What is worse than a bad contract? A bad contract you never intended in the first place.
A classic contract requires an offer with sufficient and definite terms, acceptance of the offer, and an exchange of promises to do or not do something. These are known as bilateral contracts. With some exceptions, are usually easily identified.
Another type of contract called a unilateral contract. Unlike bilateral contracts, unilateral contracts do not feature an express exchange of promises. If a promisor says they will pay $20 to the first person to bring them a hamburger, they have to pay the first person to bring them a hamburger $20, but no one has to bring them a hamburger. The asymmetric nature of unilateral contracts can cause problems. Two common scenarios that cause problems for businesses are employee handbooks and advertisements.
Employee Handbooks are one of the most important operating documents of any company. They can protect a business from liability if properly drafted and implemented. They can also create liability and resentment if done incorrectly.
Employee Handbooks are interesting because they exist in a grey area. On the one hand, businesses want to have procedures and policies they can fall back on, to ensure everyone is treated fairly for the sake of both employee morale and to protect the company from claims of discrimination. On the other hand, in states like Wisconsin and Minnesota, employment is “at-will,” meaning that an employer (or employee) can terminate the employment relationship for any reason or for no reason at all (so long as that reason is not illegal, like age discrimination).
Employment at-will can be changed by contract. Union contracts only allow employers to terminate employees for demonstrated poor performance, serious misconduct, repeated misconduct or business necessity. These are usually obvious, carefully negotiated, and signed by all parties. Employee handbooks, however, are usually policy documents not intended to change the at-will status of employees. However, unbeknownst to the employer, employee handbooks may create an enforceable contract. Usually this is unintended and only becomes apparent after an employee is terminated and turns around and sues the employer for failing to follow a progressive discipline policy or failed to pay severance benefits discussed in the employee handbook.
An employee handbook can create a unilateral contract if three conditions are met. First, the terms must be definite. For example, “we seek to ensure the job security of all salaried employees” is likely too indefinite. However, “except for misconduct serious enough to warrant immediate dismissal, no employee will be discharged without a warning” is probably sufficiently definite. Second, the terms must be communicated to an employee. This can be done by giving an employee an employee handbook. Finally, the offer must be accepted and consideration (some act or forbearance) must be furnished. An at-will employee typically communicates acceptance by continuing to work after receiving the employee handbook, forbearing their right to quit.
To avoid this, most employee handbooks include very explicit language that “this is not a contract.” A contract is enforced according to its terms and these clauses are typically enforceable. However, like most contracts, employee handbooks are complex and the placement of the disclaimer, exact language used, and other language used in the handbook can muddy the waters and negate a “no contract” clause.
In February 2021, the Minnesota Supreme Court held in Hall v. City of Plainview that an employee handbook did create a binding contract, despite the disclaimer. The handbook stated: “The Personnel Policies and Procedures Manual is not intended to create an express or implied contract of employment between the City of Plainview and an employee . . . These provisions, however, are not intended to alter the relationship between the City as an employer, and an individual employee, as being one which is “at will”, terminable by either at any time for any reason.” The handbook also contained a detailed prevision related to payment of accrued PTO on separation and the former employee sued for PTO benefits. The Court of Appeals found this was good enough to avoid creating an enforceable contract. The Minnesota Supreme Court disagreed, finding this language was ambiguous and only partially effective, and some provisions of the handbook, including the PTO rules, did create a contract.
An advertisement is often defined as an invitation to make an offer. It is an invitation to visit the business or its website and then enter a contract. The intention is to have a legally binding contract only after the customer gets to the checkout or signs a contract with the seller. However, a poorly worded advertisement can have unintended consequences.
A classic case occurred in Minnesota. In Lefkowitz v. Great Minneapolis Surplus Store, Inc. The Great Minneapolis Surplus Store placed an advertisement staying it had three brand-new fur coats, worth $100, first come, first served, $1 each. The plaintiff was the first person to show up the next day. The store refused to sell to him, citing its “house rule” that the coats would only be sold to women. The plaintiff ultimately won because there were clear, definite, and explicit contract terms and the plaintiff performed his obligation under the contract by being one of the first three people to arrive. The Plaintiff was not bound by the “house rule” because no mention was made of any house rules in the advertisement. Interestingly, this was true even though when plaintiff did it again, he knew about the house rule, but it was not in the advertisement.
A related doctrine is promissory estoppel. Promissory estoppel is a quasi-contractual doctrine that evolved England’s chancery courts based on good-faith reliance. If (1) a person makes a clear and definite promise, (2) intending to induce reliance, (3) someone in fact relies on the promise to his or her detriment, and (4) the promise must be enforced to prevent an injustice, then the person making the promise can be liable for damages to a person who relied on that promise in good faith. Unlike a contract, damages are measured by what was lost, rather than what was not gained. For example, if a business offers a prospective employee job, and the prospective employee quits their current job or declines another job offer because they are reasonably relying on the promise of a job; then, if the job promised by the business does not materialize, the prospective employee may be able to sue the business for the money they lost because they declined or quit other employment. This may create substantial liability.
Thomas Witt is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Employment Law, Family Law and Civil Litigation. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.