Pennsylvania Contract Law: The Basics
You have come to the right place concerning contract law in Pennsylvania. Our lawyers focus on contract law issues in state and federal courts in Western PA.
Phone Consultation
New Number: 412.342.0992
We have written extensively about contract law issues involving commercial (building purchase, leases, loans, debt, accounts receivable, non-compete claims and defenses) and consumer contracts of all kinds. This article addresses how contracts are formed and breach of contract issues, involving:
-
Oral (or "verbal") versus written contracts,
-
Construction and home improvement agreements,
-
Non-competes,
-
Non-payment for goods/services,
-
Credit card debt,
-
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 civil litigation lawyer until it is fairly late in the game. It is important to understand the basics of contract law, because contracts are everywhere and include every kind of transaction: from buying a home or business, your car sale or lease agreement, employment agreement, insurance agreement/policy, non-compete agreement, agreement to protect trade secrets, and even a settlement and release agreement regarding your injury claim.
The 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, and 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.
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.
What if the written contract prohibits oral modification? In the case of Somerset Community Hosp. v. Mitchell & Associates, 685 A. 2d 141 (Pa. Super. 1996), the Superior Court opined:
A written contract which is not for the sale of goods [governed by the UCC] may be modified orally, even when the written contract provides that modifications may only be made in writing. Universal Builders, Inc. v. Moon Motor Lodge, Inc., 430 Pa. 550, 244 A.2d 10 (1968). An agreement that prohibits non-written modification may be modified by subsequent oral agreement if the parties’ conduct clearly shows the intent to waive the requirement that the amendments be made in writing. Accu-Weather v. Prospect Communications, 435 Pa.Super. 93, 644 A.2d 1251 (1994). An oral contract modifying a prior written contract, however, must be proved by clear, precise and convincing evidence. Pellegrene v. Luther, 403 Pa. 212, 169 A.2d 298 (1961).
3. WHO IS IN BREACH OF THE AGREEMENT?
It can be OK to breach a contract, if the breach is "minor," meaning, the term or promise broken is not material to the overall transaction. For example, if the contract provides that you must pay the opposing party by check in the amount of $50,000, but you provide two checks, instead of one, each for $25,000. A court would like see that a "minor" breach.
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. Using the above example, let's say that you send one check for $25,000 but the other is for $20,000. This is likely a material breach of the agreement.
But you have to be careful, as the court will look at the surrounding circumstances and whether the contract expressly identifies a term (such as price) as "material." It might not be. The same goes for the time of performance. If you are late one day, it might not matter, but the contract may call for strict adherence to certain terms, such as time being "of the essence."
In other words, you should have your lawyer review your case closely before you accuse the other side of "breach," because, if the other party's conduct amounted to only an "immaterial" breach, then your accusation of breach (and refusal on your part to perform) could constitute the "material breach." Of course, we recommend that you talk to lawyer about these issues.
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 a penalty or punitive damages. Rather, click here to learn about when a "penalty" provision may be enforceable.
Likewise, for breach of contract, one cannot seek an award for general stress, aggravation, lost wages from litigating the breach (unless the contract specifically calls for it), 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.
Click here to learn about how court costs are calculated.
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 or involves 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.
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.
The one exception is contracts involving consumer protection, such as contracts for personal or residential matters. We cover these topics elsewhere on this blog, but know there are certain protections for home improvement contracts and door-to-door sales activity. Here, the courts will not re-write the contract, but there are numerous instances where a consumer can treat certain clauses as voidable and/or time periods to rescind the contract.
6. DEFENSES
You might have certain defense to enforcement of the contract against you, such as: you did substantial performance, performance is impossible (some unforeseeable event not covered by insurance is preventing your action), the agreement is against public policy, you were fraudulently induced into the contract, or you are not a party to the contract, because the agreement was entered into by your incorporated business, not you personally. You might be able to show that the contract claim against you for non-payment of debt was not pleaded sufficiently or was otherwise defective.
