Contracts are defined legally as exchanges of promises between two or more people. For example, if individual A promises to do X for individual B, and in exchange, B promises to do Y for A, there is a contract between A and B. Contracts can be purely implicit (i.e., inferred from the parties’ actions), they can be oral, or they can be written.
As a businessperson, when should you make use of each of these three types of contracts? I suggest the following answers to this question:
■For obvious reasons, implicit contracts are normally difficult or impossible to enforce, since their terms are normally difficult or impossible to prove. Thus, if you have a course of dealing with a supplier, a customer, an employee, an independent contractor or other third party and if this course of dealing is important in your business, you should never rely on an implicit contract with the third party if there is any possibility that you and he or she will disagree about your respective rights and duties.
■Under New Hampshire legislation and case law, you may perhaps be able to enforce an oral contract if it is not one of the following eight types:
(1) The first type covers contracts whose performance will not be completed within one year after the date on which these contracts are effective. For many businesspeople, this type of contract is likely to arise somewhat frequently.
(2) The second type covers contracts in which a person agrees to be responsible for another person’s debt or other obligation if the other person breaches it. In my experience, this type of contract — called a “suretyship” contract — is not common among New Hampshire businesspeople. However, its enforceability will often be critical to affected parties.
(3) The third type covers contracts involving promises that the parties will become married to one another. Prenuptial agreements fall within this type of contract, and these agreements are becoming increasingly common among younger couples.
(4) With certain narrow exceptions, the fourth type covers contracts for the sale of goods worth more than $500. In the New Hampshire business world, this type of contract is, of course, extremely common.
(5) The fifth type covers contracts by executors of wills and trusts who agree to personally answer for duties of “decedents” — i.e., persons covered by a relevant will or trust. I am not a full-time estate planner, but I assume that this type of contract is not unusual as an element of comprehensive estate plans.
(6) The sixth type covers contracts involving the sale of interests in land. Obviously, this type of contract will be critical in the business of many real estate professionals and lenders.
(7) The seventh type arises under the Uniform Commercial Code (the UCC) as in effect in New Hampshire. This type covers contracts for leases of personal property under which total lease payments are less than $1,000. These contracts will also be important for at least a significant number of real estate professionals.
(8) The eighth type involves real property contracts under the UCC in situations in which real property is being used as security for a loan. These UCC real property agreements, too, can be of great importance to real estate professionals and to people who do business with them. They will also be important for New Hampshire individuals who own one or a few parcels of commercial or residential real property and who wish to use these parcels as collateral for loans.
The rules defining and governing each one of the above types of contracts are complex, and these rules have generated a substantial volume of litigation in New Hampshire and other states. In future columns, I will address in greater detail all of the more commonly occurring types of contracts listed above. But I want to conclude the present column with what I believe is a critical piece of advice for business readers: Even if you are entering into or are already a party to a type of contract that, in theory, is enforceable even though it is an oral contract, you should create a written version of the contract if the subject matter is at all significant in your business.
There are two reasons for this advice:
■As noted above, and as the case law demonstrates, oral contracts are, by their very nature, difficult or impossible to enforce.
■If you take the trouble to put in writing the terms of a contract even though this writing is not legally required as a condition for the contract’s enforceability, the very process of writing will often enable you to discover and address contract issues you would otherwise have overlooked.