Avoiding Expensive Mistakes in Your Personal Service (Performance) Contracts: Part I

Personal service contracts are a regular, often daily, part of certain businesses. Many people presume that signatures are what make a contract fully enforceable, but there’s more to it than that. While they're critically helpful to show an intent to be bound, if other certain contract requirements aren’t met, signatures alone won't enough.  Legal elements like valuable consideration, mutual assent, offer & acceptance, and definitiveness aren't on the average person's mind when drafting contracts, but these are the legal elements a contract lawyer or judge will look for when evaluating whether a contract is valid and enforceable. Understanding these elements and other basics of contract law can improve your overall contract drafting, further protecting your interests and mitigating any fallout from poor contract drafting.  The following is a primer on essential contract terms. The purpose is to help improve your overall contract drafting skills and avoid expensive contracting mistakes.

If you take anything from this post, we'd like to impress upon you the real benefit of drafting your contracts well, whether or not you use an attorney to help.  Most contract issues (read: lost money and time) occur from ambiguities or omissions that could have been avoided with a properly drafted contract.  As you learn through life, the more you know, the more you realize what you don’t know.  So even best efforts can fall short simply from not knowing what you’re omitting or by taking a "kitchen sink" approach to your contracts. I've personally had to help several clients that failed to carefully review a “copy and paste” contract off the internet.

In this first segment, we will explore the key legal elements of a valid contract, the two types of contract breach, and the concept of substantial performance.  In Part 2, we cover how to avoid the most common failure or "pain" points of contracts and what to do if a party breaches a contract. The following information applies to almost every type of contract, but we've tailored this information to personal service contracts (as opposed to goods contracts) since they have some unique considerations. Personal service contracts include talent agreements, live performance contracts, commissions for artwork, and any other agreement where a personal service or skill is the value being exchanged from one party to another. There is a sui generis or "one of a kind" component to many personal service contracts where the skill or service offered is unique to that person of group. Service contracts for musicians, dancers, artists, designers, photographers, writers, chefs, influencers, comedians, or any performance-based profession are personal service contracts.

1. The Basics of Contract Law

Contract law forms the governing framework of legal agreements. There is a body of contract law that dates back centuries with many principles that governed the law years ago still relevant and applied today.  Traditionally the law tries to determine the “intent of the parties”, usually done by examining the text. Proving intent without explicit text can be difficult, often requiring extrinsic or circumstantial evidence. It can be done. Still, it’s always better when your intent is explicitly drafted into your contract and not left subject to interpretation.

Contract law is also founded upon fundamental principles of fairness and justice like not unjustly enriching a party in cases of non-performance and voiding contracts on public policy grounds.  Common public policy grounds that invalidate contracts are contracts for illegal goods (drugs or contraband), contracts made by minors, and contracts made under duress. If someone points a gun at your head and forces you to sign a contract, courts have the power to invalidate it as being made under duress.  Just remember this next time you try and make someone “an offer they can’t refuse” (see: The Godfather by Francis Ford Coppola for reference).

2. Elements of a Contract

Let’s define what a contract is!  A contract is a legally binding agreement between two or more parties that establishes each party's rights and obligations.  As my old contracts law professor was fond of saying, “a contract is a promise to do or not do something.”  Simple enough, right?   Not quite. A court must first decide if a valid contract exists by confirming the fulfillment of the necessary legal elements. Each "legal element" must be fulfilled to be legally enforceable by law.  In some cases. the parties believe there's a valid contract in place, but a critical legal element is still missing. This can happen willfully or by accident, but in either case, upholding the contract will be difficult.  If you’re unable to prove any legal element, the opposing party may successfully prove a valid contract doesn't exist. The following legal elements we discuss are essential for a valid contract.  You don’t need to know these inside-out, but even the simplest contracts must contain these elements so they're good to know.

a)      Offer and Acceptance

An offer is a proposal by one party to enter into a contract with another. The acceptance is the "written, oral, or implied agreement to perform an offer by the other party".  This goes without saying really, but the law will still look to see if the offer and acceptance are clearly defined. 

Even when the offer and acceptance aren't explicit, they may still exist implicitly. When you buy groceries or go to a restaurant for instance, you’re fulfilling the offer (the availability of the food for an exchange of money) by an implied acceptance to pay for your meal upon ordering and consuming it. Your actions are an implied acceptance of the store or restaurant's offer.

Example:  Sara offers a piece of artwork to Tom for $1,000 at a local Arts Festival. Tom accepts and charges the listed price to his credit card.  Sara’s offer and Tom’s acceptance satisfy the “offer and acceptance” element.

b)     Valuable Consideration

Valuable consideration is an element that requires that actual value exists on each side of the contract. That value has to be quantifiable, but not necessarily equal.  There are some common instances where the valuable consideration element is not fulfilled.  For example, a gift doesn't satisfy the valuable consideration element.  Once the gift-giver articulates the exchange as a gift, it doesn't require an exchange of value from the recipient. The gift therefore "lacks" consideration. While it may have actual monetary value, it fails to meet the criteria for "exchangeable" consideration since the intent is a unilateral exchange (i.e. the gift in exchange for nothing)

A value already transferred also fails to meet "consideration".  If someone offers you money for something you’ve already done in the past, it doesn't satisfy consideration under the law.  The exchange of value needs to be concurrent or involve unfulfilled commitments to satisfy the consideration element and establish a new, valid contract. Generally, this isn’t an issue for most contracts, but it is a necessary evaluation when assessing whether there’s a valid contract.

Example: Sara offers to paint a mural for Tom’s office as a gift.  Sara demands Tom give her $1500 for it after the fact.  Since Sara had intended the mural as a gift, Tom is not obligated to pay Sara the $1500.  A gift is an act of generosity by law and not based in a bilateral exchange of value.  Gifts are meant to be unilateral exchanges, not contracts.

c)       Mutuality and Assent

"Mutuality" requires that both parties demonstrate some kind of mutual obligation to the other.  "Assent" is a complementary concept where each party demonstrates an affirmation or demonstrated intent to complete the contract.  Signatures are a great example of mutuality and assent or what is often referred to as a "meeting of the minds”.  The signature represents both the "mutuality" of obligation and the "assent" of affirmation. The courts want to see evidence that the parties willingly and knowingly entered into the terms of the agreement. Contracts that fail for lack of mutuality and assent typically involve ambiguities or misunderstandings between the parties.

d) Legal Elements Conclusion

These three legal elements of a contract – offer & acceptance, valuable consideration, and mutuality & assent - are necessary to every valid contract. Knowing that these elements are required by law should help shed light on what to look for when there’s a contract dispute.  Mostly these three elements are often met intuitively, but they’re helpful to know so you can draft supporting language into your contract templates.  You should consider being explicit and including terms like “as valuable consideration” or “Party A offers….and Party B accepts” directly into your contracts.

2. Types of Contract Breach

Most contract breaches can be broken down into two categories: material and minor breaches.  A material breach occurs when one party's actions deprive the other of all or most of the contract's benefits.  These include worst-case scenarios - no shows, non-deliveries, refusals to perform, et al - where the cost of the breach leaves one party almost or entirely empty-handed.  For personal service contracts, a material breach is one where the show could not go on or there was a failure to pay the performer.  For simplicity’s sake, you can think of material breaches as ones that can’t be fixed or “cured” by some remedial action on behalf of the breaching party. The breach effectively prevents the execution of the contract. The remedy is often to compensate the injured party (a legal term) through financial compensation.

A minor breach by contrast, also known as a partial breach, refers to breaches that can typically be "cured" by the breaching party.  The non-breaching party has a variety of options including accepting the partial performance and rejecting the rest of the contract or demanding the other party cure the breach within a limited time. The critical part is that the contract's overall benefits can still be delivered and therefore, the breach is not significant enough to be material.  It’s best to explicitly write your most common expected minor breaches into your contract.  For instance, is delivering more than fifty percent of the performance considered delivery of the overall benefit of the contract? If the venue still has to cut the event short or refund tickets, does that make a difference? It really depends on the nature of the event and the nature of the personal service, so it's best to contract the threshold where minor breaches become material explicitly.  Do not be afraid to bring up worst case scenarios in your contract drafting, you can save yourself a tremendous amount of headache resolving this before and not after the breach.

Simply put, material breaches can’t be cured and minor ones may be cured.  It’s good to address as much of this in your contract as possible since it's good reminder and incentive to the other party for what to consider to avoid breaching the contract.

3. The Doctrine of Substantial Performance

The most common material breaches are the obvious ones - failure to deliver a performance, fulfill a critical action, or provide adequate equipment or space for the performance to take place.  The harder cases are ones that involve balancing tests like when performance or services were "somewhat" or "mostly" delivered.  They're even harder if the issue is not explicitly addressed in your signed contract.  You, your lawyer, or a court must then discern where the line for material breach will be.

The law uses what’s called the “doctrine of substantial performance” for personal service contracts to help resolve ambiguous types of breaches.  The doctrine of substantial performance addresses situations where a party has not fully performed the entirety of their contract but may still have "substantially performed" enough of the contract where the overall benefit has been delivered or conferred.  If a recipient has received a sufficient amount of the contract's benefits, then it would be unfair for them to claim that a breach was material, not minor.  They would effectively be “unjustly enriched”, a legal term for receiving a benefit while exchanging no fair value in return.  Substantially-performed contracts inherently only contain minor breaches since they remain valid and enforceable.

But how to decide whether a contract’s been substantially performed?  Contracts for goods are easier to handle than service contracts.  This makes sense since calculating damages for goods is quantifiable.  Determining what percentage of goods has been delivered is sometimes as easy as counting inventory and calculating loss. The law then provides options to the injured party about how to handle partial or incomplete delivery.  This can include partially accepting or rejecting the goods already delivered.  If the contract is for goods over a certain amount, it is governed by the UCC (Uniform Commercial Code) which lays out the law for large goods contracts.

Personal service contracts are different since delivery of services, particularly creative or artistic ones, can involve subjective opinions about quality. Adjudicating service contracts is naturally going to be more difficult as a result. Remember the section about valuable consideration? For personal service contracts, a human performance or skill is often the valuable consideration exchanged from one party to the other. Courts are hesitant to require the breaching party to fulfill a service, which is a remedy to breach called "specific performance".  Specific performance is a legal term where the offending party is required to rectify their breach not through paying money, but through performance of the contract. But courts won't typically award specific performance for personal service contracts (as opposed to goods contracts). This is because compelling a performance or personal service goes beyond just conveying damages but could also be considered punishment or servitude. In addition, the quality of performance may be worse or impossible depending on the circumstance or if there's bad blood between the parties. Courts instead will look to the doctrine of substantial performance to draw a case-specific line on what constitutes breach for that situation.  But remember, it’s all subjective – so while you may consider performance to be "substantially-performed", the other party will argue otherwise.  In the end, you’ll be at the mercy of the court or arbitrator if you can’t reach a settlement.  Your better solution (time and time again) is to explicitly lay out what constitutes substantial performance in your contracts. If an issue arises, knowing what to do is as simple as referencing your contract.

Conclusion

An ounce of quality contract drafting can prevent a pound of headaches. Drafting contracts is about reducing risk and liability. While you can't predict every issue, you can stipulate how unpredictable issues should be handled. You'll sleep better at night if your contracts are properly drafted. Where possible, include explicit text in your contract to avoid ambiguities between parties, define minor v. material breaches, and outline common substantial performance scenarios. If you have issues or are unsure about the strength of your contract language, you can reach out to us to set up a consultation at consultation@zalalaw.com. We'd be happy to review and improve your contracts!

Shreepal "Shreeps" J. Zala ,Esq.

Your Mind Is Your Property.®