Contracts & Contract Law — Basics everyone should know

Contracts & Contract Law…

Contracts are an elemental part of American life. Virtually every commercial transaction includes the elements of a contract. By definition, a contract is an “agreement that is enforceable in a court of law.” In order to reach an agreement, one party (offeror) makes an offer (proposal) to another party (offeree) to enter into a legal agreement. If the offeree consents to the terms of the offer, an acceptance then occurs and an agreement, (bargain) comes into being. For example, if one person says to another, “I’ll sell you my car for $400,” (the offer), and the other person replies, “I’ll buy it,” (the acceptance), a contract is formed the very moment the words of acceptance are spoken. When the offeree responds with a different offer instead of accepting the original one made, it is called a “counteroffer,” and when the offeree declines the offer, it is known as a “rejection.” A “revocation” occurs when the offeror has a change of mind and cancels the offer before the offeree accepts it.

Your home, your credit cards, loans for autos, all are contracts. Each time you use your charge card, you are bound by the written agreement (contract) with your charge card carrier. All of your transactions with your bank are governed by the original contract you signed with the bank when you opened the account, checking, savings, and, of course, loans.

Invitations to negotiate or invitations to deal are inherent in relatively simple transactions. For example, in advertising, placing price tags on the goods, and catalogs that show both pricing and photos of the merchandise may force the merchant to sell for the advertised price whether it is correct or not. If it has an incorrect price and no disclaimer, the seller, with a savvy buyer, will usually agree to sell for the mismarked price. Once the deal is made, the approval and confirmation of a contract is a ratification.

An “express contract,” is one where the parties state the terms of the contract either orally or in writing. An “implied contract,” is one in which the terms of the contract are not stated by the parties.

There are two types of implied contracts. First of all, a “contract implied in fact,” is a contract that arises from the conduct of the parties rather than from their express statements. For example, when you board a bus and put money in the coin slot without saying anything to the driver, and the driver says nothing to you, no express contract exists because the terms were not stated. However, a contract is implied by the fact that you paid your money, and the bus driver has agreed to take you to a destination along the bus’ particular route. Secondly, a court-imposed obligation is called a “contract implied in law” or “quasi contract.” The term “quasi” means “as if,” or “almost as if it were.” A person who has been unjustly enriched at the expense of another is required to make “restitution,” that is, restore the other person to his or her original position prior to a loss. “Unjust enrichment” occurs when one person retains money, property, or other benefit that in equity and justice belongs to another. Most often, to prevent unjust enrichment, the court will impose a contract on the parties when one actually did not exist or when an express contract cannot be enforced.

Contracts are classified according to the number of promises made by the parties. A “bilateral contract,” is a contract containing two promises, one made by each party to the contract. One party makes a promise in exchange for the other party’s promise. In other words, the acceptance is the offeree’s promise, an event that is completed during a specific period of time.

A “unilateral contract,” is the offeree’s promise for performance and contains only one promise in exchange for an act. For example, a person is offering a $10,000 reward for the return of a lost show dog. The only way the offer can be accepted is by the actual return of the show dog to the offeror. If that happens, the offer is “accepted.” In a bilateral contract, consideration (what is paid, whether money or a benefit) is found in the promises of each party, whereas in a unilateral contract, consideration is found in the promise of the offeror and the act of the offeree.

An “unenforceable contract,” is one that is valid but cannot be enforced for some legal reason. An oral contract for the sale of real property is a prime example of an unenforceable contract. This type of contract is required to be in writing in order to be enforceable. Contracts are often held to be invalid if one of the parties is not of legal age, termed “infancy” or “minority.” Infancy and minority are terms noting the party is a protected minor. Early contracts law, based on the premise of a “meeting of the minds,” viewed minors as mindless and, therefore, unable to contract. Modern contract law, based on the manifestation of assent, gives minors the power to contract and the power to disaffirm a contract, even after the other party has fully performed. Early contract law established the age of protection for minority as under 21, but most modern statutes have changed the law to 18. The adulthood term in law related to age is “majority.”

“Validity” may also be lacking related to competency or mental capacity. The lack of legal competency is known as the “lack of capacity.” Therefore, when infants reach the age of majority (adulthood), they may ratify—that is, approve or confirm—earlier contracts made during their minority and thus are bound by them.

Contracts that are completed, e.g., finished are said to be “executed.” Those that have come into existence, but are not yet carried out are “executory” (still in process). For example, when an individual states to another, “I’ll sell you my car for $500,” and the other replies, “I’ll purchase it from you,” the contract has come into existence but is in its executory stage. When the car is delivered and the money paid, the contract is “executed.”

The elements of the offer include:

* offeror’s promise
* consideration for the offeror’s promise or in other words, the price for the offeror’s promise
* offeror’s promise must be made to bring on the consideration

The promiser is the person making the promise. The offeror is the person making the offer. The promiser does not become an offeror until all three elements of the offer are satisfied.

Consideration is the “price,” or dollar amount (not limited to dollars and cents) that the offeror expects to receive for his or her promise.

The price can be anything that the law recognizes as consideration. Every contract has two considerations. In a bilateral contract, the first consideration is the “price” or the offeror’s promise, and the second consideration is the “price,” in the acceptance for the offeree’s promise.

If the contract is unilateral, the first consideration is the “price,” in the offer for the offeror’s promise and second consideration is the “price,” in the acceptance for the offeror’s performance.

Contracting for Services…

Much discussion is available on the options of contracting or working as a statutory employee in the medical and legal field for all kinds of services. The basic difference is that if you are a contractor or subcontractor, you are paid the gross amount earned. You, in turn, must calculate your expenses and net out your income. The net amount requires self-employment tax, usually reported on Schedule C of your 1040 tax form. If you are a statutory employee, your employer withholds Social Security taxes. Your employer pays one-half and you pay one-half, which is deducted from each check. You get a 1099 form from your employer each year showing the gross amount earned and the taxes withheld (usually none), unless you are a statutory employee; in that case, FICA is paid one half by the employer and one half by you. If you are not a statutory employee, the full FICA self-employment tax is due from you and is paid on a quarterly basis to the IRS.

If you are a “regular employee” then you receive either an hourly rate or a monthly salary, which is fully taxable (both Social Security, Federal and State taxes are withheld). The earnings are reported on a W-2 form supplied by your employer.

If you find yourself in the relatively pleasant position of having more work than you can handle, you might hire or subcontract someone to help you with the work. The IRS has rules relating to what constitutes an “independent contractor.” They are as follows:

Employment Status Checklist…

* INSTRUCTIONS
An Independent Contractor does the job his or her own way with few, if any, instructions as to the details or methods of the work.

* TRAINING
An Independent Contractor uses his or her own methods and thus need not receive training from the purchaser of those serves.

* INTEGRATION
An Independent Contractor’s services are usually separated from the client’s business and are not integrated or merged into it.

* SERVES RENDERED PERSONALLY
A true Independent Contractor is able to assign another to do the job in his or her place and need not perform serves personally.

* HIRING, SUPERVISING & PAYING HELPER
Independent Contractors select, hire, pay and supervise any helpers used and are responsible for the results of the helpers’ labor.

* CONTINUING RELATIONSHIP
An Independent Contractor is usually hired to do one job of limited or indefinite duration and has no expectations of continuing work.

* SET HOURS OF WORK
A true Independent Contractor is the master of his or her own time and works the days and hours he or she chooses.

* FULL TIME REQUIRED
A true Independent Contractor cannot be required to devote full time services to one firm exclusively.

* LOCATION WHERE SERVICES PERFORMED
Independent Contractors ordinarily work where they choose. The workplace may be away from the client’s premises.

* ORDER OR SEQUENCE SET
A true Independent Contractor is concerned only with the finished product and sets his or her own order or sequence of work.

* ORAL OR WRITTEN REPORTS
An Independent Contractor is usually not required to submit regular oral or written reports about the work in progress.

* PAYMENT BY THE HOUR, WEEK OR MONTH
An Independent Contractor is normally paid by the job, either a negotiated flat rate or upon submission of a bid.

* PAYMENT OF BUSINESS AND TRAVEL EXPENSE
Independent Contractors normally pay all of their own business and travel expenses without reimbursement.

* FURNISHING TOOLS AND EQUIPMENT
An Independent Contractor ordinarily provides all of the tools and equipment necessary to complete the job.

* SIGNIFICANT INVESTMENT
True Independent Contractors usually have a substantial financial investment in their independent business.

* REALIZE PROFIT OR LOSS
An Independent Contractor can either realize a profit or suffer a loss depending on the management of expenses and revenues.

* WORKING FOR MORE THAN ON FIRM AT A TIME
An Independent Contractor often works for more than one client or firm at the same time and is not subject to a non-competition rule.

* MAKING SERVICE AVAILABLE TO THE PUBLIC
An Independent Contractor may advertise, carry business cards, hang out a shingle, or hold a separate business license.

* RIGHT TO DISCHARGE WITHOUT LIABILITY
If the work meets the contract terms, and Independent Contractor cannot be fired without liability for breach or contract.

* RIGHT TO QUIT WITHOUT LIABILITY
An Independent Contractor is legally responsible for job completions and on quitting, becomes liable for breach of contract.

The HomeBizBook available from Meditec provides the details on how to interpret a contract, negotiate the best terms, and protect yourself.