Contracts can be an excellent way to protect your company and employees, but they can also hurt you. To avoid stressful and costly claims, make sure that you understand these key aspects of contract law.
Capacity to Enter the Contract
Not terribly common, but something to remember if you are working with unique populations of employees. Minors and the mentally incapacitated cannot enter contracts. Those who are voluntary under the influence of alcohol or drugs are not considered mentally incapacitated, but if an employee is pressured into signing a contract while inebriated to the point of not understanding what he/she is doing, the contract could be voided.
Lack of Consent
Consent to sign a contract must be given freely, voluntarily, and intelligently. The person signing the contract must fully understand the terms, and must not be doing so because of threats, intimidation, or a deliberately obtuse or fraudulent contract.
Lack of Consideration
Consideration is what each party will receive because of signing the contract. A contract must be more than a document: what is the signer getting for entering into the contract? What are they giving? The value of the contract—whether it is a bonus, a new job title, corrective action, or a lack of corrective action—must be spelled out. A contract without a value attached to it is close to worthless.
Revocation of Offer and Rescission of Acceptance
Want to make sure you have a safe escape route? Your contract can have a revocation of offer for you, or a rescission of acceptance for your employee. There are multiple options for including this, from mutual agreement to nonperformance. Talk with your counsel about situations where you think this may be warranted.
Often called non-competes, restrictive covenants prevent employees from working for your competition – obviously while they are employed by you, but also typically for a specific amount of time (or geographic distance) after terminating employment with you. Restrictive covenants can be easy to write, but hard to enforce. Does the restrictive covenant in your employment contract unfairly inhibit competition in the marketplace? If so, it might not hold up in court.
Acceptance by Performance or Delivery
A contract offer and acceptance can be made with words or with actions. Acceptance of a contract offer can come in the form of a signature, or by performing actions specified in the contract, such as the delivery or goods or services. Have your counsel advise you on whether these terms can help or hurt you in a contract.
Statute of Frauds
This common provision states that contracts must be in writing and contain sufficient detail to be enforceable. Do the contracts at your small business need to comply with this code? An easy way to determine if your agreement requires a written contract is to consider if it covers the areas named in the mnemonic “MY LEGS”: Marriage, contracts for more than one Year, Land, Executor (or Estate),Goods ($500 or more), Surety.
The Parol Evidence rule limits the amount of external and/or previous documentation that either party can use as evidence when contesting a contract. Your contract should be a complete and final document. Any external factors or relevant documents should be addressed within it.
Many contracts will be amended after their creation, and small or even medium-sized businesses can make the mistake of doing so verbally. Your contract may contain a statement that any amendments must be in writing, but that can be contested by an employee you made an informal comment to (and the requirement for written amendments is not always enforced). That is not to say that you should avoid getting any contract amendments in writing. They do hold up far better in court than verbal amendments.
The most common type of implied covenant is the “good faith” law: a general presumption that both parties are communicating with each other honestly and fairly regarding the creation, execution, fulfillment, and enforcement of the contract. Violation of this can typically be seen by the court as a breach of contract.
Waiver of Rights
Most contracts contain a waiver or no waiver clause. This clause states that a lack of enforcement of either party’s contractual rights, either purposefully or by accident, does not constitute a waiver of those rights.
Review Your Contracts Today
Educating yourself and making sure your contracts are complete is the first step in avoiding costly litigation. Careful review of your existing and planned contracts by your counsel is also a worthwhile investment that can pay great returns for your business.