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Why Contracts Must Have Definite Terms

In what should have been an easy win in a breach of contract case, a Tennessee bank went home with a goose egg after the Court of Appeals applied a fundamental rule of Tennessee contract law to the facts of the bank’s case. The case, which was filed in Coffee County, Tennessee, answers the question of why the material terms of contracts should be definite: Because, if they are not definite, the contract will not be enforceable.

The facts of the case are as follows:
• The Bank loaned money to the Defendants
• The Defendants were husband and wife
• On June 14, the case against the wife went to trial, but not the case against the husband
• At the June 14 trial, the Bank introduced, as evidence, a Credit Agreement which contained the signatures of both defendants and a term providing for interest at 9.25%
• The trial against the husband took place on the following November 10
• At the November 10 trial, the Bank introduced into evidence a Credit Agreement that was different from the one it relied on in the June 14 trial
• The Credit Agreement introduced at the November 10 trial differed from the one introduced at the earlier trial in that it contained the original signatures of the Defendants (the one introduced at the earlier trial had photocopied signatures)
• The Credit Agreement introduced at the November 10 trial also differed from the one introduced at the earlier trial in that, where the Bank had placed the interest rate of 9.25% in it, the “9.25%” was not next to “XXXXXXXX” which was placed in the document to cover up a different rate of interest, “15%”
• The Credit Agreement the Bank used at the November 10 trial, although signed by the Defendant wife, did not identify her as a borrower, as did the Credit Agreement it relied on in the previous trial
• At both trials, the Bank, inexplicably, also introduced a document titled “Loan Ledger” which indicated that the money loaned to the Defendants was loaned at an 18% rate
The trial court found for the Bank. The Defendants appealed. The Court of Appeals reversed the trial court, leaving the Bank without a judgment against the Defendants.

To the Court of Appeals of Tennessee, the determinative issue was whether the Bank itself disproved that it could have even had an enforceable contract by introducing two different versions of the Credit Agreement. Under Tennessee law, if one or more essential terms (sometimes referred to as “material terms”) of a contract is not definite, a court may not enforce the contract.

The Court of Appeals held that the Bank had failed to prove the existence of an enforceable contract, because it was, in effect, relying on two different written contracts to try to prove one. The opinion also makes it evident that the Bank did not help its cause by also having an internal document that showed that it disbursed the proceeds of the loan at a different rate of interest than contained in the two different versions of the Credit Agreement.

In most breach of contract cases which I have handled, the problem with definiteness has arisen, not because there were two different agreements as to an essential term, but because there was no agreement as to an essential term. (In this respect, the above case is an unusual one.) For example, two different people have consulted with me over the years about situations in which they went to work for a start-up company with the agreement that, if they worked hard (and both were underpaid), they would receive stock options.

In both instances, neither person had an enforceable contract that would result in their being able to recover in a breach of contract case. Why? In both their cases, there had never been a promise any more definite than that they would receive stock at some point. To be enforceable, they would have had to have had, at a minimum, an agreement about when they would receive the stock and how much they would receive. Remember, every term of a contract does not have to be definite, but the essential ones must be definite.