Don’t Let An Incomplete Contract Drag Down Your Business
A couple of years ago, there was a contract dispute that has stuck in my mind. In it, owners of the Charlotte Motor Speedway thought they had a contract with local municipalities to build a hot rod dragway with a contribution of $80 million in city and county funding, incentives and grants. It turns out there was no contract, and the Speedway owners were out $80 million in government financing.
Don’t let this happen to you.
The Speedway transaction started when local municipalities sent a proposal to the Speedway, containing the following 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 Speedway owners sued for breach of contract, saying the formal contract contained 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.