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Contract - A Binding Agreement

A contract is a promissory agreement between two or more parties which is legally binding. "Promissory" means a promise to do something. For example, when you buy a new car, the dealer agrees to sell you the car, and you agree to pay for it with monthly installments. The dealer offers to sell you the car, and you accept according to the details spelled out in the written contract of purchase.

"Legally binding" means that if one of the parties to a contract fails to do what was promised, he can be sued and forced by the court either to perform his part of the bargain, or to pay the other party's damages caused by his breach of the contract.

In order to have a binding contract, the terms of the agreement have to be reasonably clear, and there has to be a meeting of the minds of both sides to the contract as to what each is supposed to do.

Oral contracts can be legally binding, and fully enforced by the courts. In theory, they have just as much power and validity as written contracts.

The catch, however, is that it is difficult to prove the exact terms of an oral contract. For that reason, all contractual agreements of any significance should be reduced to writing and signed by both parties.

I have seen a few startling examples of binding oral contracts during my career as a lawyer. The most memorable one involved an agreement between two large private companies involving millions of dollars. Although the terms of the contract had been discussed in a number of complicated letters and writings between the two companies, the final acceptance of the deal was done orally.

When the one company violated the contract, the other company suffered several million dollars in damages, and filed a lawsuit to recover its losses. Even though the final acceptance was oral, the court upheld the contract and forced the other company to pay several million dollars in damages. Luckily for the injured party, the other company admitted that they had orally accepted the contract.

Most of us would not be so lucky. Therefore, the golden rule of contracts is - "if it is important enough to cost money, it is important enough to put into writing."

Many of the disputes that arise over contracts have to do with the purchaser's failure to read or understand the terms of the contract. The law presumes that if you sign a contract, you have read it and understand it. Therefore, make sure you carefully read any contract, and get answers to your questions before you sign it.

Most of the time, the person you are dealing with when you purchase something like a car or a house is primarily interested in completing the sale. Their jobs and salaries (often in the form of commissions) depend on completing the sale. If you later have a problem with the terms of the contract or the quality of the goods you purchased, you will probably not be working with the same person who sold you the item.

So another golden rule - make sure that everything that was promised to you during the sales negotiations has been included in the final documents. If you are buying a truck and the sales person promises to install a CD/radio, don't forget to check the paperwork before you sign it. That CD that you bargained for may not be included on the paperwork. If it isn't, you will have a very difficult time later proving that it should be included in the contract.

The same thing goes for the sale of a house. If the house is sold to you on condition that the roof be replaced, you should be absolutely sure that this is mentioned in the papers that you sign.

Since many major purchases like a car or house involve negotiations over many hours or days, you should keep a list of everything that is being promised to you. That way, when you go to sign the final papers, you can compare your list to the actual contract you are signing and make sure all of the things that you bargained for are mentioned.

Many people assume that if anything goes wrong with the item they purchased, they can simply withhold payments. In most cases, that is not true. For example, in car and house transactions, the paperwork that you sign is often immediately "assigned" (transferred) to another company. That company then has the right to collect your monthly payments even if the company that sold you the item didn't fulfill their part of the bargain.

Make sure that if the contract refers to any "attachments" or "exhibits", they are actually physically attached to the contract that you sign, and to the copy you receive. Any such attachments or exhibits should be signed or initialed by both you and the seller.

Be very cautious about being a "co-signer" for a relative or friend. When you co-sign someone else's contract, you are personally guaranteeing payment of that contract. If your friend or relative gets into financial trouble, and fails to make payments, you can be personally sued by the seller to make all of the remaining payments - even if you never see the item which was purchased.

When it comes to contracts, "let the buyer - or signer - beware".