In Missouri, it has long been settled that for a contract to be valid and enforceable, the essential terms must be definite and mutually agreed upon by both contracting parties. Without certainty in the crucial terms, there can be no mutual understanding between the parties and, therefore, no valid contract. However, a recent decision from the Missouri Court of Appeals shows just how far courts can go to find the existence of a valid and enforceable contract when it comes to employee compensation.
In August 2012, “Patty” was offered a general sales manager position at WDAF Fox 4 TV, which is owned and operated by Tribune Broadcasting. She had held similar positions at other television stations for more than 11 years.
While discussing compensation for the position, WDAF’s general manager told Patty that she would receive annual bonuses in addition to her base salary if revenue goals were met or revenue exceeded expectations. The bonus structure included a $5,000 payment if she “delivered the revenue plan” and an additional bonus if she exceeded 101% of the revenue goal.
Unaware of the conversations between Patty and WDAF’s general manager, Tribune’s vice president of finance told Patty that additional bonuses for exceeding revenue goals would be determined by a set “formula.”
Based on her conversations with the company representatives, Patty accepted the position, expecting to receive an annual bonus if revenue objectives were met. She never signed a written agreement regarding bonus compensation.
Patty failed to meet the revenue goals for 2012 and was not awarded a revenue-based bonus. A few months later, Tribune’s chief financial officer (CFO) sent WDAF’s general manager an e-mail articulating the formula to be used when calculating revenue-based bonuses for 2013. According to the e-mail, if Patty exceeded her 2013 revenue goals, she would receive a bonus of 20% of her annual base salary upon reaching 101% of gross station revenue budget plus 4% of every dollar over 101% of gross station revenue budget.
By September 2013, Patty had exceeded her revenue goals for the year. According to the calculations in the CFO’s e-mail, she was to receive a bonus of $170,000. However, she received a bonus of $136,164 and was informed that her bonus was reduced because of “performance issues.” She was terminated from WDAF 3 months later.
Patty filed a lawsuit alleging, among other things, that Tribune breached its contract with her by failing to pay her full bonus for 2013. A jury issued a verdict in her favor, and Tribune appealed.
Contract Formation and Enforceability Under Missouri Law
To establish a breach-of-contract claim under Missouri law, the party seeking to enforce the contract must prove a valid contract existed. The essential elements of a contract are (1) competency of the parties to contract, (2) subject matter, (3) legal consideration, (4) mutuality of agreement, and (5) mutuality of obligation.
To establish mutuality of agreement, there must be a meeting of the minds regarding the essential terms of the contract. The words and conduct of the parties must sufficiently establish their assent to the stated contract terms.
Additionally, the essential contract terms must be certain or capable of being made certain so a court can give them an exact meaning. Missouri courts will ascertain the essential terms of a contract by looking at the agreement, its contents, and the subsequent conduct of the parties. Then, courts will give meaning to the terms by applying commonsense and previous experience. Usually, a contract will not be voided if there is a possibility of giving meaning to it.
Patty’s Bonus ‘Contract’
On appeal, Tribune asserted that (1) there was no evidence that there was an enforceable contract between Patty and the company regarding bonuses and (2) even if there were an agreement, it was barred by the statute of frauds.
The court of appeals found that the terms of Patty’s bonus agreement were sufficiently defined to form a binding and enforceable contract. The evidence demonstrated that Tribune offered Patty an annual revenue-based bonus. The essential terms of the offer were (1) the bonus would be paid if she exceeded 101% of the revenue goal and (2) the payment would be calculated using Tribune’s formula.
According to the court, it was not essential for Patty to know the details of the formula at the time of acceptance or have the ability to determine how much her bonus would be. The court reasoned that although the essential terms of a contract must be definite, the details and particulars of the terms need not be.
Moreover, support for the parties’ mutual assent to the terms was found in their subsequent actions. Their conduct followed the terms of the agreement. For example, Patty was not awarded a bonus after failing to meet her objectives in 2012. However, she was awarded a revenue-based bonus for exceeding her objectives in 2013, and the bonus was calculated in accordance with the formula in the CFO’s e-mail. Those facts established mutuality of agreement between the parties and their intent to form a contract.
Further, the court held the contract was not barred by the statute of frauds, which prohibits the enforcement of an oral agreement that cannot be performed within a year. The important question was whether the contract could have been executed within a year, not whether the agreement was expected to last longer than a year.
The court found that the oral agreement between Patty and Tribune was perfectly capable of being performed within a year. The court reasoned that Tribune would know within a year whether Patty was eligible for an annual revenue-based bonus and would then be required to pay the bonus. Therefore, the court held that a jury could properly find that there was a valid and enforceable contract based on the facts, and it affirmed the jury’s verdict.
This case is a perfect reminder that contracts can be formed in different ways, including orally. Written and oral contracts regarding employment or bonuses are enforceable, and employers can’t escape liability simply because of the form of an agreement. Further, all terms and details of an agreement need not be known for the contract to be enforceable so long as the basic and essential terms are established.
Courts have taken a strong stance that contracts will be construed in favor of enforcement. Thus, it is important to be careful when communicating with prospective and current employees. Follow these best practices:
- Refrain from discussing employment terms in generalities without including appropriate disclaimers.
- When possible, reduce all terms of an employment contract to a single written agreement to ensure both parties have a clear and mutual understanding of the essential terms.
- To prevent miscommunication, funnel employment contract discussions with prospective or current employees through a single company representative.
- Alert company leaders to the possibility that they can unintentionally create binding obligations for the company.