Essential Contract Principles
Business owners and managers encounter contracts—varying in type, purpose, and complexity—daily. The finer points of how contracts are formed, what the essential provisions are, and when a breach excuses performance are legal questions; but, the answers vary depending on each fact-driven scenario. To help you spot the thorny issues, we highlighted key general principles below.
What are the elements of an enforceable contract?
Enforceable contracts have three required components:
Offer—party A must offer party an arrangement with definite terms;
Acceptance—party B must agree to party A’s terms; and
Consideration—something of value must be exchanged (e.g., goods or services for money). See C.G. Schmidt, Inc. v. Permasteelisa N. Am., 825 F.3d 801, 805 (7th Cir. 2016).
What if party A and party B agree to make a deal but the specifics are TBD. Is that enforceable?
No, agreements to agree are not enforceable contracts in Wisconsin. For example, a general contractor for an eighteen-story office building in downtown Milwaukee solicited bids from subcontractors for a glass “curtainwall.” C.G. Schmidt, Inc. v. Permasteelisa N. Am., 825 F.3d 801, 805 (7th Cir. 2016). The contractor selected one subcontractor’s bid but never entered into an agreement. The subcontractor bailed on the project, after negotiating with the general contractor for more than one year, and the general contractor sued. The court considered the parties’ conduct and writings (including two letters of intent) to determine their intent—not to be bound by the subcontractor’s bid but to reach a final, binding agreement.
Are oral contracts enforceable?
It depends. Some contracts must be in writing including, for example, contracts concerning real property (e.g., leases, offers to purchase, and mortgages; see Wis. Stat. § 706.02), settlement agreements (for actions pending in court; see Wis. Stat. § 807.05), contracts which cannot be performed within a year (see Wis. Stat. § 241.02(1)(a), and agreements to be liable for the debt or default of another person (see Wis. Stat. § 241,02(1)(b)). That said, many oral contracts are valid. But, enforceability requires that courts consider the parties’ conduct (including texts, emails, and other writings) and intent. See Associated Milk Producers, Inc. v. Meadow Gold Dairies, Inc., 27 F.3d 268, 271 (7th Cir. 1994) (“Even if the parties’ writings do not constitute a contract, however, the parties may nonetheless be found to have established a contract through their actions.”).
Are there limits on who may enter into a contract?
Yes, only competent adults (at least 18 years old) may enter into contracts.
Are there limits on activities for which people or entities may form contracts?
Yes, the activity required under the contract must be legal. For example, a contract to supply marijuana is illegal, and therefore, unenforceable in Wisconsin.
What clauses should be included in every contract?
Price, term, and the parties’ obligations are the basics of every contract. But, how they are defined and what other clauses are required varies depending on the type of contract (e.g., lease, sale of goods, service agreement), parties involved, and complexity of the transaction. As a result, there’s no one-size-fits-all approach to drafting or negotiating contracts.
What constitutes a breach of contract?
Only a “material” breach of contract will excuse the other party from performing.9 A breach is material when it is “so serious a breach of the contract . . . as to destroy the essential objects of the contract.” See Management Computer Services, Inc. v. Hawkins, Ash, Baptie & Co., 206 Wis. 2d 158, 183 (1996). Examples of material breaches include:
Failing to complete construction project phases at agreed dates. See International Prod. Specialists Inc. v. Schwing Am. Inc., 580 F. 3d 587, 597-98 (7th Cir. 2009).
Converting a gym to a “women’s facility” when the lease required the tenant to operate an “athletic club.” See 44 Assocs. Ltd. P’ship v. Capital Fitness LLC, No. 2005AP3091, 2007 WL 704179 (Wis. Ct. App. Mar. 8, 2007).
Operating repeatedly outside a franchisee’s territory. See Manpower Inc. v. Mason, 405 F. Supp. 2d 959, 970-73 (E.D. Wis. 2005).
What is the “right to cure” a breach of contract? How can a breach be cured?
The right to cure, or fix a problem, exists to an extent in common law, but more clearly, and with defined requirements, in certain Wisconsin statutes. For example:
Sellers of goods have a right to cure delivery of goods that don’t satisfy the contract’s specifications. Wis. Stat. § 402.508 (2)
Residential contractors have a limited right to cure flawed construction before the homeowner may sue. Wis. Stat. § 895.07
Tenants have a limited right to cure various breaches, including failure to pay rent, but the timeframe depends on the lease’s term. Wis. Stat. § 704.17
When statutes don’t provide the right to cure, contracts may define them. Courts are apt to apply well-defined cure provisions and contracting parties are wise to define terms clearly, rather than leaving their contract open to a court’s interpretation.
