We previously discussed in broad terms that a valid and enforceable contract must have offer and acceptance, mutual exchange of something of value and definitive terms.  But what does it mean for a term to be “definitive”?

Definitive terms tend to vary contract to contract, depending on what goods or services are being sold, the custom in that industry and the relationship of the parties.  At a minimum, a contract must state the names of the parties, state valid consideration, have a mechanism for determining price and payment terms, and be signed (physically or electronically) by the parties. If the contract is for real property, the legal description or tax parcel number of the property must be included.

In addition, it is a good idea to specify in detail key understandings of the contract, such as the obligations of each party, what standard of performance will be acceptable, what happens if that standard is not met, payment terms, delivery terms, insurance terms and what happens if there is a breach.

These terms must not be too vague or overbroad, so that a court can tell what the agreement was.  Sometimes the court will consider only the words of the contract, and sometimes the court will be able to consider evidence outside the “four corners” of the contract.

Here is a recent case that shows why it is hard for us to articulate exactly what terms must be defined for a contract to be enforceable.

In Micro Capital v. Broyhill, one party operated a furniture manufacturing plant that supplied heat to an attached warehouse. Two wood-burning boilers generated heat for both the plant and the warehouse using wood waste, a byproduct of the furniture manufacturing process.  The evidence showed the parties had discussed how to account for the shared heating before entering into the contract, but in the end merely said one party would pay “1/4 of the total heating bill” without any further detail.  A dispute arose over the amount of the heating bill and how it could be calculated.  Several people testified with different ways to calculate “total heating bill.”

The court first stated North Carolina contract law:

There is no contract unless the parties assent to the same thing in the same sense. A contract is the agreement of two minds — the coming together of two minds on a thing done or to be done. A contract, express or implied, executed or executory, results from the concurrence of minds of two or more persons, and its legal consequences are not dependent upon the impressions or understandings of one alone of the parties to it. It is not what either thinks, but what both agree. (quotations and citation omitted).

The court found under the unique heating system and the fact that the parties had negotiated extensively but never agreed to a method of calculation, that the parties did not sufficiently define “total heating bill” and thus the contract was “ambiguous” and unenforceable.

The morale of the story is, don’t get burned by ambiguous or undefined terms.