Business contracts can be tricky. You can find yourself in a contract without being aware of it.
For instance, say your neighbor turns up on your property one day with a lawnmower and proceeds to mow your lawn. You go out and say, "Thanks!" The next week your neighbor turns up again and mows your lawn again. You thank your neighbor again and think nothing of it. The third week, your neighbor mows your lawn and turns up at your door with a bill for three weeks of lawn mowing.
By your actions, you have created an implied contract, and you will probably have to pay the bill.
What is a Contract?
A contract is a formal agreement between two different people or entities (like a corporation). In a contract, one party agrees to perform a service or provides goods in exchange for some type of compensation, which can be money, or other goods or services.
To make a contract legally binding in court, there must be an offer and acceptance and consideration (an exchange of things of value).
The offer and the acceptance are sometimes called a "meeting of the minds." This is a critical point in an implied contract. As in the example above, a meeting of the minds can be implied.
What is an Implied Contract?
An implied contract is a contract that exists because (a) the parties assumed a contract existed, or (b) if the contract existed it would be unfair to one of the parties. It has the force of law because of the actions of the parties and the circumstances.
Just because an implied contract can be taken to court doesn't mean that the plaintiff can win the case. It's more difficult to get a judgment (to get the court to award payment) in an implied contract case because there is no written proof.
There are two types of implied contracts:
An implied-in-fact contract is an unwritten contract that the parties presumably intended to agree on, as can be inferred from their actions, conduct, and the circumstances. A contract implied in fact is a true contract. That means it can be taken to court.
Here's an example: Let's say a vendor and a customer have an ongoing relationship where the vendor sends goods to the customer and the customer pays. One day the vendor sends goods to a customer, and the customer takes the goods without paying and uses those goods to make products or re-sell them for a profit. In this case, a contract to buy and sell those goods might be inferred. The customer must pay for the goods because an implied contract has been created.
An implied-in-law contract is an obligation created by law for the sake of justice. It operates as a valid contract for the purposes of remedy (for the injuries party) only. In this case there is no true contract covering the matter. Contracts implied in law may also be called a quasi-contract, because neither party had the intention of creating a contract, but there is a justice issue here.
The best example is this: You are at a restaurant and you choke on a chicken bone. A doctor at the next table performs the Heimlich maneuver and saves your life. Then, the doctor sends you a bill for medical services. Yes, you'll probably have to pay. The law looks at fairness and whether you benefitted from the relationship (brief as it was).
A verbal contract, in which there is nothing in writing, might be considered an implied contract. If both parties act as if they had a contract, the existence of an implied contract can be inferred.
Some contracts are required by law to be in writing to be heard in court, but otherwise, an implied contract that is valid (that meets all of the six elements) is perfectly "legal."
Are Implied Contracts Legal?
The term "legal" is usually discussed in terms of the contract being valid and also legally binding on both parties. In addition to having a meeting of the minds, three other elements must be present to have a valid contract:
- Both parties must be competent to make decisions (not minors or under the influence of drugs or alcohol, or of diminished mental capacity)
- The contract must not be for something illegal, like drugs or prostitution
- There must be a consideration (something of value) given by both parties. If only one of the parties gives something, that's a gift, not a contract
How Do I Avoid Making an Implied Contract?
The best way to avoid implied contracts is to be aware that an implied contract might exist and being explicit about your actions when dealing with others in business and personal situations.
After the second time of mowing your lawn, you might ask your neighbor, "I really appreciate this. But, you know I didn't ask you to do this. I'm not hiring you to mow my lawn."
How Do I Avoid an Implied Contract with Employees?
Implied-in-fact contracts come up occasionally in hiring situations. You don't want to imply that an employee has any kind of employment contract with you because that opens up all sorts of issues.
When making employment offers, make sure that you explain that employment is "at-will." That means either party can cancel the relationship at any time.
In writing a policy manual, avoid the appearance of a contract. For example, don't say, "WHEN your probationary period is over." That sounds like a promise that the person will be able to stay for the entire probationary period and that he or she will have a permanent job. Instead, say, "IF you successfully complete the probationary period."
Have a talk with an employment attorney before you hire any employees, so you can learn the pitfalls and avoid them.