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Terms of a Contract

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Introduction
Property
Torts
Contracts

Leasing
Resource Management

Explicit and implied terms of a contract

As stated previously, a contract is a way for individuals to specify legal (enforceable) rights between themselves, but the law sets some parameters and answers some questions. The parameters vary by type of contract.

This list provides examples of types of contracts the legislature has addressed; the citations are primarily to North Dakota statutes.

Examples of statutes directing contractual relationships.

  • N.D.C.C. §9-12-14. "An offer of performance must be made in good faith and in such manner as is most likely under the circumstances to benefit the creditor."
    • Distinguish between offer to enter into a contract and an offer of performance. For example, during a conversation I state to you "I will sell you 10,000 bushels for $35,000;" that is an offer to enter into a contract. When I arrive with a truck filled with grain intending to deliver it as partial fulfillment of our contract (wherein I am to deliver 10,000 bushels), that is an offer of performance. See N.D.C.C. 9-12-09 et seq.
  • N.D.C.C. §41-01-13. (1-203) "Every contract or duty within this title (N.D.C.C. title 41) imposes an obligation of good faith in its performance or enforcement."
  • N.D.C.C. §47-10-13. "A fee simple title is presumed to be intended to pass by a grant of real property unless it appears from the grant that a lesser estate was intended."
  • N.D.C.C. §47-16-04. "In the absence of any agreement to the contrary between the lessor and the lessee, the products received from real property during the term of a lease belong to the lessee."
  • N.D.C.C. §47-14-03. "Whenever a loan of money is made, it is presumed to be made upon interest unless it is expressly stipulated otherwise in writing at the time it is made."
  • N.D.C.C. §41-02-25. (2-308) "Unless otherwise agreed:  1. The place for delivery of goods is the seller's place of business or, if the seller has none, the seller's residence ..."
  • N.D.C.C. §41-02.1-21. (2A-212) "1. Except in a finance lease, a warranty that the goods will be merchantable is implied in a lease contract if the lessor is a merchant with respect to goods of that kind."
  • N.D.C.C. §47-07-12. "One who sells the goodwill of a business thereby warrants that the seller will not endeavor to draw off any of the customers."
  • Minnesota Statutes 17.90 to 17.98 and Minnesota Rules Chapter 1572.  Required language and terms for agricultural (production) contracts in Minnesota.

What obligations are implied in contract?

  • "In the case of every contact, there is an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part." taken from Patterson v. Meyerhofer, 204 N.Y. 96 (1912).
  • "[In a sale of personal property,] the Uniform Commercial Code assumes the parties so phrased their sale contract that, unless otherwise specifically excluded, course of dealing, course of performance, and usage of trade "were included in the contract even if not expressly so stated.""  Campbell Farms v. Wald, 1998 ND 85, 578 N.W.2d 96
    • A course of dealing is a sequence of previous conduct between the parties [that can] be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct (N.D.C.C. 41-01-15).
      • For example, the parties have entered into a series of contracts over the years.  How they have dealt with each other in the past during previous contracts (i.e., their course of dealings) will influence how the current contract will be interpreted and applied.
    • "[C]ourse of performance relates to the conduct of the parties ... [after the contract's] formation ." Campbell Farms v. Wald, 1998 ND 85, 578 N.W.2d 96.
      • For example, how the parties have dealt with each other during the current contract (i.e., their course of dealings) will influence how the remainder of the current contract will be interpreted and applied.
      • A seller is obligated to make a delivery every Tuesday for the 6-month contract.  After several weeks of Tuesday deliveries, the seller begins to make deliveries on Wednesday and the buyer accepts the Wednesday deliveries without expressing a concern that they are a day late. The Wednesday deliveries continue to several months. Finally, the buyer complains that the deliveries should have been on Tuesday.  The court may indicate that the parties, through their action of completing Wednesday deliveries have altered their agreement that deliveries on Wednesday is now their contract.
      • Course of dealings is somewhat like adverse possession, that is, if you have a legal right (based on contract or property), enforce that legal right.  If you do not enforce that legal right, the legal system may subsequently determine that you have decided not to enforce the legal, and now it is too late to change your mind and try to enforce the legal right.
      • Bottom line -- if you have a legal right, enforce it; otherwise you may be prohibited from enforcing it at a later time.
    • A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a written trade code or similar writing, the interpretation of the writing is for the court (N.D.C.C. 41-01-15).
  • N.D.C.C. 41-02-31. (2-314) Implied warranty - Merchantability..., a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind...

2. Goods to be merchantable must be at least such as:

    a. Pass without objection in the trade under the contract description;
    b. In the case of fungible goods, are of fair average quality within the description;
    c. Are fit for the ordinary purposes for which such goods are used;
    d. Run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved;
    e. Are adequately contained, packaged, and labeled as the agreement may require; and
    f. Conform to the promises or affirmations of fact made on the container or label if any.

  • N.D.C.C. 41-02-32. (2-315) Implied warranty - Fitness for particular purpose. If the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is . . . an implied warranty that the goods shall be fit for such purpose.

"A warranty of fitness for a particular purpose is implied when a lessor, at the time the lease is executed, has reason to know of a particular purpose for which the lessee requires the goods, and the lessee relies on the lessor's skill or judgment to select or furnish suitable goods. Minn. Stat. § 336.2A-213 (1998).

"As noted above, Weinandt admitted that he never told Waconia about his intended modifications at or before the time the parties executed the lease contract and he presented no evidence that Waconia had actual knowledge of the modifications until after the execution of the lease. Therefore, Weinandt could not have relied on Waconia's skill or judgment to select a baler that, after being modified, would successfully bale a manure and straw product in a stationary position. The district court's finding [dismissed Weinandt's claim] is affirmed."  Waconia Farm Supply vs. Weinandt

Thought questions:  How do these implied warranties apply to the sale of breeding livestock?  To the sale of grain that will be used in food for human consumption?  When considering the implied warranty of fitness for particular purpose, how important is the buyer's reliance on the seller's skill or judgment?  When is it reasonable for a buyer to rely on the seller?

 

1. A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate (or in the absence of a stated estimate, to any normal or otherwise comparable prior output or requirements) may be tendered or demanded.

2. A lawful agreement by either the seller or the buyer for exclusive dealing in the [specified] kind of goods imposes ... an obligation by the seller to use best efforts to supply the goods and [an obligation] by the buyer to use best efforts to promote their sale.

Waiving or altering these implied terms

  • Can any of the implied provisions be waived or altered?
  • Several of the examples stated that the provision applies only if the contract does not impose an alternative requirement; e.g., it is presumed that interest will be charged when a loan is provided, unless the agreement states differently.
  • Other provisions cannot be waived or altered; e.g., the obligation to perform in good faith or to not interfere with the other person's efforts to fulfill their contractual obligation cannot be altered.

What is prohibited from being included in a contract?

Are there prohibited clauses other than those already addressed as part of prohibited contracts? Probably not already covered but may not deserve too much attention. Certainly want to link the two topics.

4] Unconscionability is a doctrine which allows courts to deny enforcement of a contract because of procedural abuses arising out of the contract's formation and substantive abuses relating to the terms of the contract.

7] In assessing unconscionability, the court is to employ "a two-pronged framework: procedural unconscionability, which encompasses factors relating to unfair surprise, oppression, and inequality of bargaining power, and substantive unconscionability, which focuses upon the harshness or one-sidedness of the contractual provision in question."

Strand v. U.S. Bank National Association ND, 2005 ND 68, 693 N.W.2d 918

Unconscionability does not prohibit specific clauses, but it does prohibit a contract from becoming too one-sided.

Thoughts to consider

  • Maybe include an arbitration clause; N.D.C.C. chapter 32-29.3.

  • Additional examples of common types of contacts or provisions within a contract: option to buy (see Fries v. Fries, 470 N.W.2d 232 (ND 1991)), right of first refusal (see Stuart v. Stammen, 1999 ND 38, 590 N.W.2d 224), and "Act of God" clause (see Red River Commodities, Inc. v. Eidsness, 459 N.W.2d 805 (ND 1990)).
    • The following excerpt is from the Fries v. Fries case.

    "An option is a mere offer, and acceptance thereof must be made within the time allowed, and in minute compliance with its terms, or the optionee's rights thereunder will be lost, substantial compliance being insufficient to constitute an acceptance. Gurunian v. Grossman, 331 Mich. 412, 417, 49 N.W.2d 354, 357 (1951)."

    • The following paraphrased statement is based on Stuart v. Stammen.

    A right of first refusal allows the holder of the right a reasonable time "to sign a contract to purchase the real estate" that is the subject of the right of first refusal "on the same terms and conditions" of an offer received by the selling owner from another interested buyer. If the contract is not signed with a reasonable time, the right of first refusal is considered waived and the seller can complete the agreement with the other interested buyer.

    • The following excerpt is from the Red River Commodities, Inc. case.

    "Impossibility caused by casualty or commercial impracticability caused by failure of presupposed conditions excuses performance of contracts for sale of goods. NDCC, 41-02-76 (UCC 2-613), 1 41-02-78 (UCC 2-615), 2 41-02-79 (UCC 2-616).3 Under NDCC 41-02-78, unless a seller has assumed a greater obligation, nondelivery "in whole or in part" is excused "if ... made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic [contract] assumption," and if the seller "seasonably" notifies the buyer. Uniform Commercial Code § 2-615, 1B U.L.A. 196-97, Official Comment 9 (1989) says:

    • The case of a farmer who has contracted to sell crops to be grown on designated land may be regarded as falling either within the section on casualty to identified goods or this section, and he may be excused, when there is a failure of the specific crop, either on the basis of the destruction of identified goods or because of the failure of a basic assumption of the contract.

    ...

    "Thus, non-occurrence of the loss of [the farmer's] crop was a basic assumption of this contract. [The farmer] did not assume the risk of performing if his crop was affected by causes beyond his control..."

  • Specify assumptions or conditions that, if they arise during the contract, would alter the obligations; such as war.  Would we include changing interest rates, destruction of property (assuming a lease), etc as such conditions?  Forming the contract is the time to explicitly manage risk for all parties but make sure you do not write the contract too "one-sided" (that is, so one-sided that the contract would trigger the defense of unconscionable; see Construction Associates, Inc. v. Fargo Water Equipment Co., 446 N.W.2d 237 (ND 1989)).

 

Summary of Key Points

  • The purpose of a contract is to define the relative legal rights and obligations of the contracting parties; these rights and obligations are discussed and agreed upon during the negotiations of the contract. Despite considerable flexibility in defining their contract, state law imposes limits on what the contracting parties can agree to. Likewise, state law may specify terms for a portion of a contract if the negotiating parties fail to explicitly address that particular issue in their agreement. Finally, state law may also impose certain expectations upon contracting parties.

 

Last updated November 20, 2010

   
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