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Common Contract Rules

A gift is not a contract. As every law student learns on the first day of contracts class, a promise to make a gift is not a contract. The reason is simple: The gift's recipient hasn't promised to do anything in return. Or put another way, an enforceable contract absolutely depends on an exchangeor a promise to exchangesomething of value, such as money for services.

Example 1: Marcia tells Steve she is in a bad way financially, so Steve promises to give Marcia $750 on January 1. Later, Steve changes his mind, because he decides he doesn't like Marcia after all. Can Marcia sue Steve for the $750? No. This is not a contract, because Marcia has not promised to do anything for Steve in return for his promise to make a loan. Steve had only indicated that he would give Marcia a gift in the future. A promise to make a gift is not an enforceable contract because there is no reciprocal promise or "quid pro quo," sometimes also called "consideration."

A loan is a contract. In contrast to the example above, a loan, or a promise to make a loan, is normally a valid contract. That's because each party provides the other something of value: The lender agrees to advance the borrower the money, and the borrower agrees to pay it back. An agreement to exchange goods, services, or money is a contract. The most common type of contract occurs when A agrees to pay money to B in exchange for B agreeing to work for A or provide A with valuable goods.

Example 2: Steve promises to pay Marcia $750 on January 31 in exchange for Marcia's promise to tutor Steve's oldest son. This is a valid contract because each person has promised to do something for the other. If Steve fails to pay Marcia on January 31 and Marcia has kept her part of the bargain, then Marcia can go to court, claiming breach of contract.

Most oral contracts are valid if proven. The great majority of spoken agreements are valid and enforceable, assuming their existence can be established to the satisfaction of a judge. But there are several major exceptions to this rule. Generally speaking, oral contracts are not valid if they: (1) can't be accomplished within a year, (2) are for the sale of real estate, or (3) involve the sale of goods or property worth more than $500. (But this third type of transaction needs very little written proofa faxed order or a letter confirming a deal will be enough.) Because the great majority of oral consumer contractswhether to fix a kitchen, repair a car, or deliver a bedcan easily be carried out in less than a year (even if it actually takes longer), most oral contracts that can be proven to the satisfaction of a judge can be enforced in small claims court. Someone's unjust enrichment can prove a contract. A contract can be implied where one party has obviously benefited from the other and the other expects to be paid for goods or

services. This is a tricky area of contract law that occasionally surfaces in small claims cases. The judge will be particularly interested in evidence that the party who received the benefit knew that the service provider expected to be paid. Example 3: Paul asked Barbara if she wants her house painted. Barbara says "Yes," and Paul paints her house. After he's done with the work, Barbara refuses to pay, claiming that because they never agreed on a price, there was no contract. Barbara is wrong. A contract exists when one person does work for another in circumstances where payment is normally expected and the second person accepts it. Consent can be stated, as in this example, or even implied, as would be the case if Barbara simply watches Paul paint her house. In other words, even though one or more technical parts of a contract is missing, when work is involved the law will require that a person who knowingly benefits from another person's work pay for it, unless it is absolutely clear the work was donated.

Unpaid Debts
Often, a contract that has not been honored involves a failure to pay money. Hardly a day goes by in any small claims court when someone isn't sued for failing to pay the phone company, the local hospital, a friend (former, probably), a relative, or even late fines to the public library. (See Chapter 18 for more on small claims suits where money is owed.) In many situations, getting a judgment for an unpaid debt involves no more than stating that the defendant made a commitment to buy certain goods or services, that they were, in fact, provided, and that a legitimate bill for X dollars has not been paid. As a plaintiff, you must normally prove:

the identity of the debtor the existence of a contract with the debtor that you kept your promises under the deal (normally that you provided the goods, services, or loan), and that the debt hasn't been paid.

If you are a defendant and believe you have a good defense, you'll normally need to prove:

the goods or services you were supposed to receive were delivered late or not at all or were seriously defective the plaintiff never lent you the money in the first place you already paid back some or all the money the plaintiff lent you, or the plaintiff agreed to a subsequent contract to forgive the debt or give you more time to pay.

If you are sued because you owe money to a company from which you bought consumer goods or consumer services, research your state's consumer protection laws. (See Chapter 25 on painless methods of legal research.) Also, if a seller of consumer goods or services violates a consumer protection law, then you may be able to get your money back or cancel your deal with no obligation to pay.

If fraud is present as part of a transaction, the deal can be canceled and your money refunded. Fraud can be: o intentional misrepresentation (a deliberate, false statement about a product or service) o negligent misrepresentation (a statement about a product or service made without investigating its truth) o fraudulent concealment (suppression of the truth) or, o a false promise (a promise with no intention to perform), or any other act designed to deceive. If you make certain types of purchases, you have a "cooling-off" period under federal law during which you can cancel the contract or sale. (See "The Cooling-Off Rule," below.)

The Cooling-Off Rule If you buy a product or service worth more than $25 at a location that's not the seller's permanent place of business, you have three business days during which you can change your mind and cancel the sale. (16 C.F.R. Part 429.) The Cooling-Off Rule applies if you buy something from a door-to-door salesperson (even if you invited the salesperson to make the presentation), at work, and at temporary sales locations like convention centers, fairgrounds, and restaurants. The Cooling-Off Rule does not apply to sales of real estate, insurance, securities, motor vehicles sold at temporary locations as long as the seller has at least one permanent place of business, or arts or crafts sold at fairs, shopping malls, civic centers, and schools. The Cooling-Off Rule also doesn't apply to goods or services that:

cost less than $25 are not primarily intended for personal, family, or household use are sold entirely by mail or telephone are sold after prior negotiations at the seller's permanent business location are needed to meet an emergency, or are made as part of your request for the seller to do repairs or maintenance on your personal property.

The Cooling-Off Rule requires the salesperson to tell you about your cancellation rights at the time of sale and give you two copies of a cancellation form and a copy of your contract or receipt. The contract or receipt must be in the same language used in the sales presentation, be dated, show the name and address of the seller, and explain your right to cancel.

Failure to Perform

Sometimes, a breach of contract suit results not from a refusal to pay a bill, but because one party claims that the other failed to carry out one or more of the terms of a contract. Such would be the case if:

A tenant sued an apartment owner who agreed to rent him or her an apartment but instead rented it to someone else. (Leases and rental agreements are discussed in more detail in Chapter 20.) A small business sued a caterer who showed up four hours late with the food and drink for an important party. A customer sued a tattoo artist who began an elaborate skull pattern on his back but couldn't find the time or inspiration to finish itleaving the customer with what looked like a lumpy potato tattoo and the prospect of paying someone else to finish or remove it. A freelance writer hired to write an annual report sued the business involved when it failed to provide essential financial information, making it impossible to do the job.

In court, you'll need to convince the judge that the contract existed. If the contract is in writing, bring it to court. If it's oral, be prepared to prove its existence through witnesses and circumstantial evidence. Be creativeif you lent money to a debtor using a check, bring a copy. Along with your own testimony that the borrower promised to repay you, this should be all you need to establish the existence of a contract. Damages resulting from a breach of contract are normally not difficult to prove. After you show that the contract existed and that the other party failed to meet its terms, you should testify as to the dollar amount of damages you have suffered as a result. And when appropriate, you'll also need to introduce evidence to convince the judge that you really did lose this amount. Example 4: Justine and Bob planned a June wedding. Since the families of both prospective spouses were widely dispersed, this was to be a combination family reunion and wedding. As a result, the couple planned a large reception with a meal and arranged to have it catered by Top Drawer Deli. The deli prepared a written list of all food and drink orders, and Justine signed it. When the big day arrived, everything went swimmingly until the 200 guests arrived at the reception to find that, while the band was playing cheerfully, Top Drawer Deli had not shown up with the food and bubbly. The best man hopped into his SUV, drove to the nearest liquor store, and was back in less than 20 minutes with ten cases of champagne. (Clearly there was a reason he was picked as best man.) Someone else had the presence of mind to order 30 pizzas. Two hours later, Top Drawer Deli showed up full of apologies. (A key employee called in sick, and their van broke down.) Justine and Bob accepted the cake and turned down everything else. When the bill came for the whole works, they paid for the cake and told Top Drawer to eat the rest. Top Drawer sued the newlyweds for $4,000 for breach of contract. Bob and Justine countersued for $5,000 for emotional distress. The judge agreed with the newlyweds that by being two hours late to a time-sensitive event, Top Drawer had breached its contract and, as a result, Bob and Justine owed them nothing. But the judge also dismissed Bob and Justine's emotional distress claim after remarking that the reception obviously turned into an unforgettable party.

The fact that many contract cases are easy to win doesn't mean that all result in victory. In fact, a good number of plaintiffs lose cases that they assumed were open and shut. Why? Usually because they:

failed to show that a contract existed (see Examples 1 and 5) failed to show that a contract was broken (see Example 6) failed to sue the right defendant (again, see Example 5), or failed to establish that they really suffered a monetary loss (see Example 4).

Example 5: Ben, a landlord, sued John, the parent of one of his tenants, for damage John's daughter and her roommates did to their rental unit. John was sued because he had cosigned his daughter's lease. Ben easily convinced the judge that the damage had, in fact, occurred, and the judge seemed disposed toward giving him a judgment for the $980 requested, until John presented his defense. John showed that the lease between his daughter and the landlord had been rewritten three times after he originally cosigned it and that he had not added his signature to any of the revised versions, one of which involved replacing several of his daughter's original roommates with others. The judge agreed that because John had not cosigned any of the subsequent leases, he wasn't liable. The reason was simple: There was no longer a contract between Ben and John. (Leases and rental agreements, including a detailed discussion of the rights and responsibilities of cosigners, are discussed in more detail in Every Landlord's Legal Guide, by Marcia Stewart, Ralph Warner, and Janet Portman (Nolo).) Example 6: Sid sued Acme Dry Cleaners for $650, the cost of replacing a pigskin suede jacket that was ruined (it shrank dramatically) by Acme. Sid established that he had taken the jacket to Acme for cleaning and had agreed to pay Acme $80. Acme, by accepting the jacket, clearly implied it would properly clean it, so there was no question that a contract existed. Sid was very sure of his loss. He stood in the courtroom and slowly tried to wriggle into the jacket. The sleeves barely came to Sid's elbows, and the coat itself didn't reach his waist. The whole courtroom burst out laughingincluding the judge, who almost choked trying to keep a straight face. So far so good, from Sid's point of view. By putting on the shrunken jacket, he made his point more effectively than he could have with ten minutes of testimony. Unfortunately for Sid, he overlooked two key things. Sid's first mistake was asking for the full $650, which is how much he paid for the jacket. However, by the time Acme got ahold of it, the jacket was eight months old and had been worn almost every day. Valuation is a common problem in clothing cases. (It's discussed in detail in Chapters 4 and 21.) Sid's jacket was probably worth no more than $400 (and probably less) in its used condition. Whenever property is damaged or destroyed, the amount of money you're entitled to will be limited to the fair market value of the goods at the time the damage occurrednot their replacement value. Sid's other mistake was failing to anticipate what Acme might say in its defense. Vijay, Acme Dry Cleaner's owner, testified that he was amazed when he saw the jacket after cleaning. His cleaning shop specialized in leather goods, and the cleaning process should not have resulted in such shrinkage. He also testified that he had examined a number of other items in the same cleaning batch and found no similar problem. He then sent the jacket to an "independent testing laboratory." Their report, which he presented to the court, stated that it was the jacket itself, not

the cleaning, that was the problem. According to the report, shrinkage occurred because the leather had been severely overstretched prior to assembly. The judge was convinced by the testing lab report and felt that Acme had breached no contract as far as the cleaning was concerned. However, the judge also felt that Acme, as a leather cleaning specialist, had some responsibility to notify Sid that the jacket should not have been cleaned in the first place. Therefore, the judge held mostly for Acme but did award Sid $100. He also suggested that Sid might want to consider suing the store that sold the jacket. The judge explained that Sid could claim the store breached an implied warranty by selling clothing made from seriously defective material. He could use as evidence the very lab report that lost him his original case. More material concerning contracts:

How much you should sue for in a breach of contract case (how to value your damages) is discussed in Chapter 4. Breach of warrantybased on a written or oral contractis covered below. Leases and rental agreementsa specialized type of contractare covered in Chapter 20. How to collect on contracts involving unpaid bills is covered in Chapter 18. If your contract involves fraud, undue influence, or a simple mistake ($2,000 was mistakenly written as $20,000), you may have a right to have the contract ended or rewritten or to get your goods back under the legal doctrine of equitable relief. (See Chapter 4.)

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