Be Up to Speed on Enforceable Contracts

By: Donna Ray Berkelhammer. This was posted Monday, October 14th, 2013

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English: The grandstands of Charlotte Motor Sp...

(Photo credit: Wikipedia)

In August 2007, Charlotte Motor Speedway and Speedway Motor Sports announced their intent to build a hot rod dragway next to the speedway. The City of Concord responded by changing its zoning laws to prevent the dragway. The Speedway owners threatened to leave Cabarrus County, and Concord repealed the zoning changes.

A month later, the chairman of the Cabarrus County Board of Commissioners and the Concord Mayor proposed municipal funding for financing, design and construction of road, pedestrian, utility and noise attenuation projects.  The proposal letter said the city and county would commit to generate $80 million  for infrastructure and transportation investments through a combination of tax-based incentives and other incentive grants.  They also needed an additional 36 months to secure $20 million from the State of North Carolina.

The proposal also contained this language:

We understand that all parties anticipate that the $80,000,000 will be formalized in an agreement that will also provide an outline of a schedule to prioritize projects and to identify the investment that [the Speedway] plans to make through the construction of the drag strip and improvements to Lowe’s Motor Speedway.

The Speedway owners called immediately to accept the proposal and built the dragway.  When the dragway opened a year later, the city and county delivered a formal contract to finalize the agreement.  The contract required the Speedway to spend tens of millions of dollars on infrastructure, but gave the municipalities up to 40 years to reimburse the Speedway owners.

The owners sued for breach of contract, saying there were all kinds of provisions they never approved and that were completely unreasonable.

The NC Court of Appeals ruled that there was no contract, and the Speedway owners were out of luck trying to get that $80 million.

A valid contract must have 1) assent, 2) mutuality of obligations, and 3) definite terms.

Assent. Assent usually means one party makes an offer to sell something or provide a service, and the other party accepts the offer.  This can be straight forward, but it can also be very complicated.  If the party receiving the offer “accepts” but changes a material term (later delivery, lower price, different material), this is not acceptance, this is a counter-offer.  An offer may be open for a few days.  What if it is accepted late? What if the acceptance gets lost in the mail or cyberspace, but one of the parties perform their obligations anyway?  All these very specific facts must be analyzed to determine if a valid contract has been created.

Mutuality.  Mutuality of obligation is often expressed as “consideration.”  In a typical commercial transaction, one party is selling a product or service and the other party is paying for it.  Each is exchanging something of value (the good or service in exchange for money).  A promise to make a gift is generally not an enforceable contract — the recipient has not given up something of value, and cannot sue for breach of contract if the gift is not made.  It is possible, however, to create valid consideration by promising not to do something.  Non-compete contracts rely on this principle: the employer pays a sum of money, and the employee promises not to compete for a time after leaving the job.

In the Speedway case, the proposal letter discussed what the municipalities would do, but there were no obligations of the Speedway cited at all.  For that reason, the court found there was no mutuality of obligation, and thus, there was no contract.

Definite Terms.  Finally, a valid contract must contain definite terms.  In the Speedway case, the Speedway owners argued that the opening-day letter was a valid and enforceable contract. The Court of Appeals found the letter to be silent on several key terms, particularly any obligation on the part of the Speedway owners and when the City and County would have to spend the $80 million. What may have been most damning to the Speedway was the phrase in the letter that said “all parties anticipate that the $80,000,000 will be formalized in an agreement” that would outline and prioritize the exact projects the Speedway would undertake.  The proposal letter on its face indicates the preliminary and incomplete nature of the agreement, and supports the finding that there was no contract.

We will discuss later what terms must be included in a contract to make it “definitive” enough to be enforced.  If you have questions about a contract, please contact your business lawyer.

 

 

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