Tim Elliot: Hello and welcome to another edition of Lawgical, the legal podcast from the Dubai-based law firm, HPL Yamalova & Plewka, and still the Gulf Region’s first and only regular legal podcast. My name’s Tim Elliot. I’m here at the firm’s offices in Reef Tower in JLT – the Jumeirah Lakes Towers District. Here is the firm’s Managing Partner, Ludmila Yamalova. Socially distanced as we still are, Ludmila, but it’s always good to see you.
Ludmila Yamalova: Great to see you too, Tim. Thanks for being back.
Tim Elliot: Now, in this edition if Lawgical, we are going to break down contracts: What they are, how they work in this age of communication via social media and WhatsApp, and much, much more. Now, the classic image of a contract, Ludmila, for most of us a printed, perhaps bound, bunch of sheets of paper peppered with legal jargon that many of us, yourself withstanding, probably don’t understand, a number of signatures and stamps. Now classically that is kind of what constitutes a contract. Here’s what Dictionary.com defines a contract as: A written or spoken agreement, especially one concerning employment, sales, or tenancy that is intended to be enforceable by law. It pretty much covers the basics. I think it is reasonable to say that there is, I’m guessing, a lot more to it in these information-age days. Am I right to say that?
Ludmila Yamalova: Well, yes and no. A contract in a way is a fairly simple proposition. A contract is voluntary. In other words, you cannot force me to get into a contract with you, and I cannot force you to stay in contract with me. It’s a voluntary instrument. It can be as complex or as simple as we want it to be, but for a contract to be valid there are a few basic elements which in many ways, going back to your original question, they have not changed very much. These elements have not changed. Therefore, the field of contract law and contract interpretation has more or less remained the same perhaps since its inception, though the types of contracts that are use in today’s society have changed. In some ways they’ve become more complex, and in other ways they’ve become a lot simple.
But generally speaking, as you rightfully pointed out, the expectation and perception of many, for a contract to exist there has to be a formal looking document that ultimately either has big words like contract or agreement and has to include a lot of jargon and legalese which is barely understandable by those who draft, let alone those who actually supposed to be the parties to it. That’s is the general perhaps perception or expectation that we continue to run into. Perhaps this is where this belief that a contract has to be something complex comes from.
But in fact, our philosophy, and my personal professional philosophy and practice, has been that the more complex a transaction, the simpler the contract must be. That’s because at the end, it is an instrument, a commercial instrument, a voluntary instrument between two or more parties that should serve as a roadmap, as a checklist of parties’ respective rights and obligations. Therefore, in simple terms, it has to be understandable by those who actually sign it and not by those who draft.
The reality, however, is that most contracts – and I find it quite sad and regretful that still to this day most contracts – are drafted in a way that just include too much jargon, too much legalese. It is very difficult, even for legal practitioners who did not draft, to understand, though I would even suggest that in most cases even those who draft them don’t understand, but certainly they’re not very helpful to those who become parties to the contract.
That is to answer your question in a two-sided way. On the one hand it’s complex, but on the other hand the more complex it is the more simple it should be.
Tim Elliot: It always seems as though it is henceforth and hitherto and upon this day, the 17th day of March, 1790. It’s almost we view it through that kind of lens, but the simple fact is you can enter into a contract now in different ways. It’s almost the method of delivery which in some ways has changed. You could enter into a contract in person via WhatsApp, via email, or through other means of communication these days.
Ludmila Yamalova: For sure. You’re absolutely right. This is why, for all those reasons, and other reasons, these fanciful terms like henceforth, therefore, notwithstanding, and such are much less relevant these days. Generally speaking, what is a contract?
A contract has several basic elements.
1) There has to be an offer. I offer to sell you my car.
2) There has to be an acceptance. You say, “Yes, I will buy your car.”
3) Then both of us have to have capacity to actually conclude this transaction. In other words, it has to be my car and not somebody else’s car that I sell you. Equally so, you have to have capacity to be able to buy the car. Let’s say if you are mentally not well and not quite in your right state of mind, you should not be entering into these kinds of transactions, so capacity is another element.
4) Then there has to be consideration. Consideration basically means an exchange of value. I offer you my car, and now you have to give me consideration, i.e., some kind of compensation for the value of my car. Consideration is an extremely important element in all contracts. In fact, for a contract to be valid there always has to be consideration. The consideration has to be proportionate to the value that you receive. I give you my car, so your consideration for my car cannot be one dirham because that is not really proportionate to the value that you receive. It has to be more or less corresponding with the benefit you are receiving. That is how consideration is defined. Now, consideration does not have to be money. It could be something else. So, I give you my car, and you give me your watch in exchange.
Tim Elliot: Not the best deal with the watch I have on today, Ludmila.
Ludmila Yamalova: You don’t know what kind of car I’m offering you. I may be offering you a toy car.
Tim Elliot: That’s a good point.
Ludmila Yamalova: It could be money. It could be some kind of a barter deal. It could be, for example, a watch or some other piece of jewelry, or it could be your house in exchange for my car. That’s consideration.
5) Then there has to be what’s often referred to as a mutuality of obligations. In other words, the contract cannot be one sided. That is, presuming we have two sides, both of us have to have some sort of obligation to each other. It cannot be that my only obligation here is to give you the car by such and such a date. Well, what’s your obligation to me? Your obligation is to pay me money for the car.
6) There is another element in the contract; that is, the contract has to be definitive in scope. For example, it cannot be that I offer you my car, but we don’t specify the price for the car. In this particular case, the definite term that is required is the price for the car. If, for example, it is a contract for building a property there has to be a price and a time, because it cannot be that I will build you a property or a house and then you pay me $1 million, but the timeline for when I’m supposed to give you this house is not stated in the contract. Because if that were the case, then maybe you give me the $1 million now, but I will give you the house in 100 years. That is what is referred to as the definitive scope of the contract. Ultimately, these are the elements of what make a contract a contract.
Perhaps in sounds simple. Perhaps it sounds complicated. But the general gist of it is for a contract to be enforced, it has to have all of those elements.
Now, how you specify, spell out, or define those elements, in today’s day and age it truly varies, a fairly broad gamut. So, as you rightfully pointed out, we can start from a very sophisticated looking, properly drafted, and a very beefy legal document that says: I am a contract, and I have these very fancy terms that very few people can understand, and that could be a very well-drafted and a very important contract.
Or, it could just be Tim and I, we’re sitting in a park, and you look at my car and say, “Hey, I like your car.” And I say, “Okay, I’ll sell it to you.” You say, “Okay. Are you sure?” I say, “Yes. Sure. Okay. I’ll sell it to you for 50,000 dirhams.” You say, “That’s great. I’m going to go get a loan, and I’ll get 50,000 dirhams to buy your car.” That’s it. That’s all we have. It’s oral. That’s a contract.
These are two extremes. One is a very, very formal contract that is documented in thousands of pages of terms and conditions and exhibits and attachments. The other one just is oral, and there are no documents to prove anything. Yet, both are contracts, and both of them are enforceable.
The difference is: What are you enforcing? In the first case where you have thousands of pages of documents, you know what you are enforcing because there are thousands of pages of terms and conditions that you can argue. In the other case where it is an oral contract, what are we enforcing? It becomes a matter of proof. What were the terms of our agreement? Just because those are not spelled out on paper does not make it less enforceable. It just becomes a more complicated job of actually proving that a) we had a contract, and b) what the terms of the contract were. But it’s not impossible.
Let’s take that scenario and think through it. How would you prove that contract for a car sale? Let’s say you sent me a message the next day on WhatsApp. “Thanks for agreeing to sell your car yesterday. Relying on your representation, I went, and I borrowed money from a friend of mine for x% interest or something, so I’ve got money for you.” And I say, “Okay” or say nothing. Then you show up and you offer your money, and I say, “Hey, no, no, no. I didn’t tell you that I was going to sell you my car. Where is the proof?” Now it becomes a matter of proof. Then you can say, “Well, listen, I would not have gotten this loan for the car if it weren’t for your representations. Why else would I have gotten the loan and committed to paying extra money, i.e., the interest rate, for example, for something that I would not have gotten the benefit of?” Then it becomes more subjective and whatever other communications you might have created on the back of that meeting or if you had witnesses.
There are different ways of proving a contract. But in that particular case, let’s say there was somebody else that was sitting next to us on the bench, and they heard this conversation, so they could offer their testimony to prove that yes, in fact, we did meet, we talked, and that was our agreement. There could be that. There could be a whole series of communications between me by either WhatsApp, SMS, emails, or what have you, or even written notes showing yes, this is what we have agreed on, these are the dates, and such. Now, I cannot come back to you and say, “Well, all these paper notes and handwritten notes and paper napkins and such, they’re not a contract because, look, where does it say it’s a contract?” That would not work. There is a contract, and for a contract to be enforceable, it can be anything from a properly drafted agreement to a bunch of paper napkins and email correspondences and WhatsApp messages, however disjointed, but equally enforceable.
Tim Elliot: It’s interesting. Let’s go to a point I guess I should have brought up before. When do you know that you need a contract? A contract, from what you said, involves the exchange of goods, services, money, the promise of any of those, I guess. But when do I know that I need to have a contract?
Ludmila Yamalova: It’s a great question. You need to have a contract when you are about to do something relying on representations that are a part of the contract. For example, you want to write a book for me, or you want to write an agreement for me for services, and I said, “Yes, please, go ahead.” At that point, because you are about to commit your resources, your time, and put in your experience to write this book, and that’s when you know that you should actually have a contract because you’re about to give something of value, you’re about to commit something of your own time and resources. That’s one example.
Another example is when you and I want to go into a partnership. I said, “Okay. That’s a great idea. I think there is a lot of promise in this partnership. Let me go and sell my car so I can raise money to commit to this partnership.” Here I am going to lose something as part of our new business venture. This is when you should want to have a contract, or I would want to sit down with you and document this because relying on these representations, I will now go and give something away of value. Therefore, before you do that, ultimately before you either part with money, or part with something that is valuable to you, or you commit time and resources, there should be some form of documenting of a contract.
Tim Elliot: I’m starting to think in this podcast that you actually do want to use it to sell your car. Can we just have you confirm or deny this?
Ludmila Yamalova: I hope that before I confirm or deny, I hope you understand one of the elements which has to do with consideration. Yes, I will sell you my car for $1 million.
Tim Elliot: A point very well made. Two questions. We have a valid contract. How do you memorialize a valid contract aside from hearsay of someone who sat on the park bench, next to you and me in the park talking about that car sale, for example? How should you record a contract? How do you make sure that a contract is legally enforceable, that you can actually take it forward and use it for the intent for which it was produced in the first place?
Ludmila Yamalova: With regards to memorializing a contract, it could really be, especially in this day and age, it could just be over WhatsApp.
Tim Elliot: As simple as that?
Ludmila Yamalova: As simple as that. for example, I want to hire. I say, “Tim, I want to hire you.” You say, “Oh, that’s great. What are you willing to pay?” “I’ll pay you x.” “That’s great. What do you want me to do?” “I want you to do 1, 2, 3, 4, and 5.” “Excellent. When do you want me to start?” “Tomorrow.” “Great.” Let’s say you are working from home and you are doing things from home for the next month. Then at the end, you’ve created whatever the masterpiece that you would have created in one month, and you come to me for compensation. I say, “Well, hang on a second, we don’t have a contract.” Do we have a contract?
Tim Elliot: We do because it’s all through WhatsApp.
Ludmila Yamalova: That’s right. We have not only proof of contract, but we also have proof of the terms and condition of the contract, in other words, what we agreed on, which is a) you were working for me, b) that you are compensated to the tune of whatever, the x amount, c) what your responsibilities were, for example, write a book, and d) by which time you were supposed to produce this book.
Now, the terms of the contract are there. The scope of the contract is there. They are definitive. They are clear. There was an offer. There was acceptance, and, there has been performance, which is you created your book. Voila, we have a contract. There is not really much more that we require.
Now, what if there is a dispute? This is really why contracts are generally recommended because it’s all good as long as we’re both on the same page.
Tim Elliot: Right.
Ludmila Yamalova: But now, you’ve produced your masterpiece. You’ve come back to me and I said, “Okay. Thanks very much for the masterpiece, and I’m not going to pay you because we don’t have an agreement.” Or, for example, I don’t even take your masterpiece, so therefore I did not receive any benefit. But that’s not an excuse. Now, you want to bring a case against me. Where will you bring a case? That’s why an agreement is important because let’s say when all of this is happening, you were in England and I’m in America. So, where do you bring your dispute? In England or in America?
Tim Elliot: That’s a very good question. Where should I bring a dispute in that instance?
Ludmila Yamalova: Well, my advice and in most cases, this is why, first of all, you want to have a contract, and second of all, when you do draft a contract you always want to include a provision there in the event of a dispute where do the parties want to litigate. Now in the event there is a dispute, where would you want to litigate? Ultimately, you want to litigate wherever it is that you can best enforce the contract. Now enforcement comes in different ways. Enforcement comes legally, and that is, legally where do you think, which legal system, would benefit you most? More importantly, commercially. You could perhaps enforce this contract between us in England, but I have no interest in England. Yes, you have a judgment from England, from a British court, that is against me in your favor, that grants you $1 million, but I have no interest in England. Where are you going to enforce the contract? That’s one of the considerations and also one of the reasons why, again, you want to go back to the drawing board and have some sort of a contract where you can go through these kinds of considerations ahead of time and address them in the document, not in a complicated document, a clear document. But in that particular case you would want to choose your forum for dispute resolution somewhere where there is leverage. Your leverage over me would be wherever it is that I reside because that’s where I have assets, because at the end, if there is a dispute and a dispute for money, you want to be able to recovery money. To recover money is obviously best where the defaulting party actually has something of value where you can either file an enforcement case or seize those assets against a judgment.
Tim Elliot: As outlandish as it seemed as an example, it makes the point really well. It’s worth remembering that a contract can take many forms. Theoretically if two people enter into a contract together, it could be on the back of a napkin at a restaurant, as long as it is signed, it is a contract. It could be a discussion over WhatsApp as long as there is agreement there, and it’s a to-and-fro conversation, as it were, then that’s reasonable. Let’s just recap, Ludmila. The point really is, isn’t it, that entering into a contractual agreement shouldn’t be entered too lightly. Also, proper drafting of any contract is extremely important, but as you’ve said, try to keep it as simple as possible.
Ludmila Yamalova: That’s it. In terms of, what is simple? This is how I would propose to anyone who is considering entering into a contract, and anybody who is in business should enter into contract, and I’m sure is entering into contract. In most cases, we are all dealing with contracts on any given day. You go to a grocery store. That’s a contract when you buy something. When you go an appliance store and you buy a phone, that’s a contract. If you come home and in that box there is no phone, but there is an iron, that’s a breach of contract. You don’t think about it. But generally speaking, what is a contract?
One element of the contract that you are going to include is parties. Who are the parties to the contract? In our case, it would be you and me.
What is the subject of the contract? I will sell you my car. That is the subject of the contract.
Now, then there is always money involved. Okay. What is the value of the contract? My car is worth x amount.
By which time or which date do we want to perform the contract? There should be a specific date.
Then, what if the car I gave you doesn’t work? It may not matter to you because perhaps you’re buying my car for scrap, or it may matter to you. Whatever else, what other conditions may matter, you want to include those. In this particular case, if it’s a car that you want to use and you are relying on this to be operational and safe, you’d want to include those terms.
Also, you want to address in the event one of us defaults. For example, I gave you a car that’s not operational, what’s the redress? What do we do? Do we just go back to our respective positions, or do I have the obligation to fix it, or do we agree that I’ll give you a discount, or do we agree that you take the car, you pay for the additional service, and then I have to pay, you subtract from the price. These are the important things that need to be addressed in the contract whenever we are talking about each other’s obligations. Both sides have to have some sort of obligations.
Similarly, if we have a contract where you say you will buy my car by such and such a date, if you don’t buy the car, you are in breach of contract. In that case, if you have not come up with the money by a certain date, what do we do? Does the contract just go away, or do we agree ahead of time that I will give you a grace period, or that there will be a penalty, or that now my car will cost more money? This is how contracts become a lot more complicated, but generally speaking, that’s it. This is it. The contract for the sale of a car should include those general elements: Parties, subject, price, our respective rights and obligations, and what do we do in the event of default.
Tim Elliot: That is another episode of Lawgical. I’m never going to be buying a car from Ludmila. That’s everything you needed to know about contracts now, I think. As always, Ludmila Yamalova, the managing partner here at Yamalova & Plewka, our legal expert. Appreciate your expertise. Thank you.
Ludmila Yamalova: Thank you, Tim.
Tim Elliot: To have a legal question answered in a future episode of Lawgical or to arrange a consultation with a U.A.E. experienced qualified legal professional, you can WhatsApp us, 00971 52 525 1611, or click the Contact button at LYLawyers.com.