Contract law is the foundation for American business. Our contract law has evolved from the English common law system and establishes basic standards for formation of a contract – generally an offer met by acceptance. Contracts may be oral or in writing subject to conditions precedent and subsequent. Business people sometimes get into problem areas when communications are made orally or by email which may seem to be a contract or which may look like a contract – but which may not meet the requirements for a contract. The contrary problem is when business people believe they have entered into a contract but learn that requirements for a contract have not been met.
A potential problem area concerns the “agreement in principle.” Since a contract is either binding or it is not, many lawyers do not know what an agreement in principle really is. It is often a statement of general terms of an agreement which will later be put into a written document. The real question is whether the agreement in principle is intended by the parties to be binding. One party may say yes, the other party may say no. Our advice would be to avoid agreements in principle unless it is clearly stated therein that there is no agreement between the parties until such time as a final written agreement is prepared and properly signed.
In addition, some business people are surprised to learn that they have made a binding oral contract where all of the contract terms are orally agreed to even where a proposed written agreement is planned for production and signature. If the writing is simply a memorialization of the previously formed oral agreement a Court may find it to be unnecessary. It comes down to the intent of the parties. If the parties intend to be legally bound by their oral statement, then their agreement is final and binding at that time. The subsequent written memorialization may be window dressing. Numerous Pennsylvania courts have held that where the parties have agreed on the essential terms of a contract, the fact that they intend to formalize their agreement in writing but have not yet done so, does not prevent enforcement of the agreement.
In dealing with contract formation, it is necessary to be clear about whether an oral agreement or a final written document is meant to be the final contract. Much headache and heartache can be avoided by clarity in contract drafting.
– Bill Brennan