contracts, Law

3 Comments
  1. BZ Niderberg permalink

    As you certainly are aware, Avrum, SOME contracts do indeed need to be in writing in order to be enforceable, such as those governed by the Statute of Frauds in whatever form it exists in the subject jurisdiction, as well as modifications of existing agreements with suitably worded merger clauses.

  2. Yakof (Tom) permalink

    I like your summary, Avrum.

    In addition to protection in case of a disagreement, contracts prevent most disagreements from ever arising.

    Reason: contracts set ground rules for the parties’ relationship before problems arise. That’s why a contract is invaluable in any transaction that involves future dealings: landlord-tenant, employer-employee, even buyer-seller (for example, you’re delivering 10 kegs of beer tomorrow — or even if you’re delivering them and getting paid right now, you want to know or what will happen if the beer goes flat before the bar sells it all, etc.).

    True, ground rules won’t stop disagreements if the other party is acting in bad faith; in those cases, having a contract won’t keep the peace and you’ll have to litigate, though of course, if properly drafted, the contract will still serve you well in the litigation. But in the vast majority of transactions the contract will preserve the peace because the parties are acting in good faith and will follow the ground rules they set to preserve their business relationship, whereas if they had not made a contract they’d find themselves in a non-productive argument that may ruin the relationship going forward.

    What’s more, negotiating the contract can even help prevent problems in those rare cases where the other guy is a genuine crook. How? There’s no better way of finding out how someone does business than to see how he behaves in contract negotiations. His response to your attempt to work out ground rules will help you figure out how cooperative he is and teach you a lot about him — sometimes enough to let you decide you don’t want to do business with him at all — before you’re stuck in a bad deal!

    Good luck to all of us!

    Yakov Greiff
    Admitted to the Bar in New York, California and Israel

  3. Roman Law (Napoleonic Code) requires all legally enforceable obligations to be in writing, notarized and entered in the Public Register. Verbal agreements and/or statements are not admissible unless substantiated by tangible verified evidence. I much prefer Anglo-Saxon based law which is much fairer whereas Roman Law lends itself to fraudulent manipulation by the highest bidder as is the case in Mexico. Mexico has an excellent legal code but very little justice for the common man.

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