- May 24, 2012
- Posted by: Seth Heyman
- Categories: Business Law, Contract Law
Before a contract is drawn up, the two parties to a deal have to reach a firm understanding of how they want to work together. Once the business arrangements have been finalized, the matter is turned over to the attorneys for them to work out the legal aspects of the deal. So at what point does an enforceable contract exist: after agreement is reached on the business terms, or on the legal terms?
Under contract law, there is no contract until all of the material elements of the deal have been negotiated and agreed upon. So after the business issues are agreed upon, a dispute over whether and when a contract exists will boil down to whether any of the outstanding legal issues are material elements of the deal. Take for example, a situation in a direct marketing company makes an arrangement with a call center for processing inbound calls generated from an infomercial. The call center agrees to handle 1,000 inbound calls per day at $5.00 per call. The deal is then passed on to the attorneys for them to work out the legal niceties and draw up the contract.
Afterwards, the lawyers go back and forth, but wind up getting stuck on an arbitration provision; one wants the arbitration to be binding and to take place in New York, and the other wants it to be nonbinding and to take place in Los Angeles. In the meantime, the call center starts adding staff to handle the anticipated volume of the calls, and turning down other business. At the same time, the marketing company finds a better deal with another call center, and cancels the previous arrangement. The call center files a lawsuit for breach of contract. Who wins?
In this case, the call center is likely to come out on top. The details of any arbitration proceeding were never discussed while the parties negotiated the business terms, mainly because neither of them cared one way or the other. Therefore, the arbitration provision was not a material element of the deal. In contrast, if the parties hadn’t agreed upon the number of calls or the price per call, the outcome would be different.
The bottom line is this: if the parties have agreed to the business terms of the deal and want to proceed before hammering out the legal details, they should first write down the basic terms of the arrangement, and have that writing signed by both parties. Even if that simple document lacks all of the legal matters typically included in such contracts, it will at least serve as evidence of the arrangement and allow the parties to proceed with some level of confidence.
Another useful hint: hire an attorney who doesn’t charge by the hour. Hourly billing creates a perverse incentive: the more time it takes to hammer out a deal, the more money the attorney makes. On the other hand, an attorney who bills by the project wants to wrap up the arrangement as quickly as possible in order for him to work on something else.