Wisconsin Contract Law – What Makes a Contract Legally Binding?
As a business owner, you probably enter into contractual relationships every day. Many of you deal with written contracts on a fairly regular basis. However, do you understand the basics of contract law and what makes a contract legally binding? Do you know what to look for when reviewing contracts prepared by the other party, or by your own attorney, that make it a legally binding contract?
Under Wisconsin contract law, legally binding contracts, whether oral or written, require three basic components: offer, acceptance, and consideration. An “offer” requires one party to offer something of value to another party, which is then “accepted” by that other party. “Consideration” is what the two parties are required to exchange with each other as part of the contract. The consideration must be something of value, and the consideration must be mutual, that is, both parties must provide something of value under the contract. For example, an agreement whereby one party agrees to pay you $1,000.00 without receiving anything in return is by definition not a contract.
Generally, the consideration takes the form of money paid in exchange for the provision of goods or services. This holds true for multi-million dollar transactions between international conglomerates and when you take your car to a mechanic for repair. A corporation agrees to pay millions of dollars for another corporation to develop specific software or some other product, and you pay your mechanic to replace your spark plugs. In either case, there is an offer, acceptance and consideration, and therefore an enforceable and legally binding contract. Keep in mind, however, that legally binding contracts may require consideration other than money, for example, when two parties agree to exchange parcels of real estate.
Under Wisconsin contract law, all contracts also come with an implied duty of “good faith and fair dealing” by both parties to the contract. While this is a fairly broad phrase, in essence it means that, once an agreement has been reached, both parties have an obligation to make reasonable efforts to meet their respective obligations and to avoid taking steps that impede the execution of the contract. .
The parties to the contracts have the right to enforce them in the courts of law. Generally, remedies for breach of contract take one of two forms, either specific performance or money damages. Specific performance is an equitable remedy most often granted in cases involving real estate transactions, where the court orders the offending party to perform its obligations, i.e., “specifically perform” the contract.
In most cases, the remedy for breach of contract is monetary damages, usually in the form of “consequential” damages. Consequential damages are those damages that naturally arise from a party’s breach of contract and may include the cost to replace a product that was never delivered, the cost to repair a defective product, and any resulting lost profits. However, consequential damages must be “reasonably foreseeable” at the time the contract was created in order to be recoverable.
With certain exceptions, oral contracts can be just as valid and legally binding as a written contract. As a lawyer, I recommend that whenever possible, contractual obligations be set out in a written document signed by both parties. As a general rule, courts are required to look solely at the written contract itself to interpret the obligations of the parties, unless there is some ambiguity in the contract. In the absence of a written agreement, or when there is ambiguity in a written contract, the court may seek extrinsic evidence, including testimony from the parties, to determine its intent. In other words, the judge or jury will determine the fate of the parties, as opposed to the parties themselves. Therefore, written contracts that clearly define the obligations of the parties are almost always preferable to oral contracts.
I close with a suggestion. Never ignore the “boiler” language you often find at the end of contracts. While these provisions may seem like an afterthought added by lawyers to lengthen the contract, they are often vitally important, specifying, among other things, where written notices (for example, to terminate the contract) should be sent in under the contract, where the claim should be filed, and the laws of the jurisdiction that will govern the contract. While it is important to review the detailed provisions of the contract, it may be just as important to understand the “standard” provisions at the end of the contract.
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