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Contract Basics: The Pen Actually Can Be Very Mighty

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You would be hard-pressed to find an adult in the United States who never has signed a contract. You rent an apartment; you sign a contract. You enroll your children in daycare; you sign a contract. You borrow money for school; you sign a contract. You join a gym; you sign a contract. This does not include the plethora of subscription services so common these days like entertainment streaming, cell phones, music services, product delivery services and so many more. We execute many contracts without a second thought, but not all contracts are created equally. Signing on the dotted line for that hotel room or rental car does not carry the same weight as entering into an agreement to buy or sell real estate, but the legal obligation you create when doing so remains the same.

Although the law is concerned where a contract is procured through fraud, misrepresentation, or duress, the courts aim to preserve our autonomy to contract with one another freely. The law does not concern itself with whether the terms of the agreement are reasonable or whether any party possessed enough knowledge to enter the agreement. The parties to any contract can have different levels of sophistication, and bargaining power might be unequal, but each one is legally bound to know the terms of the contract entered. The stroke of that pen comes with a duty to understand the document, and that is where many fall short.

Contracts can be difficult to understand simply because of the manner in which they are drafted. The legalese in many standard provisions can seem unintelligible to most, and some contracts will contain dozens of these confusing terms. However, ignorance is no excuse under the law, particularly when an agreement contains a provision indicating that the parties agree that its terms are fair, just, and reasonable. It is customary for contracts to contain such provisions which serve to cut off future challenges to that contract by one manner or another. These can be explicit waivers of rights, such as waiving your right to a jury trial to resolve future disputes, or implicit waivers like the one above. When you agree in writing that the contract is reasonable, you waive your right to challenge its reasonableness in the future even if you did not understand what you were signing.

While most would think to enlist the help of an attorney for contract drafting or negotiating, contract review is just as important. Agreements involving large sums of money or long-term obligations are most critical. A 5-year service contract can look great today, but circumstances can change for either party over that long a period, and that must be considered. An agreement requiring a sizable non-refundable down payment could result in a great loss if the agreement falls through for a reason other than a breach. From lawn service contracts to pre-nuptial agreements, any legally binding document must be reviewed thoroughly to ensure that you understand both your obligations and your rights under it.

Whether you need a contract drafted, negotiated, or reviewed, the experienced attorneys at Cornerstone Law can help. Contact us to schedule a consultation today.

The Importance of Putting it in Writing

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One of the most common causes of legal disputes is the failure to get an agreement, however small, in writing. Today, on the Cornerstone Law Blog, we want to tackle why it is so important to put your thoughts in writing when you and a friend or business associate are agreeing to a contract.

To begin with, it’s important to note that agreements are typically binding even if they are not in writing. Contrary to popular belief, most oral agreements are legally enforceable—if you can prove them (although there are exceptions, such as when dealing with land, with contracts for goods over a certain price, and in certain industries such as home improvement).

So why is it important to get your agreement in writing if it can be enforced even without a written document?

Why get it in writing?

  1. The most important reason is it is hard to prove what an oral agreement was for.

    Unscrupulous parties can lie about what was agreed to, and even when everyone is being honest, people’s memories tend to fade surprisingly quickly. Relying on someone else’s memory to agree with your own is a recipe for disaster in enforcing your contracts.

  2. Misunderstandings are harder to smoke out and deal with when a contract is not written down.

    It may sound funny, but there have been many lawsuits litigated over something as simple as the meaning of “here.” If someone agreed to bring a product “here,” where is “here?” If the agreement was made over the phone, one person may have assumed that “here” meant someone’s home, when in fact they meant their business some many miles away. Sometimes this type of disagreement can be cleared up easily, but in other cases it can be a mistake that can cost substantial sums of money.

    The point is this: without putting something in writing and taking the time to clarify simple points of misunderstanding, you can end up in a contract dispute that neither party brought about by their malice or ill will.

  3. It helps you to think about things that you weren’t really considering when you first made the contract.

    If two people get together and agree orally to a “handshake deal,” they may not be thinking about questions such as, “What happens if a pandemic shuts down the world and one side can’t deliver the product because the government won’t allow it?”

    And what happens if there is a good-faith dispute over the contract? Do the two of you first have to go and deal with it in front of a board of arbiters, or do you go straight to court? And which court? Where can you be sued? What do you do if a labor shortage or a war in another country suddenly makes it impossible to get the raw materials necessary to produce the product you’ve ordered? 

There are hundreds of potential questions that a good transactional lawyer can help you to work your way through. Even without the involvement of a lawyer, there are things you may think of as you put the agreement in writing that will help you to confront potential misunderstandings and disagreements that will cause problems down the road. 

How can you put it in writing without being overly difficult?

Sometimes business owners in particular are concerned that continually putting contracts in front of their clients or customers will cause them concern and will scare them off of working with them further. In most cases, this concern is not well-founded.

Most customers understand and even appreciate the time that you will take to put things in writing. But if they don’t or if you are concerned that the time necessary to reach a written agreement will make it difficult for you to continually get new contracts drafted, one approach is simply to put everything into an email or even a text message.

Once again, putting everything in writing will help you to confront disagreements that may arise between you and the other party. In most cases, it is best practice is to say, “Are you in agreement with all of these things?” at the end of the email (or something to that effect). Getting them to respond back will in many cases create a binding written contract between you two. 

Note: this article is not meant as legal advice.

There are specialized areas of law where a simple email or text message is not sufficient. It’s important that you talk to a lawyer about your specific concerns. But in the meantime, we hope that the tips in this article will help you in your day to day business and personal affairs to ensure that your contractual agreements are being memorialized in writing.

For help in drafting or reviewing contracts, contact Cornerstone Law Firm today.

Independent Contractor vs. Employee – Does it Matter?

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If you have signed a contract of employment, you may have noticed a line that stated you are an “independent contractor” or an employee. Perhaps it’s a full paragraph dedicated to the topic, or maybe it’s simply assumed in the title of the agreement. When difficulties arise in an employment relationship, many people wonder, what is the significance of this determination of independent contractor vs. employee?

People are often surprised to learn that the mere designation of an employee as a “1099” employee (named for the IRS form on which independent contractors report their income), and even the filing of taxes in accordance with that designation, does not necessarily mean that the individual is actually an independent contractor rather than an employee.

As a general rule, employees have greater legal rights than independent contractors. They can bring suit under a range of federal and state laws for unpaid wages that entitle them to financial penalties and attorneys’ fees. On the other hand, contractors often have to resort to common law claims, such as breach of contract. In addition, some government departments will help employees recover unpaid wages, while contractors are largely on their own.

Here are several factors that a court will consider in determining whether someone is an independent contractor (a 1099) or an employee. None of these factors is conclusive, on its own but rather they are all considered together by a court, in addition to other factors:

1. Exclusive Employment

independent contractor

One of the most important factors in determining whether someone is an employee or an independent contractor is whether their employment is required to be exclusive with that employer.

For example: If you work at a doctor’s office and your employer requires you to sign an agreement that you will not work at any other medical facility, or in even more extreme cases, that you will not work at any other job without your employer’s permission, then this tends to suggest that you are an “employee.”

2. Right of Supervision

Independent contractors are generally an unsupervised bunch. A true independent contractor is someone who is hired to come into a job site, do a job, and then leave, even if it’s on a regular basis.

For example: The engineer who repairs machines at a shop may come in only as required for individual repairs. No one stands over his shoulder and tells him what to do, how long to be there, what hours to put in, or anything else like that. Rather, he is hired for specific jobs, brought in, and then he leaves.

The right to control someone’s work and to tell them what to do, when to be at the work site, when to leave, what to wear, and many other incidentals of employment, imply a direct employment relationship rather than that of an independent contractor. Once again, none of these factors are binding, but this is another consideration. 

3. How the Worker is Paid

Less important factors, such as payment, should also be considered. Are you paid on a salary, a commission, or are you paid by some other arrangement? Do you invoice the company or do they determine your pay for you? Each of these is an important factor in determining whether you’re an independent contractor or an employee.

4. Work in A Specialized Field

In some cases, statutory law controls whether you are an employee or an independent contractor. For example, due to the abuse of “independent contractor” status by employers, the legislature in Pennsylvania has passed an important statute governing whether construction workers are employees or independent contractors.

Many construction employers prefer to classify all of their employees as independent contractors on the idea that they then can avoid Worker’s Compensation payments. This has been determined to be unlawful in Pennsylvania, and the statute provides for a specific set of factors that must be considered. Thus, if you’re in construction or any other number of specialized and regulated fields, your status as an employee or independent contractor may depend on a more specialized analysis.

Conclusion

It is important to note that nothing in this article should be taken as legal advice. Every situation involving independent contractors and employees is unique and depends on more factors than we can list here. However, the important takeaway from this article is this: just because you’re classified as an independent contractor doesn’t mean that you actually are and vice versa. Properly setting up an employment arrangement from the start is important, and even after things have gone south between an employer and an employee, making these determinations can be important. 

Furthermore, if you find that there are statutory protections for you as an employee that are not being given you, your employer’s response that you’re an independent contractor is not necessarily the final word. Call the attorneys at Cornerstone Law Firm, LLC today. We can discuss how we can clarify your existing relationship, protect you if your rights are being violated, or how we can ensure a strong legal relationship with your workers.

Breach of Contract Damages

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Whenever you sign a contract, you hope that the other party will fulfill their obligations that they’ve agreed to. Unfortunately, that doesn’t always happen. So, when someone else breaches a contract, what are your rights if you decide to pursue litigation? What will a court award you in damages at the end of a lawsuit?

Today on the Cornerstone Law Firm blog, we discuss what you’re entitled to after a breach of contract in Pennsylvania. But before we begin, we should dispel a common myth. Just because you have a contract with someone doesn’t mean you can actually make them perform it! It is very rare that a court will order “specific performance,” requiring the other party to carry out their obligations under the contract.

Instead, courts prefer to award “economic damages” (that is, money). They’ll give you money corresponding to the value that you “lost out on” under the contract. As simple as that may sound, there are actually several competing ways to calculate damages.

1. Compensatory Damages: What you lost

The primary method of determining damages under a breach of contract is compensatory damages. A court will award damages based on the amount of money that you lost pursuing the contract in order to attempt to make you whole.

breach of contract

So, let’s imagine a scenario when your company spent $400 buying products for a job and sent out workers for two days to start working on the job before the other party breached the contract. When you realized that the other party performed none of their obligations, you stopped work, reassigned your workers to other projects, and moved on with business.

If you prevail, the court will order the breaching party to pay you $400 for materials, and will attempt to calculate the value of the lost labor and time that you invested in the project. In construction contexts, you may also be able to claim some of your overhead under what is known as the Eichleay formula, which measures office overhead and other costs that often go unnoticed in contract disputes. All of this can be included, depending on the circumstances of your case.

2. Expectation Damages: What you should have earned

Another method the courts sometimes use in awarding damages under a contract is known as “expectation damages.” A court will figure out how much you expected to profit under the contract and award that amount to you. So, if you expected that you would spend $600 on a job and that you would earn $1,600 on a job, the court will award you $1,000 in damages.

Expectation damages deal with profit—and that can be hard to calculate. In addition, courts avoid awarding damages for the potential reputation boost a particular job would have been, although it can still be relevant in some instances.

breach of contract

Imagine that a dress designer agrees to design a dress for a movie star’s appearance on the red carpet. The dress designer is excited to earn $1,000 in profits on the job, but is more excited that this job will launch her into a new stratosphere of design jobs when the movie star appears on the red carpet.

If the movie star breaches without excuse, the designer will recover $1,000, but is not likely to succeed in acquiring damages for the loss of expected sales had the movie star worn her dress. Courts seek to provide what is just—and expectation damages may not include every “expectation” you had for the job. Rather, expectation damages seek to provide what you lost out on.

3. Punitive Damages: Punishing the breaching party

In some instances, a court is willing to award punitive damages. Punitive damages punish wrongdoers conduct and are meant to be a warning to others not to do the same.

However, punitive damages are very rare. In American Law, courts do not like the idea of punishing wrongdoers in a civil context. Indeed, the free market system even encourages breach of contract where the breach of contract will be more efficient for the parties involved. Punitive damages are only awarded for wanton or reckless conduct.

“Punitives,” as they are often called, require a showing that the breaching party did something far worse than make a business decision. They must have engaged in fraudulent or abusive conduct, or have acted with malice. Accordingly, punitive damages are rarely awarded. Indeed, even if a contract calls for punitive damages in the event of breach, these provisions will generally not be upheld.

4. Liquidated Damages: We’ve already agreed how much this is worth

In some instances, contracts specifically name the amount of money that the parties expect to lose if the contract is breached. Particularly in situations where there’s a complex construction job, where damages may not easily be measured, the parties will agree to write in the amount of value that each party expects to lose if the other breaches at a various stage of construction.

Courts are wary of these provisions fearing that they may become a back door punitive damages provision. Accordingly, there are a number of factors courts will analyze when looking at a liquidated damages clause in a contract to determine whether it should be upheld and applied in a specific situation.

Liquidated damages can make litigation more efficient, skipping over complex wrangling over which form of damages should be awarded. But, in some instances, they can backfire as they create an unfair incentive for a party to breach a contract at a point where the liquidated damages would actually be less than the value that the party would be losing.

Quantum Meruit: The value of what you produced

Quantum meruit is a Latin term meaning “the value that has been earned.” In other words, even in the absence of a contract, your work has created some sort of value toward the other party.

When it comes to quantum meruit, the court is acting in an equitable capacity in attempting to measure the value of what you created for someone else. Quantum meruit comes into play where a contract is illegal because it contains provisions that are statutorily unenforceable, or where the contract doesn’t help in interpreting the actual situation that has arisen.

At the end of the day, you really don’t usually want to be in a quantum meruit world. It’s usually best if you’re prevailing on pure contract grounds.

Conclusion: Damages are unique to the case

Which sort of damages should you seek in your initial complaint? How can you protect yourself if you’re quoting a job or drafting a contract, in order to make sure that a breach does not end up leaving you in financial peril?

Contact the litigation attorneys at the Cornerstone Law Firm. We’ve helped many clients deal with the difficulties of figuring out the appropriate measure of damages in their cases, and we can help you too. Call us today!

Contracts Promote Business

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Contracts are the fabric of society. Contracts promote business by clarifying parties’ expectations and facilitating better working relationships. They hold us together, allowing commerce to go forward quickly and securely, and allow the conscientious businessman a remedy when a business partner goes back on his word. But contracts are often frustrating to the business owner precisely because of their importance. When presented with a contract and all its glorious fine print, most people glaze over (seriously, when was the last time you read your iTunes’ user agreement?).

We have a gentlemen’s agreement

One mistake many people make is assuming that a “gentlemen’s agreement” will suffice for their business. “I was raised to honor my word,” I’ve heard many clients say after they were burned by someone who never put their commitment in writing.

The problem with such oral agreements is two-fold. First, as the old joke goes, oral agreements aren’t worth the paper they’re written on. Just because you were raised to honor your commitments doesn’t mean the other guy was. And second, even where both parties are honest, written contracts force both parties to think about scenarios they might not otherwise consider.

For example, let’s say that you are a famous orange-grower, and I would like to buy and re-sell your delicious, name-brand oranges. We agree that you will sell me 1,000 oranges at $1 a piece. We shake hands, and we have a deal, right? Well, yes, we do, but do we really know what our deal is? Am I picking up the oranges, or are you paying to have them delivered? Does it matter if this year’s orange crop came in smaller than last year’s? Do I have to pay on delivery or after I re-sell,  and do you care if I pay with a credit card? Most of all, what if you had a bad year and sell me your neighbor’s oranges? I bargained for your name-brand oranges, not some neighbor’s knock-off citrus!

I think you get the point. Sitting down and writing out an agreement does not eliminate the possibility for misunderstanding, but it helps to bring into focus the various things that can go wrong in a business deal, and allows the parties to allocate the risk of various possibilities.

What should a good contract have in it?

Obviously, a contract should be as unique as the deal it governs. It’s always frustrating to see form contracts copied and pasted from one thing to another, as though a business deal is just a cut and paste job. Nonetheless, certain provisions should probably be in your contract.

  1. Allocation of Risk

What happens if the crop you’re buying—or the product you’re depending on the production of—is unavailable because of famine, war or strike? You can laugh, but this happens all the time. What if the other party dies tragically during the term of the contract? Is his estate responsible for completing the contract?

  1. If there is a conflict between the parties, where can suit be filed, and what state’s laws will apply?

This might seem unnecessary in a deal between two local businesses, especially in a place like Berks County. But what if the other party to your contract moves to Montana, and the deal breaks down at some point? Can you sue him in Reading, Pennsylvania? That depends on a number of factors, believe it or not, but if you’ve written that into the contract, the answer will almost certainly be yes.

  1. What are the parties’ remedies if someone breaches?

If you mess up, what happens? Does the contract dissolve? Is there a stated financial penalty? Does it depend on the damage done to the deal? This part of a contract is governed by a fairly complex thicket of Constitutional law and public policy legislated both through our General Assembly and our courts. Understanding how these remedies will be enforced (or whether a court will refuse to enforce the remedy the parties wrote into the contract) is vital to creating a strong document to govern your transaction.

  1. Terms of Payment and Other Logistics

Sounds obvious, right? But how are you getting paid (or making payment)? Does it matter if it’s in cash, or will you take a line of credit? Will you allow a grace period if a payment doesn’t get in on time? If so, what interest rate are you agreeing to? Who’s delivering? To where? If weather interferes, is delayed delivery excused?

Conclusion

A contract is the lifeblood of a good business deal. It is crucial to have a well-drafted document that covers the contingencies that can arise. As the old saying goes, “Measure twice; cut once.” A well-written contract can lead to a much more amiable relationship between the parties when unexpected difficulties arise, and can lead to more and better business in the future. Do you need contracts to cover your business? Contact the Cornerstone Law Firm today, and let us see how we can help you.