What is a Contract Under California Law?
For a contract to be legally binding, all parties must agree on the terms of a possible sale of goods or services. While courts in other states can be a little more flexible with what exactly qualifies as a contract, this is not the case within California.
According to Section 1628 of the California Civil Code, a contract is generally defined as an agreement to do or not to do any act, and can be either in writing or oral. Oral contracts a sometimes dismissed or seen as less viable than written contracts, but they are still legally binding. Verbal contracts are, however, more difficult to prove without any supporting evidence.
In each state, there are four major elements that must be present to form a lawful contract. The first one is the offer. This is, essentially, the proposal or invitation to enter a deal, which can come from either party . The second element is acceptance. This means that the terms of the contract must be clearly accepted by the other party. Third, the deal in question must constitute consideration. This is the primary motive behind the contract. Finally, the last element is mutual consent. Both parties must fully understand the obligations that they are agreeing to, before confirming the agreement.
In California, Section 1550 of the Civil Code lists the following five elements that must be present in order for an agreement to count as a legal contract:
For a person to file a lawsuit over a given contract, all elements must be easily recognizable. Even if one party was able to initiate a deal, if all five elements were not present, then the agreement cannot be legally binding.
Analyzing Contract Types Under California Law
There are four types of contracts recognized in California: verbal, written, implied and express.
Verbal (or Oral) Contracts
While verbal contracts (or oral agreements) are generally unenforceable in court under the Statute of Frauds, there are a few exceptions: If an exception does not apply, then the verbal contract is not enforceable by law. However, verbal contracts may still be valid if both parties can hold to their ends of the agreement or if the parties act in good faith. For example, if a person hires a contractor to remodel their kitchen at a specific price and pays them up front, then the contract has been executed and is no longer valid. The contractor no longer has any obligation to follow through on the project.
Written Contracts
Written contracts are any contracts documented in writing. Generally speaking, written contracts take precedence over verbal contracts when it comes to enforceability in the event of a dispute. Contracts must be in writing when:
Implied Contracts
Implied contracts are a type of oral contract that are based upon actions taken by the individuals involved. For example, if two individuals go to a bar and engage in a conversation where one person orders a drink and pays for it, and the other person orders another drink while the first drink is being consumed and does nothing to pay for it, then an implied contract has been formed where the second individual should pay for their drink. In order for an implied contract to be valid, the following must occur:
Express Contracts
An express contract is a type of written or verbal contract that is specifically stated between the parties. This is the most common form of contract. When both parties agree to specific terms of the agreement, such as price, scope of work, deadline, etc., an express contract has been formed. Express contracts do not have to be written down or signed to be legally enforceable, but having a written contract is always recommended.
Key Terms for California Contracts
Regardless of the contract, it should also include the essential agreed-upon terms:
- Conditions precedent for either party
- Timeline for performance
- Dispute resolution and what happens in the event of a lawsuit
- Jurisdictions, where the parties will litigate or otherwise resolve their disputes
- Confidentiality of the terms and existence of the contract
- Obligations in the event of termination
- And those are just a few examples of terms that should be included.
As a general rule, contracts under California law can include just about any number of negotiated terms; provided, however, the terms must not represent any unlawful activity. So, whether you are talking about a lease agreement with a tenant, a loan agreement with a personal guarantor, or an asset purchase agreement with a software as a service provider, you need to understand the reasons for including certain terms in the contract and how, if required, you will enforce those terms.
Creating a Contract in California: Requirements and Steps to Follow
Contract formation in California typically follows a series of sequential steps. It’s important to consider that not all contracts require each element and that contracts may be formed verbally, or even through the conduct of the parties, as opposed to in writing. The subsequent sections of this article will further discuss formation; however, below are the essential elements required for contract formation in California: The offer is a manifestation to enter into the agreement. In other words, the person offering the agreement is making an offer to himself/herself/itself by making an offer to another. An offer can only be accepted if it is sufficiently clear. Acceptance of the offer must be by the party or parties who were formally offered the deal. Acceptance must be communicated to the offering party so that they are aware that the deal has been accepted. Consideration involves some benefit to one party and some detriment to the other. The benefit does not have to be monetary. Consideration is typically described as the "bargain for exchange." And as such, a deal (or agreement) without consideration is not enforceable because it lacks the element of mutual consent. The purpose of a contract must be legal. In other words, the contract must not be for an illegal purpose or violate public policy. Parties entering into a contract must be legally competent to do so and have the authority to enter into the deal. A contract is voidable if either party is not legally competent to enter into the agreement, which means the agreement can be cancelled. A contract is void if the act involved is not legal, is against public policy, or the parties entering into the agreement miss the element of being competent to do so. The terms of the agreement must be sufficiently definite so the parties may be able to understand what their obligations are. Where the terms are not definite, the contract may be voidable or the court may find the contract enforceable to the extent of the parties’ performance.
Common Mistakes with California Contracts
Ambiguous Terms
One of the most common pitfalls in contracting—especially among inexperienced businesspeople—is using ambiguous terms. California courts tend to enforce the plain meaning of a contract’s words, no matter how financially disadvantageous this may seem to one or both of the parties. This means you should familiarize yourself with the common legal meanings of terms such as "consideration" or "indemnity" even if these concepts are clear in the context of your agreement. Always define uncommon words and complex terms on the first or reference page of your contract.
Unenforceable Clauses
There are a number of contractual provisions that California courts refuse to enforce, regardless of how well the parties have agreed upon them . These include:
Restrictions on the right to a jury trial
Arbitration clauses
Contingent contractual obligations (known legally as "conditional subsequent" obligations)
In some cases, it may be possible to redraft your agreement to mitigate the risk of unenforceability, while in other cases, you may need to resist including certain clauses altogether.
Non-adhereance to State-specific Statutes
California courts are strict about enforcing the statutes that apply specifically within the state. From non-compete clauses to time limits on debt collections, California law is different from much of the rest of the United States—and that difference means that courts will not enforce many agreements that would otherwise be valid in other states. It is critical that both parties understand their rights in California before signing a contract—particularly that the contract gives either party the full protections to which they are entitled.
California Contracts: Enforcements and Legal Remedies
When a breach of contract occurs in California, several legal remedies may be pursued by the wronged party, depending on the nature of the breach and the complexity of the agreement. The legal principle guiding the remedies in contractual disputes is to put the injured party in the position he or she would have been in had the contract been performed as agreed.
Typically, a breach of contract lawsuit can result in four legal methods of enforcement:
Damages
- Compensatory damages: Damages resulting from the wrongful action of another person are awarded as a form of compensation for the injury, damage, and loss caused by the breach of contract.
- Punitive damages. These are damages beyond compensatory damages intended to penalize or punish the wrongdoer and deter others from similar conduct.
- Consequential damages. Referred to as special damages, these are awarded to cover foreseeable harm that was caused by the wrongful act.
- Liquidated damages. Liquidated damages become payable immediately upon the breach or default. The liquidated damages amount should specify the sum to which the injured party is entitled or expressly state that the other party will forfeit an agreed upon minimum sum.
Specific Performance
Typically, a court will not order specific performance, but will instead award monetary damages. Specific performance is an equitable remedy requiring the breaching party to fulfill his or her contractual obligations. However, a California judge may order a breaching party to perform his or her obligations and to carry on with the original agreement for the benefit of the person who suffered the breach.
Injunctions
An injunction is an order issued by a court requiring the defendant to refrain from performing a particular action. A California judge may issue a temporary or preliminary injunction to protect the rights of the non-breaching party. The injunction would be in place until the court decided whether the defendant should be permanently prohibited from the challenged conduct. A permanent injunction may be issued when the damages caused by the breach are irreparable, or when it is not possible or practical to assess the harm inflicted by the defendant.
Defending against Breach of Contract Claims
A breach of contract lawsuit means that the agreement has not been upheld as it should, resulting in damage to one or both parties. However, California law provides for defenses to breach of contract claims.
A breach of contract defendant may be able to prove:
- Impossibility or impracticability of performance
- Mutual mistake of fact at the time of entering into the agreement
- Incomplete performance of the contract by the other party
- Anticipatory breach of the contract.
Latest Developments and Trends in California Contract Cases
The impact of the Uniform Commercial Code (UCC) and its amendments is constantly evolving. Licensed professionals, such as lawyers, architects, real estate brokers, and insurance producers, should be aware of new licensing and contracting requirements and restrictions as well as recent cases impacting their areas of expertise. Meanwhile, changes to the California Civil Code reflect significant new developments in the protection of non-employees and independent contractors, including changes to the Protecting Tenants at Foreclosure Act (PTFA) and New Home Warranty Act, among others.
Many changes in California contract law are happening in the courts, where case precedents are being set by the influence of recent California appellate decisions on future rulings. For example, in 2010, the California Court of Appeals for the First District held that contracts containing waivers on the part of uninsured consumers in addition to overall waivers of all consumer rights that flow from the deal are, on their own, an unconscionable contract, depending on the consumer’s degree of wealth. In their ruling in Kilgore v. Key Fitness Center, the court elaborated on the bill prepared and considered during the recent legislative session by California Senator Loni Hancock (D – Berkeley). Ms . Hancock was attempting to gain the full support needed to pass her legislation, which now requires each fitness facility to be licensed and secure a surety bond before doing business in California.
In 2010, The California Supreme Court upheld the Ninth Circuit court’s decision to not allow collection and enforcement of a $15,000 non-compete agreement between an insurance agent and his former employer in Edwards v. Arthur Anderson LLP, and the California Supreme Court also restricted the ability of insurance agents to enforce non-compete agreements with former customers in the 2010 case of Juan Torres v. Civil Service Employees Insurance Company, Inc. These two cases highlight the evolving legal implications surrounding non-competition agreements in California.
Due to the recent spate of natural disasters (like hurricanes, earthquakes, floods, etc.) that have hit the United States, 2010 also marks a time during which we have seen greater scrutiny of force majeure clauses and other "Acts of God" provisions.
Additionally, recent California case law has set new precedents and reduced the stature of liability waivers in cases involving torts. For example, in 2010 a California Court of Appeals upheld a waiver of trespass liability in the case of Hessefort v. Community Memorial Health System, Inc., and a liability waiver signed by teenage boys who participated in a mixed martial arts class was held to be enforceable in O’Connor v. McAJ Holdings Corp.