Does a Contract Need To Be In Writing To Be Valid and Enforceable?
No doubt, you have established many spoken and unspoken agreements in your healthcare practice. When can these agreements constitute a valid and enforceable contract?
Contracts are legally enforceable agreements between parties creating mutual obligations. They’re promises enforceable by the coercive power of the state.
Classically, contracts are formed by combining the following three elements: an offer, acceptance, and consideration. With these elements in place, parties are bound and liable for not performing their promised obligations — for breaching the contract.
The Three Elements of a Contract
Contract Element One: The Offer
The American Law Institute defines the offer as “The manifestation of willingness to enter into a bargain. An offer occurs when the offeror makes the offeree justified in thinking her assent is invited and will conclude the deal.” (Restatement (Second) of Contracts § 24. )
The courts look to what a reasonable person would think constitutes an offer. For example, it must be clearly communicated and contain sufficient detail. “I will sell you a movie ticket for $10” constitutes a valid offer. In contrast, merely saying “I will sell you a movie ticket” lacks sufficient detail. It’s missing a material term (a price). Thus, it would be hard to enforce.
Offers can be bilateral or unilateral. Bilateral means each side has an obligation, such as when one party agrees to build a house and the other party agrees to pay that person for their work. Unilateral refers to only one obligation. An example would be a contract where someone says, “If you find my dog, then I will pay you $100.”
Generally, offers are revocable until accepted. Unilateral contracts can be revoked until the offeree actually completes the task — that is, finds the dog. However, there may be limits on revoking unilateral contract offers. For instance, if someone says, “I will pay you one million dollars if you roll a penny across the Brooklyn Bridge with your nose,” that person cannot revoke that offer when you are one inch to the finish line. That is, when unilateral contracts are substantially performed, courts may be willing to pretend they were fully performed in the interest of fairness.
Contract Element Two: Acceptance
Acceptance occurs when the offeree indicates a willingness to enter into the bargain under the offered terms. This willingness can be expressed or implied. An expressed acceptance would be saying the words, “I accept!” In contrast, implied acceptance might be starting to build a house after being offered 100K to build someone’s house. Even if you don’t say that you accept, beginning the construction implies that you do.
Another example of implied acceptance would be a physician starting to perform a physical examination. This likely implies acceptance to contract into a doctor-patient relationship, regardless of the words said or unsaid.
Contract Element Three: Consideration
Consideration refers to the benefit that each party receives in exchange for what that party gives up. It must be of value such as money, time, effort, a needed service, or a valuable tangible item. Consideration is “this for that” or the Latin term quid pro quo.
A clear example would be a contract to buy a car for 10K. One party gets a car and gives up 10K. The other party gets 10K and gives up a car. There is a “this for that” — each party loses something and gains something.
In another example, a physical therapist owns an LLC offering PT services. This owner amends her LLC operating agreement to add another member, a recent graduate of PT school. The owner expects the recent graduate to work for the LLC offering PT services. Here, the owner gets an employee, and the recent graduate gets equity in the LLC.
What doesn’t count as consideration? Imagine that a friend says, “I will be so happy if the Bulls win tonight that I will give you $100.” There is no consideration because there’s no this for that. Only one side is risking something. The other side is not bargaining anything nor providing anything of value. This is an example of what lawyers call a “gratuitous promise” and not a contract.
Rewarding someone for a past action does not count as consideration. If the friend above says, “I will give you $100 because I had so much fun at that Mets game that you invited me to last month,” there’s no consideration. The invitation to the game was not bargained for, and there was no quid pro quo.
But what if the consideration is inadequate? Typically, courts do not care if each party’s consideration seems fair and equal. If a physician agrees to perform surgery for $1K, that is a contract. It’s unlikely the court will evaluate the market value of the surgery and invalidate the contract because the patient was getting “too good” or “too bad” a deal.
But there are limits. If the doctor charges $ 1 million for a basic procedure that usually costs $100, a court may very well invalidate the contract due to inadequate consideration. When consideration is “grossly inadequate to shock the conscience,” the contract can be void.
As outlined above, an offer, acceptance, and consideration constitute a contract. Nothing in classic contract law demands that these elements be written down or signed. Thus, you should always be careful about what you say and do because contracts can be easier to form than you might expect.
Let’s look at an example. Say that a psychiatrist describes her services on the phone to a prospective new patient. She reassures the patient that she will safeguard the patient’s protected health information. This may constitute a contract even if it’s merely promised orally. A court may hold that:
- The psychiatrist offered to provide psychiatric services and take reasonable measures to protect the patient’s health data
- The patient accepted when he arrived for the psychiatry session
- There was consideration: the psychiatrist received money, and the patient received the benefit of psychiatric services with a psychiatrist who protects his data.
If hackers steal this patient’s data, the patient can argue the psychiatrist should have done something more to protect the information, thus breaching the oral contract. If the patient can prove the promise to safeguard data was material (a legal term that means, very loosely, that it was significant or essential to the patient’s decision to move forward), then the psychiatrist might be on the hook for damages.
Statute of Frauds
Not all verbal contracts are valid, however. Under an old doctrine called the statute of frauds, some contracts must be in writing and signed by the parties. Each state has created its own version of the statute of frauds.
In general, the statute of frauds demands the following types of contracts be written down to be valid:
- Marriage – Any contact related to marriage, like a marriage contract or prenuptial agreement
- Lasting one year or longer – Contracts that will not be completed in less than one year, such as a long-term supplier agreement where the manufacturer agrees to sell to a distributor for a five-year term
- Land – contracts related to the sale of land, such as buying a house or getting a mortgage.
- Estate – Contracts where an estate executor promises to pay an estate debt with his own money
- Large Sums Money – A contract for the sale of goods for more than $500
In these cases, the writing must
- Reasonably identify the subject matter of the contract;
- Sufficiently indicate that an agreement was made; and
- State the essential terms of the deal, like price and quantity.
Note that the writing can be several distinct pieces of writing linked together, as long as they reasonably demonstrate all the writings related to the same agreement.
The statute of frauds may prevent the enforcement of an otherwise valid contract. In other words, agreements that fall under one of the above categories are presumed invalid even if there’s an offer, acceptance, and consideration.
Imagine that a therapist wants to open a new practice. The therapist and the landlord agree orally that the therapist will rent office space for five years, at $3,000 per month. However, someone later offers the landlord $4,000 per month. If the landlord jumps at the higher offer, the therapist may be out of luck. Why? This deal will not be completed in less than one year. Therefore, the statute of frauds applies. To be a valid and enforceable contract, the agreement must be written down and signed by the landlord.
Note that the therapist can attempt to link together writings to prove there was a contract. Perhaps the therapist took notes memorializing their conversations or saved relevant email communications. However, to win in court, these combined writings must sufficiently outline the terms of the deal, and the therapist must have some writing signed by the landlord.
Thanks to a concept called promissory estoppel, an agreement that is missing an offer, acceptance, or consideration or lacks the required writing and signatures under the statement of frauds may still bring liability. In this scenario, a party can recover because they reasonably relied on a promise to their detriment.
For promissory estoppel to apply, three elements must be in place:
- A promise that’s clear and detailed enough to know what the promisor is saying they will do or provide.
- Reasonable reliance – the person seeking recovery must reasonably rely on the promise. For instance, if a NY-based dentist promises to hire a hygienist, it would be reasonable for that hygienist to move to NY. It would not be reasonable for the hygienist to move to Hawaii.
- Detriment – the person seeking recovery must rely on the promise to their detriment. There must be harm. The hygienist above may be harmed due to out-of-pocket moving costs.
When promissory estoppel applies, the promise has the same binding effect as if the parties entered into a contract. No other formal requirements need to be satisfied. It doesn’t matter if the promise was not written down, and it doesn’t matter if there is no consideration. The court seeks to make the person whole based on principles of justice and equity.
In short, promissory estoppel can be broadly applied and make someone liable without a formal contract. The more power someone has, the more likely courts will assume their promises carry weight, and the more likely they will be liable — even if there is nothing in writing.
For example, a physician promises a patient that he is an “expert” in cardiac surgery. Relying on this assurance, the patient enters into a doctor-patient relationship and has bypass surgery. Unfortunately, the surgery does not go well, and the patient suffers harm.
Afterward, the patient learns that the doctor was merely a general surgeon with no expertise or experience in cardiac surgery. In addition to a medical malpractice claim, this patient can allege promissory estoppel. The patient can argue there was: 1) a promise that the doctor was an expert, 2) reasonable reliance on that promise in electing to have that doctor perform the surgery, and 3) resulting harm in that the surgery did not go well.
Let’s go back to the New-York based dentist as an employment example. The dentist promises a hygienist a job, and thus, the hygienist moves. Nothing was written down, so there was no formal contract. On the one hand, the statute of frauds would apply because the salary was over $500, necessitating a written contract. However, that might not matter. Promissory estoppel likely applies, and therefore the hygienist may be able to recover damages.
Most likely, you have established many spoken and unspoken agreements within your web of professional relationships — including provider-patient relationships. But, which agreements constitute a valid and enforceable contract? As we’ve explained, contracts do not always need to be in writing.
If you establish an unwritten agreement that falls under a statute of frauds you may have an “out.” However, promissory estoppel may make you liable for upholding an agreement, regardless of the lack of formalities. Healthcare professionals’ promises often carry extra weight. As a result, courts often defer to patients. Thus, we offer this warning: let the promisors beware!
Attorneys often see the messy, unpleasant outcomes of oral agreements. So naturally, we tend to recommend extreme care in what you offer or accept as you conduct business. If you’re unsure of your liability under an existing agreement or you would like to create a formal contract to reduce the uncertainty, reach out to an attorney licensed in your area. The attorneys of Jackson LLP help independent healthcare practices, businesses, and professionals in several US states. Reach out to us for a free consultation to determine if we’re a good fit for your needs.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.