Conversations About Customer Contracts

Leslie Cernak, writing here about “contract basics,” has been involved in the fuel oil industry for more than 36 years, running operations for her own company, and later working in legal and compliance support for an energy company. Cernak recently earned a master’s degree in legal studies for energy law from the University of Oklahoma, College of Law. This is her debut column for Fuel Oil News.

WHEN was the last time your customer contracts were updated? Whether you have in-house counsel or hire an attorney, be involved in the process. There is no substitute for industry experience. Lawyers know the law, but you know your business and what is trending in the industry.

To begin with, consider the following:

• Do you want to call the document an “agreement” or a “contract?” The terms basically mean the same thing if there is a written document. The term “agreement” carries a softer, less formal tone. There was, and perhaps there still is, an industry perception that “agreement” applies most appropriately to a service agreement while “contract” should be used for a fuel pricing contract.
• Use plain English in customer contracts and drop the “legalese” (e.g. therewith, whensoever, witnesseth). Many states require this by statute. Also, states may require a certain font size and limit the length of each sentence or paragraph within customer contracts.
• A contract must have the following four basic requirements to be valid: (1) agreement, (2) consideration, (3) capacity, and (4) legality.

AGREEMENT: An agreement involves an offer and an acceptance. Here are a few suggestions:

• The parties need to be clearly identified. I recently read an agreement that interchangeably used the terms “buyer,” “applicant,” “customer,” and “you” for the accepting party. Use the same identifying words the same way throughout your document and introduce the party’s identifying words in the introductory paragraph (preamble).
• If the customer is more than one person, state whether these persons may act jointly or severally.
• The customer’s address may change during the term of the contract. Do you want to allow the contract to remain valid with a change of the customer’s address if the new address is within your market and the customer will use the same type of fuel? Do you want to allow an assignment to a third party? The answer may depend upon the type of contract. Keep in mind that a third, outside party cannot be contractually bound.

CONSIDERATION: Consideration requires that something of legally sufficient value be given in exchange for goods or services. The concept is straightforward, but it is important to think about “end game” provisions at this stage. Fuel pricing contracts come to mind. How is it best to handle a contract in which the customer defaults by not taking a certain percentage of the gallons specified in the contract?

• More likely than not, an attorney will recommend that any remedy be called a “liquidated damage” instead of a “penalty.” 
• Does it make sense to extend the term of the contract, perhaps at your discretion, to allow for delivery of the remaining fuel?
• Is the customer subject to liquidated damages or an extension of the term if the customer receives LIHEAP assistance, thereby reducing the number of contract gallons that can be delivered during the heating season?

CAPACITY: Contractual capacity is the legal ability to enter into a contractual relationship.

• Minors are not usually bound by contracts. In most states, the age of majority for contractual purposes is 18, according to Miller and Hollowell in Business Law, a legal textbook. However, a minor “who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the good.” Heat is a necessity in cold climates.
• Contracts signed by an intoxicated person can be either voidable or valid at the option of the intoxicated person. I’ll say that in my 36-plus years in the industry, I have not experienced a challenge to contract validity based upon a person being intoxicated.
• If a customer is mentally incompetent, a contract can be deemed void, voidable at the option of the mentally incompetent person, or valid.

LEGALITY: A contract must be written for a legal purpose, and it cannot be contrary to statute (including licensing statutes and usury laws) or contrary to public policy (including exculpatory clauses). There is a lot to consider when writing a contract. I find it to be something of an art form. Hopefully, these basics were helpful to get you started or they provided a good refresher. As always, seek the advice of an attorney in this and all legal matters. Happy contract writing!