Pennsylvania Contract Law: the Basics

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You have come to the right place concerning contract law in Pennsylvania.  This article addresses:  

  1. Oral (or “verbal”) versus written contracts,

  2. Construction agreements,

  3.  Non-competes,

  4. Non-payment for goods/services,

  5.  Various types of breach, and more.

Is Contract Law “Common Sense”? 

No.  Unfortunately, those entering into contracts – including businesses involved in commercial transactions – often assume that “common sense” will govern so they fail to consult a litigation lawyer until it is fairly late in the game.  It is important to understand the basics of contract law.

photo08The Basics. Fortunately, there is a detailed body of law governing contracts.  Contract law sets a universal framework to determine whether you have a binding agreement, what are the terms, when a breach occurs, and what damages are available. Let’s cut right to the key questions that we are asked every day:

1. How is a contract formed, and, do all parties have to sign something?

2. Is an oral contract enforceable?

3. How do you determine who is in breach?

4. What damages are recoverable?

5. Does a contract have to be fair?

1. CONTRACT FORMATION

A contract requires an offer, acceptance. something of value bargained for, also called consideration or bargained for exchange, plus reasonably specific terms.

Offer.  Let’s start with the offer.  An offer is an objective manifestation of an intent to be bound to an agreement.  You going to Walmart, setting a TV on the checkout counter, and handing over your credit card may suffice.   But not you saying to the Walmart rep, hey, would you take $600 for this $650 TV?

Acceptance.  The offer is accepted via the communication of an intent to be bound in a manner consistent with the offer.    If you set a TV on the counter of Walmart, and the clerk runs outside and puts a note on your car, saying ”We accept!” that will not suffice.  You wanted to know before leaving the store whether you a deal.  Fortunately, you don’t have to read each other’s minds.  Courts look at the objective implication of the parties’ conduct.  In Walmart, your offer implied a certain way to accept:  by ringing you out at the register, not putting a note on your car.

That example sounds silly, but it illustrates an important point.  In Pennsylvania, a contract to settle a multi-billion  dollar lawsuit does NOT need to be in writing, and hence, many times, during negotiations, one party may think he has a deal, when the other disagrees.  Plus, these fast-paced times, texts and emails play a massive role in negotiations, the courts are frequently called upon to resolve whether an offer has been “accepted” when one party hit “send.”

Our law firm recently litigated a six figure case in this area.  We filed a petition to enforce a settlement agreement where no party had endorsed a writing.  See Vycom v. Crighton Plastics, GD 10-023363, Court of Common Pleas of Allegheny County. The case resolved favorably for our client.

A settlement via email or other expression of intent of the parties through their appointed counsel is sufficient to create a binding agreement.  See Commerce Bank/Pennsylvania v. First Union Nat. Bank, 911 A.2d 133 (2006).  “As a general rule, signatures are not required unless such signing is expressly required by law or by the intent of the parties.”  Id. at 145, quoting Shovel Transfer & Storage, Inc. v. Pennsylvania Liquor Control Bd., 559 PA. 56, 739 A.2d 133, 136 (1999).

Consideration.  A unilateral contract is unenforceable.  “Unilateral” means that only one party is doing something.  A promise to make a gift is not enforceable.  Each party must have ”skin in the game” in the form of something specific exchanged.  It could be a promise for a promise, or a service exchanged for another thing.  This is called consideration.  Consideration in the amount of $1 in exchange for a brand new car can suffice if that is what the seller is truly bargaining for.

Most rules have exceptions.  Even if consideration is lacking, a claim may exist for detrimental  reliance, or “promissory estoppel,” if one has reasonably relied on a promise to his detriment.  The relying party can sue, but only to the extent of his reliance.  So if I promise to give you my car, and you donate yours to charity in reliance, I may be liable to you for the cost of you replacing your car, if I break my promise.

Likewise, even if no contract exists, if one party has done something that unjustly enriches another party, a claim may exist for the amount of enrichment.  If, for example, a contractor goes to the wrong address and builds a beautiful garage that improves the value of the property (but the property owner had no contract with the builder), the contract may, potentially, have a claim for unjust enrichment if a court thinks that fairness requires it.

Reasonably Specific Terms.    An agreement must included the “essential” terms. A court can imply or read into the contract certain non-essential terms to effectuate the intent of the parties, but the essential terms must be agreed upon.   What are essential terms?  This depends on the nature of the transaction.  If, for example, you are buying a car, price is an essential term.  If key terms are greed upon, and there is objective manifestation of intent to be bound, it may not matter whether your contract is vague as to the exact time you will pick up the car, unless the timing is essential to one party.

If one party makes a mistake about a contract term (saying one price, meaning another, for example), that’s considered a unilateral mistake and the contract will remain enforceable against the mistaken party.  If, however, the the other party knows of the mistake, or if there is a mutual mistake (both parties are mistaken about price, for example), then the contract may not be enforced against either.

What the terms?  Can you look beyond a writing for terms?  What about prior emails between the parties to determine the terms?  The answer is, maybe.  Courts look to the intent of the parties.  If there is a written agreement and the parties include a merger clause (or zipper clause) — saying this is the only agreement and prior statements are not part of the agreement — then you cannot look at prior transactions.  Absent a zipper clause, the courts may look beyond the four corners of the document to determine the parties’ intent.

This is called the parol evidence rule.  Parol means “outside.” The courts will not admit evidence of intent with regard to a fully integrated written agreement (one containing a zipper clause).

Note that the courts imply a duty of good faith and fair dealing in every contract in Pennsylvania.  This will not create a basis to recover punitive damages or attorney fees (as discussed below) but it may does spare the parties the burden to write into every contract “this shall be carried out in good faith,” etc.

What about fine print?  Is that enforceable?  In many instances, yes.  The question is, did the parties have a chance to read it?  If one party inserts fine print and the other party opted against even reading it, ignorance is no defense.  However, if you go skiing and the resort owner prints language on the back of your ticket that you might never read, that’s considered a contract of adhesion and you may not be bound on limitations of liability as stated on the back of the ticket, for example.

Call any time for a free consultation:  412.780.0008.

 

 

2. ORAL CONTRACTS VERSUS WRITTEN CONTRACTS

You might ask, how do I enforce an oral contract in PA?  Or, can I enforce it at all?  Allow us to clear up some term terminology, first.  Oral contracts are sometimes referred to as “verbal contracts” or “verbal agreements,” but that’s not technically correct.  “Oral” means spoken; verbal is anything involving words, something “verbalized,” and you can verbalize in writing or through speech.

OK, with that out of the way, when does a contract have to be in writing?  The truth is, not very often.  As mentioned above, an oral agreement will suffice to settle a multi-billion dollar lawsuit in Pittsburgh, Pennsylvania.  In fact, in PA, most oral contracts are enforceable.

The only types of contracts that must be in writing are those involving: the sale of an interest in real property (land and buildings), the sale of goods in excess of $500 (if it falls within the Uniform Commercial Code or UCC), leases of real property in excess of one year,  residential construction and home improvement contracts, and certain other specific types of agreements.

What type of agreement does not need to be in writing?  There are many.  These include contracts for any type of service (everything from car washes to agency agreements), the sale of goods that fall outside of the UCC, settlements of lawsuits, landlord-tenant leases and agreements capable of performance within a year.

Most often, the issue with oral contracts is proof.  However, a trial lawyer worth his salt can help you explore every option to maintain or defend a claim regarding an oral contract.  This is where experience and deep knowledge of the rules of evidence and procedure can carry you a long way. Call any time for a free consultation:  412.780.0008.

 

3. WHO IS IN BREACH?

Some breaches are OK, if immaterial to the overall transaction.  However, some breaches go to the essence of the agreement and are considered a  ”material breach.”  Those are more serious and allow the non-breaching party to sue for damages.  But here, you have to be careful, if your opponent has only committed a minor or immaterial breach, your attempt to set aside the contract could, by itself, constitute the material breach.  For this, you should talk to a lawyer ASAP.

 

4. DAMAGES RECOVERABLE

Let’s say the other side has materially breached and it’s clear:  they failed to pay you for services, or they performed services and damaged your property.  Now what?   In contract law, you can sue for the benefit of your bargain, meaning, if someone agreed to sell you a near-new Mercedes worth $30,000 for only $10,000, then breaches the agreement, you can sue for $20,000 (the benefit of your bargain), but not for the car, itself, unless it is so unique it cannot be replaced.  Few things meet that standard, except for land (no two parcels are alike, or a rare painting).

Can you sue for punitive damages or attorney fees?  You can also sue for consequential damages, certain out of pocket expenses to repair or fix something to deal with the consequences of the breach, but not for attorney fees, punitive damages, stress, lost wages (unless its an employment contract), inconvenience, or pain and suffering   Those things are not recoverable for a breach of contract, but you may have a separate claim for fraud, a total scam, or recklessness.  Or, if your insurance company has failed to pay your claim properly, you may have a claim for bad faith.

Rescission is always available to those who have been defrauded by false representations.  A contract can be rescinded.  Fraud in the inducement of a contact is where a party knowingly or recklessly makes a false statement to someone and that entices the person to enter into an agreement that he otherwise would have declined.  Fraud during the performance of a contract, however, may not be actionable as the gist of your claim may be for breach of contract, not fraud, and thus you may only receive breach of contract damages, not those recoverable for fraud, such a punitive damages or attorney fees.

If your contract involved consumer goods or services, the other party’s breach may trigger the Unfair Trade Practices and Consumer Protection Law, which may entitle you to an award for treble (or triple) damages plus attorney fees, if the other party had engaged in deceptive practices. Call any time for a free consultation:  412.780.0008.

 

5. FAIRNESS:  DOES A CONTRACT HAVE TO BE FAIR?

This one is easy:  no way, never, unless one party owes a special duty to the other as his fiduciary, for example.  Otherwise, all bets are off.  Contracts are expressions of freedom to negotiate and the courts will not step in and second guess whether something is “fair.”  The whole point of entering into a contract is, you think you’re getting the best deal, not the most “fair” deal to all parties.  If you don’t like the deal, you can walk away before agreeing to it.  By this token, the courts will protect your good deals, but not save you from poor ones, unless the other side has violated the rules of the game.

The fact is, modern civilization depends on a universal understanding of contract law.  Imagine how long it would take to build a new home (much less a skyscraper) if the sub-contractor hired to pour the foundation played by his own rules in terms of breach or contract interpretation?  The fact is, all consumer and business transactions depend on uniformity in dealings.  We covered a lot and I hope you found this helpful.

Call for a free consultation:

(412) 780.0008

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This posting is by no means a comprehensive, exhaustive catalogue of the many and complicated principles of contract law. It is meant rather to give an overview and sampling of this body of law. You should talk to a lawyer (us!) before drawing any conclusion about how the law might apply to your case.