Simple questions often lead to complex and sometimes very confusing, muddled and even conflicting answers. Take the query, “Is there a contract?” Colloquially, contracts can be seen as scary shackles binding the unwary to massive tangles of responsibility and exposure. Even the threat of them can be used as bludgeons to force the unwilling into submitting to demands to avoid the wrath they could unleash if unheeded. We’ve attempted to defang those monsters in many of my previous columns here, to bring them into the light, examine them for what they are; merely tools that, when used properly, can benefit both sides of the table amicably. But not everyone has been able to discern that nature.
The fear of contractual obligation has driven some to attempt to completely avoid using the name in favor of other, less scary sounding verbiage for their dealings. It’s as if by using a different name the sharp barbs no longer pierce, the obligations aren’t as onerous or the binding isn’t as tight and can more easily be slipped. Does what something is called make a difference in its true nature? Usually not. (I bet you expected me to say, “It depends” there.)
Contractual though not a “contract”
First off, let’s set the ground work on the legal side of things. The branch of law that deals with contracts is broader than just the four-corners of written documents with the word “contract” on them. There are many situations where contract-like obligations adhere just as resolutely to dealings between parties. They go by odd and somewhat aloof sounding names like unjust enrichment, reliance or promissory estoppel, but, in essence they all extend from a group of legal recourse intended to prevent one party from unduly taking advantage of another.
Notice how I phrased that. Contractual laws are not in place to prevent ANY advantage, just unjust ones. If you are fully cognizant of what you are doing the law is perfectly happy to let you concoct or agree to a bad deal for yourself as long as the other side isn’t dealing shadily. In short, the law isn’t supposed to protect you from your own bad business practices.
We’ll define a few of those near-contracts and contract-like conditions below, but, first, let’s revisit a definition of what a traditional contract means.
Succinct definition of a “contract” – whatever you end up calling it
The most succinct definition I can create for a traditional contractual agreement that encapsulates nearly all the major elements of the idea is this:
A contract is a beneficial meeting of minds on bargained for legal detriments.
As in any “simple” legal definition each term used represents a complex legal concept that may or may not have similarity to the typical usage in colloquial language of those words. We have gone into what most of these terms mean previously. What I want to point out this time is what’s NOT in the definition. Notice there is no mention of a written document. None is required to have a binding contract. Also, there’s no mention of balance or fairness. That’s why negotiation before agreeing to a contract is so important. There’s no requirement of terms or “magic phrases” so avoidance of the word “contract” in a document has no relevance as to whether it is a contract in actual fact.
One key aspects found in many of both contracts and near-contracts is a reliance on the simple idea of a promise. Since most arrangements aren’t instantaneous deliveries (the “I’ll let go when you let go” arrangement,) there is some reliance that the parties will live up to what they promise to do, not do, begin or stop, per the terms of the agreement. The promises are where the obligations carry the weight of enforceability. An unfulfilled promise or one not filled in the expected manner is grounds for a legal argument for compensation of some kind triggered by that failed promise.
Broken promises in a love life can lead to heartbreak, in a script can lead to an act break, in a contract can lead to a lawsuit. But a broken promise even outside of a traditional contract can be cause of serious legal concern in the area I’ll call “near contracts”.
Near Contracts (or very rosy smelling not-roses)
There are classes of legal recourse that arise to protect parties in similar ways to contracts even though all the elements of a contract aren’t in place. They nearly all revolve around the power of promises. We’ll go through a few of the major ones here.
Promissory estoppel is when a promise is made that reasonably induces definite and substantial action or forbearance.
The most common example is a very one sided situation where one party only promises something, say a payment, and puts no other elements on the table. But on the weight of that promise of future reward the other party goes to substantial lengths to “earn” the recompense. Once the efforts are expended relying on the promised return, the law weighs heavily against the original promisor rescinding the promised gain. For example, say someone offers a reward for the finding and return of a lost item. A potential searcher hears the offer and sets about, expecting to be rewarded at the end, expending her time and efforts to find the item. If the searcher succeeds, finds the item and returns it to the initial offerer, the initiator would be remiss if they fail to give the reward to the successful searcher. (There are complications, of course, if while the search goes on the offer is rescinded in the same manner as it was offered, or the searcher isn’t the one who finds the target, or the searcher expends much more than a reasonable person would consider prudent, or goes off half cocked, unprepared, etc.)
A broad principle governing these near contracts is often reliance. The party that puts themselves out must actually have relied on the thing promised. If the person didn’t believe the offer was genuine or had the goal in hand all along, then there is no obligation of the first person to live up to the promise. If, however, the person putting themselves out would not have done so except for the expectation of the fulfillment of the promise and relied on it to their detriment, then the obligation becomes binding.
The basic scale balancing issue in all these contract-like situations is often an attempt to avoid unjust enrichment. In a strange twist of legalese, that means just what it sounds like. The law can step in when someone enriches themselves at what it deems as the unjust expense of another. In the ideal, this is the area of law where the powerless can pursue restitution from the powerful taking advantage just because of their position, where the charlatans can be brought to justice from duping the unsuspecting. In the ideal.
There is even a strange class called adhesion contracts. Examples of these are the contract terms on the back of an entrance ticket to an amusement park or cruise ship agreement. They attempt to appear like regular contracts but only one side is allowed to set the terms. There is no bargaining. Even though the concept refers to this one sided deal as a “contract” by name the law recognizes the oddness and applies special unfairness checks to keep them from being unjust. Like, the terms cannot be unreasonable in expectation, e.g. no first-born child assignments. And because the more powerful party sets the terms and writes the document, any mistakes or unintended consequences of the actual terms are strictly interpreted and enforced against the drafting party if warranted.
So there is not always a need for a standard, recognizable “contract” to have an agreement warrant similar protections recognized by the courts. Which is why it always seems silly that some will go to strange and bizarre lengths to either ensure there is a contract, or avoid the appearance of there being one.
Consider consideration or the $1 fallacy
And even in forming a legitimate contract there are some that get hung up on the most esoteric and trivial elements. One glaring example is the expectation that there must be some monetary value exchanged. So you’ll have strange clauses that say something like, “…for and in consideration of One Dollar ($1) and other good and valuable consideration, the receipt and sufficiency hereby acknowledged,…” This is leftover language from ancient contract issues that no longer apply but used to work and do no real harm to leave in and so timid lawyers leave in the language and confuse everyone.
The concept at the crux is consideration which is the legal term that refers to the concept of the value of the deal as evaluated by each party. A legitimate contract requires that both parties are offering and receiving something that is valuable in exchange for the agreement. Otherwise, it could be a gift offered by one side with no expectation of anything in return. In a gift exchange you can’t hold the recipient to any obligation, it must be truly, freely given.
Consideration is the value of the contract. It is a different thing for either side and must be real to them, though it doesn’t have to have the same state of value to anyone else. Sentimental value or prestige are non-marketable but valuable examples here. This was bothersome to the courts back in the day and so they shied away from considering contracts that didn’t exchange a real, commonly evaluated value, hence the importance of money being exchanged. That’s no longer strictly necessary, but, the remnants still pop up. As long as the consideration is a real value for each side, whatever that reality may be, the contract can be valid.
Contracts are a balancing act
The consideration issue reflects another important aspect of a true contract, there’s a balance to what is risked and required of both sides. It doesn’t have to be an even balance, but, attempts at contracts that are too one sided in risk or obligation are often found to not be valid contractual dealings. If a party asks you to do a lot and put lots of your own skin in the game but is risking little or none of their own and is obligated to do nothing, this isn’t a contractual discussion worth having.
This leads to the question I’d been asked that was at the root of the thinking resulting in this column. There are an awful lot of documents that go by many different names in our industry. Often we get familiar with the names of some of these and suddenly may be thrown by a “new” document title. It really doesn’t matter what something is called. The real issue is what does the proposed document require and does it meet the above criteria to qualify for a contractual style arrangement? Once you get a sense of that answer you can proceed, knowing what both parties will be committing to if you decide to go ahead.
Here’s an example of terms that are used with varying frequency lately that “can” end up meaning the exact same thing.
Options – as we’ve discussed before, are the contractual arrangements made to restrict a rights owner from marketing the covered work to anyone during the limited option period. Usually there is a short period of restriction stated (“Option Term”) and a price specifically given in compensation for so restricting what you have a legal right to do (“Option Price”). Please remember that this document and its terms HAVE NOTHING TO DO WITH THE PURCHASE AGREEMENT OR PRICE. They are often combined in a single document, but, they are separate ideas and should be negotiated separately to keep that clear in both parties minds.
Now the title of a document new to the person asking me the question was discussing a Shopping Agreement. This is a term for a document that attempts to set a restriction on a work’s owner from shopping their own material around, giving that right to the exclusive purview of the other party. The savvy here will recognize that the situation attempting to be created is exactly the same as an option. The use of a new title for the document is an attempt to bypass the usual expectation that the giving up of that right needs to be compensated for. Parties that favor using so called “shopping agreements” are trying to confuse the issue and talk people out of the expectation of legitimate compensation.
If a party wants to use the term Shopping Agreement and allows a “Shopping Agreement Price” and limited the exclusivity to a “Shopping Agreement Term” then you’ve just negotiated a slightly more wordy Option Agreement and can treat it as such. If they refuse to offer money or limit their time of access, run to the hills and don’t do business with these shady characters, regardless of their story.
I’ll mention one other title for documents that is used by those who for some reason are averse to using contracts. I do so because the term has its own legitimate use and should not be confused with contractual obligations. The term is a Memorandum of Understanding or MOU.
An MOU is a legal structure on its own. Similar to contracts, it is used between two party with compatible interests. Unlike contracts, an MOU does NOT set up any obligations between the parties. It is basically a document that publicly states the intentions of each party and how they are expected to align without obligations or penalties if either party changes its mind or fails to succeed in its goals in the future. You might wonder what use such a document might serve if there is no guarantee or recourse if the other party wigs out? Well one example might be, in business it might be useful to show potential investors or your own board that you are not foraging into the new venture alone, that others have similar and complimentary ideas. It bolsters the confidence that the ideas behind the venture are good ones if they are shared by completely outside interests. It might serve as a bandwagon effect. It is not a strong, legal document, but, it still can have significant uses if used as intended.
The problem comes when people are averse to the obligation part of contracts. They may like the idea that an MOU cannot be used by the other party as a bludgeon to force them to comply. They think that by naming the agreement an MOU instead of a contract that they are somehow lessening the obligation terms of the agreement. They are woefully mistaken.
Any document that is adjudicated as having contractual terms will be treated as a contract by the courts regardless of what it was called. It’s the details of the agreement that matter not the words used. In fact, this kind of thinking is often amplified and reflected in one of those common terms added usually at the end of contracts. My version is this,
“Titles or captions of articles, paragraphs, and subsections contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provisions.”
In short, a contract is a contract if it is a contract, whatever it is called. As Shakespeare phrased it, A rose by any other name would smell as sweet.” But I don’t suggest you try smelling contracts. Since the demise of the ditto machine it just doesn’t have the same kick.