Contract Law 101 – Maryland Contracts

Back to Basics – Contracts 101.

(Originally published in the Mid Atlantic Mariners Club Newsletter, 2010).

The first rule of contract: capture the intent of the parties.

In every profession, not just the law, we are faced with making, interpreting and abiding by contacts.  Sometimes these contracts are long and impossible to understand (mortgage refinancings, consumer warranties) sometimes they are so fleeting that one hardly notices (“I’ll pick up lunch”).  In law school, we learn that a contract consists of an enforceable promise.  It’s a promise that one can take to court, and the court can make the other comply or award damages for their failure to do so.  All contracts, though, include a major element of hope and trust and if that trust is broken, bad things happen, and the threat of a court’s intervention may not be enough to save the deal.

When a client comes to me about a contract, it is usually one of three things — reviewing a contract that someone else has prepared; papering an understanding where the framework is already in place; or protecting a client from the risks of a particular kind of deal.  The most frequent contracts for me are boat and ship purchase contracts — these often involve a significant outlay of funds before the product is near completion, and therefore require both trust and legal protections.  With all projects, I generally start with the same three questions.  What are you trying to accomplish?  What has already been agreed to?  How much do you know and trust the other party?

 When it comes to reviewing a contract that someone else has prepared for my clients’ signature, I focus on two things.  First, does it capture the items that my client thinks are being agreed to?  Many times I am given a form contract such as a boat brokerage agreement, and the parts of the deal that are most important to my client (the time of delivery and the promises that the boat will be fully commissioned to spec) are nowhere to be found.  Usually this can be handled with an addendum that sets out the specifics (Boat to be delivered to Maryland on date certain at the seller’s risk and expense), but sometimes the brokerage contracts simply will not do the trick.  Lawyers often joke about the boat brokerage and real estate contracts — they do a great job protecting the brokers or agents, but beyond that, its usually a lot of words that don’t say too much.

 My favorite project is when a client comes to me and says … “I agreed to _____ with ______ – can you write a contract for that?”  I like this kind of project (not just for the irony of the fact that there may already be an oral contract) because it usually allows me to work from the ground up, as opposed to slogging through pages of 8 point font prepared by someone else.  I get to start with “what exactly has been agreed to?”  Typically a clients’ answer to that question feels like the tip of the iceberg … “we agreed that I would sell his product for a 10% commission.”  This leaves open all sorts of lawyer-fun — how much do you have to sell; can you sell competitor’s products, too; can they hire other brokers or salespeople; where will suit take place; what happens upon termination?  And what happens if there is no agreement on all of the side issues?  I love that question.

 The Second Rule of Contract: be reasonable.

Assuming that there is enough of a contract to be a contract (generally that it is known what is being agreed to, including when it is to be done and how much it is going to cost) everything else may be an open term.  In some areas of the law, like partnerships, employment and state insurance contracts, there is a whole body of statutes that fills in the blanks.  In those areas people may “agree” to many things that they never even thought of.  If there are not default terms, then the agreement reverts to the rules of reasonableness.  These rules are essentially human instincts — most people will agree most of the time about certain things even if they have never considered them before.  If the contract is to buy a certain thing (say a house), then it is only for that particular thing, not something else.  If it is for something that is largely interchangeable (like a Blackberry), then it may not mean a specific thing, just a thing like it.  You can usually do well in contracts by staying polite and acting reasonably, but sometimes that is mighty hard.

 The rest of contracts is just simple interpretation — if the words on the paper say to do X, and X isn’t illegal or completely unreasonable, then that is what you do.  Words are notoriously tricky things, though, so one must write with care and make sure that everyone abides by at least the most important terms over time.  There are a few contracts (marine insurance, for example) where certain words and phrases have such a history behind them that their meaning is known with some certainty.  But for most contracts, even ones that have been used many times, no court has ever interpreted the key language, and everyone is operating on   hope that the words mean what they think they mean.  This is the real difficulty with “form” contracts — people trust it because its The Form, but who knows whether it captures the agreement that was really intended.

 What can you take away from all of this?  First and foremost, be sure that the contracts you enter into actually capture what is being agreed to — this can be trickier than you think.  Second, sometimes the simplest contracts are the best ones — agree to the key items, and otherwise act reasonably.  Third, there are times when a very thorough papering is necessary — like when a major asset like a house or a business is on the line.  In those cases, have clear goals and good representation that is looking out for your specific interests.

J. Dirk Schwenk is a Maryland real estate and civil litigation lawyer.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice ever since.