When Will a Promise or Statement Be Considered a Binding Contract?
Business owners and entrepreneurs make promises and statements every day. Often, they don't realize how others might interpret them. A verbal statement that sounds like an offer can be legally construed as one, saddling you with contractual obligations under contract law you may not have intended.
If you're a small business owner, you should be especially aware of the difference between an empty statement and a legally actionable one. This understanding is crucial in business law. The following information will help you better understand how your statements -- if accepted, even silently -- can become legally binding contracts.
Have You Made an Offer?
When meeting with business partners, employees, or prospective employees in an interview setting, always be careful before making statements that could be considered an offer or a binding agreement. Remember, a legal contract could result.
For example, telling a business owner that you can sell your widgets for $50 apiece after learning the competition sells a similar product for $60 could be considered an offer, especially if they responded in the affirmative, i.e., "That sounds great." This scenario creates an enforceable contract. Under the contract terms, you have agreed to provide widgets for $50 each.
Let's assume the owner canceled a meeting with another supplier only to discover that you can't sell the widgets for less than $65. A potential breach of contract could result if the business owner argues that you offered to sell the product for $50 each.
When a Statement or Promise Becomes a Contract: Overview
Suppose one party, the offeror, makes a statement or a promise that causes another party to rely on that statement in such a way that they are financially injured by that reliance. In that case, a court will enforce the statement or promise as if it were a valid contract. The court does not need to find an agreement or consideration to enforce the promise as a contract. However, it is difficult to prove a statement if there is no written agreement or written contract.
Providing a remedy against a person who has broken their promise appeals to most people. However, the "detrimental reliance" of the promisee (the person to whom the promise is made) on the promise must be reasonable and foreseeable by the promisor (the person who made the promise) at the time of the statement.
If the promisee took action that the promisor could not have anticipated, the promisor is not required to live up to the promise. This might include a noncompete clause that wasn't properly communicated.
Simple Statement or Contractual Offer? An Illustration
Suppose John says he will pay Doris $3,000 to care for his children for the summer. Doris cancels her less-lucrative summer employment in favor of John's offer. At the last minute, John takes in a foreign exchange student who will do the work for free. Doris may be able to receive damages from John for the lost earnings she suffered by relying on his promise.
But, if John says he will pay Doris $3,000 to take care of his children for the summer and Doris drops her health insurance coverage because she assumes John will cover her, her assumption is not based on a promise made by John. Therefore, Doris can't get damages from John for her increased medical expenses. This is an important disclaimer to keep in mind for promises and oral contracts.
Statute of Frauds
While the above information deals with verbal agreements, it's important to remember that some agreements must be in writing to be enforceable. This is because of a common law doctrine called the Statute of Frauds. It applies across the United States because all states have made the Statute of Frauds a part of their state law.
Generally, the following types of contracts must be in writing to be enforceable:
- Real estate sales
- Modifications to a real estate or mortgage contract
- Leases for real estate for longer than one year
- An agreement to pay someone else's debts
- Contracts that take more than one year to complete
- Contracts for more than $500 (check state law as the amount varies)
Get Legal Help Understanding What Can Be Construed as a Contract
Sometimes, the line between a casual promise and a contractual offer is much finer than we realize. Business owners must be careful what they propose to employees, partners, and others since even an innocent statement can become a contract. Contact a local contracts attorney who can provide legal advice on agreements and other contract-related questions.
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