CONTRACT BASICS

Any person engaged in business must deal with contracts. There are many types of contracts. A contract may be oral, written, express, or implied. There are basic principles applicable to all contracts and it is prudent to be aware of these general principles. However, special laws may apply to different fields of endeavor which either modify the general rules or impose additional requirements concerning contracts. An attorney who practices business law or corporate law can assist you with the review and/or preparation of a contract. Below you will find a broad overview of the law of contracts in Georgia.

I. DEFINITION OF A CONTRACT

A contract is an agreement between two or more parties for the doing or not doing of some specified thing. An “executed contract” is one in which all the parties have performed all the obligations which they agreed to perform. An “executory contract” is one in which something remains to be done by one or more parties to the contract. An oral or parol contract is a contract which is not in writing. An express contract is an agreement in which the terms of the contract are openly stated, either in writing or orally. An implied contract is a contract which the law infers from the acts or conduct of the parties. There are two types of implied contracts, those implied in fact and those implied in law. Contracts implied in fact are those in which the conduct of the parties indicates an intent to form a contract. Contracts implied in law are those in which there is no express or implied agreement between the parties, but rather the obligations are imposed by law. Contracts implied in law also are referred to as quasi contracts. Quasi contracts are not true contracts, but are based on the law of unjust enrichment. 

II. ESSENTIAL ELEMENTS OF A CONTRACT

To constitue a valid contract, there must be parties able to contract, a consideration moving to the contract, the assent of the parties to the terms of the contract, and a subject matter upon which the contract can operate.

  • PARTIES 

Parties must have the capacity or ability to enter the contract. The contract of an insane, mentally ill, mentally retarded, or mentally incompetent person for whom a guardian or conservator of his affairs has been appointed by the court is void. However, the contract of such a person for whom a guardian has not been appointed is voidable rather than void. The contract of a minor also is voidable. The parties to the contract should be correctly identified. A person making a contract in his individual capacity will be liable for performance of the contract. However, a person signing a contract in a representative capacity on behalf of a corporation or limited liability company generally will not be personally liable for the obligations of such entity.

  • ASSENT OF THE PARTIES
The parties must assent to the terms of the contract. This assent is referred to as a "meeting of the minds." In Georgia, an objective test is used to determine whether assent has been given. "The legal test for mutuality of asset to contract or meeting of the minds requires the application of 'an objective theory of intent whereby one party's intention is deemed to be that meaning a reasonable man in the position of the other contracting party would ascribe to the first party's manifestations of assent, or that meaning which the other contracting party knew the first party ascribed to his manifestation of assent.'" North Georgia Elec. Membership v. Dalton, 197 Ga.App. 386, 398 S.E.2d 209 (1990).
  • CONSIDERATION

There is no enforceable contract in the absence of consideration. Any benefit accruing to the promisor, or any loss, trouble, or disadvantage undergone by the promisee is sufficient consideration in the eyes of the law. Where mutual promises are given, each promise is itself consideration for the return promise. Mere inadequacy of consideration will not void a contract. An executory contract without consideration is called nudum pactum or a naked promise and is not enforceable. However, Georgia has adopted the doctrine of promissory estoppel. A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. Under the doctrine of promissory estoppel, the action or forbearance of the promisee supplies the missing consideration. Promissory estoppel cannot be used as a substitute for consideration unless the promisee reasonably relied on the promise.

  • SUBJECT MATTER AND CERTAINTY

For a contract to be enforced, it must contain definite terms. No contract exists until there has been an agreement on the essential terms. However, Georgia courts have stated that "it is unnecesssary that a contract state definitively and specifically all facts in detail to which the parties may be agreeing, but as to such matters, it will be sufficiently definite and certain if it contains matters which will enable the courts, under proper rules of construction, to ascertain the terms and conditions on which the parties intended to bind themselves." Kerwood v. Dinero Solutions, LLC, 292 Ga.App. 742, 666 S.E.2d 40 (2008). In a variety of cases, Georgia courts have found that there were no enforceable contracts because an essential element of the alleged contract was missing. Such cases include those where: (i) the alleged contract failed to specify the price; (ii) the alleged contract contemplated rezoning but failed to specify who was to apply for the rezoning; (iii) the alleged contract did not specify its duration; (iv) the alleged contract was silent as to the nature of the services to be performed and place of performance.

III. CONTRACTS THAT MUST BE IN WRITING

In Georgia, if not all other states, certain obligations are not binding unless the promise is in writing and signed by the person making the promise (or an authorized agent on his behalf). A statute which requires that an obligation be in writing to be enforceable sometimes is referred to as a "statute of frauds." Under Georgia statutory law, the following promises must be in writing and signed by the person making the promise for the obligation to be binding: (1) a promise by an executor, administrator, guardian, or trustee to be responsible for damages out of his own estate; (2) a promise to answer for the debt, default, or miscarriage of another; (3) any agreement made upon consideration of marriage, except marriage articles as provided in Article 3 of Chapter 3 of Title 19; (4) any contract for the sale of lands, or any interest in, or concerning lands; (5) any agreement that is not to be performed within one year from the making thereof; (6) any promise to revive a debt barred by a statute of limitation; and (7) any commitment to lend money. The Georgia statute of frauds does not prevent the enforcement of a obligation if (1) the contract has been fully executed, (2) there has been performance by one party, accepted by the other party in accordance with the contract, or (3) there has been such part performance of the contract by one party as would render it a fraud by the party refusing to comply if the court did not compel performance. There are many appellate court cases which analyze and construe the Georgia statute of frauds and the exceptions to it. A business attorney can assist you in determining whether a particular agreement must be in writing.

IV. SHAREHOLDER AGREEMENTS

One type of contract is the shareholder agreement. Some preliminary considerations related to shareholder agreements are discussed below. An agreement among shareholders may impose restrictions on the transfer of shares of a corporation. OCGA § 14-2-627 (a). A restriction on the transfer of shares is valid and enforceable against the transferee if the restriction is authorized by the Georgia Business Corporation Code and its existence is noted conspicuously on the front or back of the certificate. OCGA § 14-2-627 (b). The Georgia Business Corporation Code provides that a restriction on the transfer of shares is authorized: (i) to maintain the corporation’s status when it is dependent on the number or identity of its shareholders; (ii) to preserve exemptions under federal or state securities laws; (iii) for any other reasonable purpose. A restriction on the transfer of shares may: (i) obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares; (ii) obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares; (iii) require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; (iv) prohibit the transfer of the restricted shares to designated person or classes of persons, if the prohibition is not manifestly unreasonable. OCGA § 14-2-627 (c).

In the absence of a shareholder agreement (or any restrictions contained in the articles of incorporation or the bylaws), a shareholder may transfer his or her shares without any right of the corporation or other shareholder to prevent such transfer. Often shareholders of a closely held corporation do not wish for the shares of the corporation to be freely transferable, and therefore seek to impose some limitations on the transferability of the shares. The prospective parties to a shareholder agreement should consider several matters in connection with its formulation.

Shareholders should consider what events will trigger an option or a right to purchase shares of a shareholder. Triggering events may include the following: (i) death of a shareholder; (ii) desire of a shareholder to accept offer made by a third party to shareholder to purchase his or her shares; (iii) retirement of shareholder-employee; (iv) disability of shareholder; (v) resignation or discharge of shareholder-employee; (vi) personal bankruptcy; (vii) attempted sale or encumbrance; (viii) judicial sale. For each triggering event, the shareholders must determine whether the corporation and/or other shareholders will have an option to purchase the shares or an obligation to do so, and what the purchase price will be. The purchase price might be (i) an amount specified in the shareholder agreement; (ii) the fair market value determined by appraisal at the time of the triggering event; (iii) the book value of the shares, or (iv) in the case of a right of first refusal, the amount of a bona fide offer. Each method of choosing or determining the purchase price has advantages and disadvantages. Another matter to consider is how the purchase price will be paid (e.g., lump sum or installments). If the purchase price will be more than a nominal amount for a deceased shareholder’s shares, the parties may wish to fund the agreement by the use of life insurance policies of the lives of the shareholders. Where the corporation owns the policies and is required to purchase the shares, this is known as a redemption agreement. Where shareholders purchase life insurance policies on the other shareholders’ lives, this type of agreement is referred to as a cross-purchase agreement. In entering a shareholder agreement, the shareholders have a potential conflict of interest, and each shareholder should consider having the shareholder agreement reviewed by his or her own attorney.

Please contact one of the attorneys/lawyers of Chambers, Chambers & Chambers, LLP if you need assistance related to the preparation or review of a business contract.

Disclaimer: The above memorandum provides some general information about contracts in Georgia. It is provided for informational purposes only and should not be considered legal advice. No person should act or refrain from acting on the basis of information contained herein. You should seek appropriate legal advice on your particular legal matter from an attorney licensed in your state. This content may not reflect current legal developments, and this firm disclaims all liability with respect to actions taken or not taken based on any information contained herein.

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