Writing effective contracts in the electronic age
Dr. John Murray, Jr. -- Purchasing, 3/4/2004 2:00:00 AM
One of the fundamental misconceptions about the law of contracts is the tendency to treat the contract as if it is the paper on which the terms are written. The contract is the abstract legal relationship between the parties to the contract. The paper or papers on which the terms are written is only evidence of the contract, and it is not the only evidence. A contract may include what may be labeled "invisible terms" that are based on the usage of the trade, the prior dealings between the parties (past practices) and the conduct of the parties in carrying out the contract that lawyers call "course of performance."
Contracts are evidenced by purchase orders, acknowledgments, invoices and various other printed forms. Sometimes, there is no document evidencing the contract. Only certain types of contracts are required to be in writing under the law of contracts as found in each state.
Contracts for the sale of land have to be in writing and many states require a real estate agent's contract to be in writing. Contracts in contemplation of marriage such as pre-nuptial agreements must be evidenced by a writing. A contract where one party agrees to answer for the debt of another (a suretyship contract) has to be in writing and, in most states, a contract that cannot possibly be performed within one year from the time it is made must be in writing. The most common contract required to be in writing is the contract for the sale of goods where the price is $500 or more.
The "writing" requirement may now be satisfied by an electronic record in recognition that so much e-business is now done through the Internet or other electronic means. Messages on answering machines may suffice to evidence a contract. The modern term is "record" instead of "writing" because "record" can encompass both traditional forms of writing and electronic records. Modern statutes allowing electronic records, however, do not include wills, trusts or codicils which must still be evidenced by paper documents, appropriately signed.
Just because the contract is expressed in writing, however, does not solve a host of other problems. The written word requires interpretation. A writing evidencing a contract for equipment at a price of $100,000 may appear perfectly clear until one of the parties argues that the parties intended "dollars" to mean Canadian dollars. The language of a given trade may provide a meaning to a term or phrase that is quite different from its ordinary meaning. For example, a contract for a pound of platinum may seem clear until it is learned that there is a trade practice of measuring platinum in troy ounces (12 to the pound instead of 16).
In one famous case involving a contract for the sale of thousands of pounds of frozen chicken, one party argued that "chicken" meant only chicken used for broiling or frying and not stewing chicken. The court listened to experts on both sides testifying as to the meaning of "chicken." No court will ever know what was really in the minds of the parties to the contract. Decisions must be based on the evidence of what reasonable parties, under the circumstances, should have understood by the words used in making the contract.
Where the parties have signed a document that appears complete on its face, one of the parties may allege that they had also agreed to another matter that is not found in the signed document. Courts are then required to decide whether parties such as those before the court under all of the surrounding circumstances would or would certainly have naturally included the alleged agreement in the written document. It is bad practice to simply rely upon a separate oral agreement. Buyers should always insist on the inclusion of such matters in the writing itself. If it is in the writing, there will be no argument—and most importantly no lawsuit—as to whether it was part of the deal.
In addition to using evidence of trade usage to help interpret the meaning of written terms, trade usage as well as prior course of dealing becomes part of the contract. In a case involving the supply of containers, the buyer insisted that the seller breached the contract by not providing a sample container before producing the thousands ordered to allow the buyer to inspect the prototype. There was nothing in the written contract about such a sample. The buyer, however, produced evidence of a trade practice that, in such contracts, the sample was always provided for inspection before the mass production began. The court found the evidence of trade usage convincing. It was, therefore, a term of the contract though it was an "invisible term."
Where buyer and seller had formed several contracts in the past requiring monthly delivery of the products in lots of 150, they signed a new contract with the same terms. Deliveries under the new contract revealed shipments ranging from 95 to 170 units per month. When the buyer sued, the court received evidence of the prior dealings between the parties which revealed that the seller often shipped less or more than 150 units each month and the buyer never complained in the past. The court, therefore, found that when these parties stated "150 per month," they really did not mean 150. The past practice (course of dealing) became an invisible term of the new contract. Unless the new contract expressly negated such trade usage or prior dealings, it was automatically part of the new contract.
Careful drafting can keep you out of courtrooms where two things can happen and one of them is bad. Even if you win, you must still pay your lawyer and many other expenses. It is prudent to be careful to control the terms of the contract at the time they are controllable—before you sign on the dotted line.
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