Personal service contracts are a regular, often daily, part of certain businesses. Many people presume that signatures are what makes 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 exact things a contract lawyer or judge will look for when evaluating whether a contract is valid and enforceable. Failure to meet these requirements leads to unwelcome surprises, costs, and unenforceable contracts. Understanding the basics of contract law can improve your overall contract drafting further protecting your interests and mitigating any fallout from poor contract drafting. This article is a primer on essential contract terms with the purpose of improving your overall contract drafting skills and avoiding 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 your best efforts can fall short simply from not knowing what you’re omitting or, as often is the case, taking a "kitchen sink" approach to your contracts. We've taken on at least one client who needed help because they failed to carefully review a “copy and paste” contract template they used off the internet.
In this first segment, we will explore the key legal elements of a valid contract, the two types of contract breach (material vs. minor), and the concept of substantial performance, which is how to determine if partial performance is enough to fulfill a contract. In Part 2, we’ll 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 the execution of a personal service or skill is the value being exchanged from one party to another. There is a sui generis 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 often 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 “intent of the parties” which is usually done by examining the text of the contract. Proving intent without a contract can be difficult, often requiring extrinsic or circumstantial evidence outside of the contract, but 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 certain types of contracts on public policy grounds. Common public policy grounds that invalidate contracts are contracts for illegal goods (drugs or contraband), contracts made by minors, or contracts made under duress. If someone points a gun at your head to force 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).
1. 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 determining whether the contract fulfills the necessary legal elements. A "legal element" is a requisite by law for something to be legally enforceable. In some cases, the parties believe there's a valid contract in place, but a critical legal element is missing. If that’s the case, upholding the contract will be difficult. If you’re unable to prove certain legal elements actually, the opposing party might use this to argue that 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 party. The acceptance is the agreement to perform that 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 still exist. When you buy groceries or go to a restaurant for instance, you’re fulfilling the offer (the availability of the food) with an acceptance (the exchange of monetary value). 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. This also sounds like a given, but there are 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 receiving party, so the gift doesn't constitute consideration for contractual purposes. While the gift might have actual monetary value, it lacks consideration. A value already transferred also doesn’t constitute consideration. If someone offers you money for something you’ve already done in the past, then while you can agree to accept it, it doesn't satisfy consideration under the law. The exchange of value needs to be concurrent as a current or forward exchange to satisfy the consideration element. Generally, this isn’t an issue for most contracts, but it’s 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 not based in an exchange and therefore is not considered valuable consideration under the law. Gifts are meant to be unilateral exchanges.
c) Mutuality and Assent
"Mutuality" requires that both parties demonstrate some articulation 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 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, particularly about the intent of one party to enter into the contract, the lack of a signature, or a behavior demonstrating that a party had no intention of fulfilling the contract.
These three legal elements of a contract – offer & acceptance, valuable consideration, and mutuality & assent - are part of every valid contract. Knowing that these elements must be defined by your contract and are required by law should help shed light on the process we go through as lawyers 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 for perform - where the cost of the breach leaves one party entirely or almost entirely empty-handed. For personal service contracts, a material breach might be one in which 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 prevents the execution of the contract; generally, material breaches can't be cured. The remedy is often to compensate the injured party (a legal term) usually 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 then 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, that is, the breach is not significant enough to be material. This can be subjective so 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 case 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. 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 that may be cured. It’s good to address as much of this in your contract as possible. Not only is it a good safeguard, but it also provides a good reminder and incentive to the other party for what to consider to avoid material breaches on their end.
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 have "substantially" performed enough of the contract where the overall benefits of the contract have been delivered or conferred. This is sort of like determining the line between minor and major breaches. I mentioned earlier that contract law involves principles of fairness and this is one example. 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. If the contract has been substantially performed, then any breach would be considered minor whereas the opposite is true, if it hasn’t been substantially performed, then it should be a material breach by law.
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 the loss. The law then provides options to the injured party about how to handle partial delivery. This can include accepting or rejecting the goods already delivered.
But this is different for personal service contracts since delivery of services, particularly creative or artistic ones, can involve significant subjectivity. 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 contract according to its agreed terms. The requirement by law to fulfill services to remedy breach is called specific performance. Specific performance is a non-monetary legal remedy where the breaching party must fulfill the remaining 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 circumstance and 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 “substantial” based on the contract terms or the intent of the parties. This may depend on the nature of the service, comparable examples, or what seems fair or just given the circumstance. But remember, it’s all subjective – so while you may consider performance to be substantial, the other party will argue otherwise. In the end, you’d 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 so that if the issue arises, knowing what to do is as simple as referencing your contract.
Conclusion
An ounce of contract drafting can prevent a pound of headaches. You save yourself time, money, and anxiety when you draft your contracts well. Drafting contracts is all about reducing risk and liability and while you can't predict every issue that will occur, you can stipulate how unpredictable situations should be handled. When you approach your contracts with care and diligence, you will see better results and sleep better at night. When in doubt, look to include explicit text in your contract to avoid ambiguities between the parties, define minor v. material breaches, and outline thresholds for likely cases of substantial performance.
Also, don't hesitate to cycle back around to your contract templates periodically with lessons learned and to seek out room for improvement. You can also have an attorney look over your standard contract templates or review your contracts; it will make a difference.
Shreepal "Shreeps" J. Zala ,Esq.
Your Mind Is Your Property.®
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