Wednesday, November 19, 2008

When a Contract isn't a Contract.

How do you know when you have or need a contract? Let’s repeat what a contract is. A contract is a promise for a promise. In order to have your contract enforced in a court of law you need one more element--Valuable consideration. That’s promise to do something, not do something, give money or other goods, or some act that lets a judge know it was meant to be contractual relationship and not a sale or a gift.

What does that actually mean and why does it matter? Because sometimes people think they have a contract when they don’t and pay lawyers to pursue or defend claims they have no hope of winning. Knowing the elements of a contract can help you know if you need more in your documents. You never need less, so we wont go there:>

Lets do a hypo: Susie has an older pony she wants to place in a good home. Danny says he would like the pony and promises Susie he will give it back if he ever changes his mind. Susie agrees and gives Danny the pony. Danny decides he no longer likes pony and sells it to Cathy. Can Susie go after Danny on a contract claim? It depends.

Susie made no promise to Danny. She gave him a pony. The pony is valuable consideration and Danny made a promise to Susie, but what did Susie promise Danny? Will a judge know what to do if Susie goes to court? She gave Danny a pony and he offered to give it back if he no longer wanted it, but Susie did not condition her release of the pony based on Danny’s promise. She did not say “I promise you this pony if you promise to give it back. There may or may not be a contract and there is no written evidence for a judge to decide who meant what and why Susie gave Danny the pony. In general, people do not give valuable things away if they are not meant as gifts.

So off they go to court paying lawyers to convince the judge each side is right. Danny says he never made that promise and he pony was a gift. He argues he only took the pony because of its value for resale and if she meant to keep ownership, Susie should have paid board in the amount of $500 a month just like all the other pony owners in his barn do. He asks the judge why a reasonable business person would take on an expense if he could not later profit from it?

Susie argues that it was not a gift and that they had a contract in which for the valuable consideration of the use of a well trained pony Danny promised to pay all expenses and give the pony back if he no longer wanted it. She claims the use of the pony was the bargain he desired and not the eventual sales price he might one day realize. On order for Susie to be in the same position she would be if the contract had been carried out, she demands the pony back. Except Danny does not have the pony. Cathy does. What should the judge do?

This is a pretty common place scenario that happens all the time, but legally, it’s a nightmare. The poor judge knows nothing about horses or ponies, he has to apply the laws of gifts, contracts, property and equity to decide who gets what and how and why and he must base his decision pretty much on who he believes more. It all comes down to credibility and what a reasonable person might have done. That’s where it all breaks down because “reasonable” and “what horse folks do” is not always a train that runs on the same tracks.

It is not often that reasonable people give things away or sell them and still want them back. If you have a car and you no longer want it you sell it or give it away. If you do not sell it or give it away you have just loaned it to someone and judges have no problem figuring that out. A loaned car must be returned or paid for. If you borrow a car you pay for parking, the gas it used or the tires it needed. If it gets impounded and racks up a huge bill the true owner would not be expected to pay for that. The true owner just wants the car back or the money for the car. Open and shut case.

But cars have titles. The true owner of a car is the person who holds title in their name. In most states horses do not have titles. The true owner is most likely the person in possession of the animal and paying for its upkeep. Unless, of course, you have a real written contract to bring to court. And a good contract at that.

Lets change the facts just a little. Susie gives Danny the pony and makes him sign a piece of paper that says “I, Danny, promise to give pony back to Susie if I no longer want it.” That’s better, but its still not a contract and it still leads to Danny demanding board for said pony when Susie demands pony back. Nobody rides for free, right? Except Danny.

Now go back to the elements of the contract and try once again. “I Susie, for the valuable consideration of the use of this well trained pony, let Danny have pony until he no longer wants it at which time he promises to give it back to me” That’s a contract. That tells the judge the condition upon which the promises were made and what value Danny gets out of his promise to give it back.

Do a few words really make that much difference in a contract case? You bet they do. My case books are not 1 foot thick for no reason. The best way to get out of a contractual obligation is to argue that no contract exists! If contracts have certain elements then they must be in there or it’s up to a judge to guess who was thinking what. This generally makes their lives harder as a simple well written contract at the time the deal was made would have kept this case off her calendar and been settled quickly.

And lets go one step further, you already have a pen and that piece of paper, why not add who is responsible for all expenses and what remedies will be agreed upon if the other party breaches? Sure, a well written contract might scare off a few potential people, but isn’t that a good thing if they plan on not keeping their word? And yes, it may cost a few hundred bucks if you have to pay a lawyer to write contract, but you know how much we will charge you to go to court over that free pony??? No, you don’t want to know.

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