For my inaugural post let’s start with something near and dear to my heart, contracts.
A brief history on the introduction of contracts.
Long, long ago people earned their living by working the land, not computers. Society in this time was referred to as a primitive society and the economy was based on agriculture. Bargains were enforced through property, not promises and many transactions were completely performed immediately upon agreeing to the transaction. This second arrangement is called a barter agreement. Trading on property vs promises and barter arrangements meant contracts were not necessary.
For example, say Pa Ingalls agrees with his neighbor Braveheart that he will plant corn in Braveheart’s yard and in exchange Braveheart will help build Pa’s new cabin. Pa Ingalls plants the corn. Braveheart does not help build the cabin because he leaves to fight King Edward I. What Pa Ingalls provided in consideration of receiving the assistance in building the cabin was his actual performance. His claim against Braveheart isn’t based on a promise to build the cabin, it is based unjust detention of the fruits (or vegetables in this case) of Pa’s labor, the planted field of corn. This is a property issue, not a promissory issue.
In primitive times consideration was also property not promise based. Typically the non-monetary forms of consideration provided were family members or livestock. In ye olden days this meant promises between tribes were often enforced by a tribe turning over a high ranking member of the group to the other tribe as a hostage or slave until the other tribe had kept their promise. Or giving them a cow. So before agreeing to plant the corn Braveheart either provides Pa with Pocahontas or a cow to keep until he can help build the cabin. Again, this consideration is property based, not promise based. Braveheart doesn’t need to promise to help build the cabin, Pa has Pocahontas or the cow as tangible property to keep if Braveheart falls short.
Also, back then many times once a deal was struck the transaction immediately occurred. For example, say Pa Ingalls needs some nails to make repairs to his cabin. He goes to the Trading Post and in exchange for the Trading Post providing nails Pa swaps some butter Ma Ingalls made because Pa’s cholesterol is high and he doesn’t need butter anyway. The swap happens immediately and the transaction is concluded right then. No need for a contract.
Eventually the economy became less and less dependent on knowing how to farm the land and more dependent on knowing how to manufacture things. This is called a commercial society. We are in it. More and more of us work for companies that do things like make software, hardware, cars, furniture, etc and less and less of us farm.
In a commercial society you promise to develop or manufacture goods in exchange for the other person promising to pay you when complete. No cows or kin are exchanged as consideration for you to develop and manufacture. Instead you promise to manufacture something in exchange for their promise to pay.
Our modern day hostage equivalent is called a contract of adhesion. A contract of adhesion is a standard form agreement (often click acceptance) drafted by a company that has superior bargaining power and there is no room to negotiate it. These hostage contracts are justified on the basis that the services offered by the company that drafted it are necessary to our economy, especially with the advent of online commerce. Frequently these hostage contracts are legal, just as human hostages were in the days of yore.
Typically software development for a project, like most other manufacturing processes, can’t be completed instantaneously or even in a day. No barter here although just as there are still some farmers some people do still barter though it is less frequent than in primitive times.
And so because we have moved from a property to a promise based society contracts entered the picture.
Now let’s talk if contracts are required for your deal to be enforceable. You are not required by law to have a contract for every deal but it certainly is smart to have one (also a topic for another day).
Typically in the U.S. the only times a contract is required is in the following instances: Contracts for marriage, contracts that can’t be performed within a year, contracts for the transfer of interest in land, contracts by the executor of a will to pay a debt of the estate with his own money, contracts for the sale of goods totaling $500.00 or more, contracts in which one party guarantees that person will perform if another party defaults on their obligation. This is known as the statute of frauds and the purpose is as the name suggests to prevent fraud on another. You may also notice that for the most part these are all highly emotional situations and/or decisions that are likely to be made after a few drinks. And so just because you drunkenly agree to marry someone or tearfully promise your cousin to pay the debts of your deceased Uncle Bob’s estate or promise your best buddy that because you are pals you will co-sign on their lease you won’t be held to this promise unless there is a written contract. Subject to some exceptions if you actually go through or begin to go through with your gallant promise, because this is the law and there is an exception to most everything.
For our final part of this blog, let’s cover what the key elements you must have in a written contract are.
First, you need the offer! Someone must actually promise to do the thing.
Second, you must accept the offer exactly as it was made, no differences in what you will accept. If you decide you want something else this is a counter-offer and the other party can then decide whether to accept or reject. Let’s say your best friend offers to co-sign on your car purchase. You say that’s great and since you’re in a co-signing mood go ahead and co-sign my apartment lease too. Your best friend does not have to go through with it just because they offered to co-sign the car purchase, this isn’t a buy one get one free kind of deal.
Third, you need the intent to be legally bound and the intent for the contract to be enforceable. If you enter into a written contract with someone intent to be bound is presumed, no backsies here. If you have an agreement and there are portions you intend to be bound by but other portions you only want to be bound in the event of certain contingencies you need to make that clear. A great example of this is a letter of intent or term sheet for an acquisition. Prior to due diligence you won’t know if the acquisition will go through or not or what terms you’ll need in the final draft because that is dependent on due diligence results. However, you don’t want to begin due diligence if you don’t have an understanding of the key and basic terms of the acquisition regardless of what due diligence turns up. Most of the value of any company is the employees so let’s work off that as our example key terms. For example you want to keep the key employees for a minimum period of time post acquisition to be sure the acquiring company has time to get familiar with the new business and the other party may not want to begin without an agreement not to poach their employees you were introduced to during due diligence if the acquisition doesn’t work out. So it is made clear there is no guarantee the acquisition will go through, but a condition for it to go through is you get to keep the key employees under contract for at least a minimum certain period post acquisition and in exchange you agree if the deal doesn’t work out you won’t poach the employees.
Last, you need consideration. Notice I said consideration, not fair consideration. There is flexibility in what is offered as consideration with of course exceptions (fraud, duress, unconscionable conduct). The lack of requirement on fair consideration works itself out most of the time because the other party is of course motivated to get a fair payment in exchange for what they provide.
Now that we have covered what the most boring part of contracts is, the history of them, you can bet my blogs will only get more interesting from here. I promise ; ).