An installment payment contract is a specific type of contract in which the payment structure of the contract is made in a series, or installments, rather than in one large lump payment. Alternatively, an installment contract can also involve deliveries of goods or the provision of services that are done in a series, rather than all at once.
As a specific type of contract, in order to form a valid contract under state and federal laws, generally the following requirements must be met:
- Offer and Acceptance: One party must first make an offer, and the other party must accept that offer. Further, both the offer and acceptance must be done in such a way that is clear and unambiguous;
- Assent: Both parties must then mutually assent, or agree, to the terms of the contract.
- This means that both parties should be clear with each other regarding the terms, words, and definitions that are used in the agreement, including whether or not any provisions form an installment contract; and
- Consideration: Each party must finally exchange something of value, such as how one party is generally providing a service or goods in exchange for monetary payment.
In addition to the above requirements, it is important to note that some contracts must be in writing in order for them to be legal. For example, contracts for the sale of real property, as well as contracts for the sale of goods worth over a certain amount, such as involving the sale of goods of $500 or more.
Installment contracts are commonly used because they benefit the consumer, who may not possess sufficient funds in order to make a full or one-time payment. Sellers are also benefited when the sale of goods or distribution of services occur on a cyclical basis, which allows for them to have a continuous book of business.
Regardless of the overall content of the contract, any installment provisions should be clearly written in order to include the specific details regarding how the installment payments or deliveries will work. This is important in order to reduce the likelihood of a breach of the contract by one of both parties.
What Are Some Common Examples of Installment Contracts?
As mentioned above, installment contracts are commonly utilized in situations involving contracts that contain payment provisions where payments are to be made in installments or contracts involving delivery of goods provisions where deliveries are to be made in installments.
Common examples of when installments contracts can be used may include:
- Vehicle Sales: When an individual buys a motor vehicle, they generally agree to make monthly payments over a specified period of time to cover the cost, instead of making a one time lump sum payment;
- Sale of Land Plots: In real estate transactions involving a sale of a plot of land or other real estate, buyers may agree to pay for a tract of land through installment payments over a period of time while gaining immediate possession of the land.
- Importantly, in installment contracts involving real estate, legal title is not obtained until the final installment payment is made;
- Computer Service Contracts: Contracts for computer or technology services, such as software subscriptions, often involve installment payments being made over a set period of time;
- Agricultural Sales Contracts: In these contracts, the goods are subject to seasonal cycles, such as produce or agricultural goods.
- For instance, a farmer may sell their crops ahead of time, and receive installment payments as the crops are harvested in accordance to the terms of the contract; and/or
- Wholesale Contracts: Also known as retail installment contracts, these contracts generally involve a seller purchasing “in-style” or “in-season” clothes from a wholesaler.
What If an Installment Contract is Breached? What are the Remedies?
A breach of contract most commonly occurs when one of the aforementioned requirements to form a valid contract is not met. For example, if only one party assented to the agreement, such as due to vague language regarding the installment provisions, then the contract may be voided.
A void contract means that the contract is canceled, as if it never existed, and the parties could be released from their duties. Under other circumstances, the court may declare the contract “voidable.” Voidable means that the parties can choose to continue under the contract or cancel the contract as they wish.
In most breach of installment contract cases, the non-breaching party will be entitled to a damages award for at least the current installment that was breached. In other cases, the non-breaching party may be required to pay a damages award that will cover the remaining installments or deliveries covered by the contract.
As mentioned above, in order to prevent confusion associated with contract terms, the parties should include a section in the contract that addresses breaches of installment terms. For instance, the parties may choose to include a “grace” provision for a first-time breach of an installment or a provision stating that any breach at all will result in a damages award for the remaining payments.
It is important to note that the contract terms will control the remedies in a breach of contract case in most scenarios. However, if the contract is silent on remedies for breaching the contract, then state laws will also come into play. In general, there are two types of remedies that a party can receive for a breach of contract:
- Legal Remedies: Legal remedies refer to monetary award damages, such as compensatory damages, nominal damages, and liquidated damages; or
- Equitable Remedies: Equitable remedies are issued by a court when a legal remedy will not sufficiently compensate for the damage done.
- This most commonly includes remedies such as specific performance of the contrat, reformation of the contract, or rescission of the contract.
The difference between the above remedies that are awarded will determine what the non-breaching party can expect to receive, as well as what the breaching party will be required to do as punishment.
For example, if a person who is selling their house refuses to hand over the keys and property to the buyer at their closing, the buyer may sue the seller for specific performance. This means that the remedy in that case is the court can force the seller to give up their property to the buyer.
The type of legal remedy that is awarded will also determine how to calculate the amount of damages that the non-breaching party should receive. For instance, if a buyer has already paid for certain items to be shipped to them, but the company who owns the products never sent the items and kept the money, the buyer could sue the seller for breach of contract and collect compensatory damages and/or seek restitution for the missing merchandise.
What Are the Pros and Cons of Installment Contracts?
As can be seen, there are numerous pros and cons of utilizing installment contracts. Examples of advantages of using installment contracts include:
- Installment contracts allow buyers flexibility in paying for the goods purchased under the contract by allowing them to make installment payments over a larger period of time, rather than a one-time lump sum payment;
- Installment contracts also allow buyers to gain immediate possession of the goods or property while they are timely making installment payments;
- Installment contracts also allow for a buyer to budget more easily, as the installment payments are predictable; and/or
- In some cases, paying off an installment contract can positively impact a buyer’s credit score.
Examples of cons of installment contracts include:
- Most installment contracts involve interest charges being added over time, which can make the original purchase cost higher;
- There is also a risk of default in an installment contract if a buyer misses any payments; and/or
- When negotiating the purchase price involving an installment contract, buyers often have less leverage in the negotiation than if they were paying one lump sum contract. This is because there is a risk to the seller that the buyer may default.
Do I Need a Lawyer for Help with an Installment Contract?
If you are having any issues associated with an installment contract, it may be in your best interests to consult with an experienced contract lawyer. An experienced contract lawyer can assist you with drafting, reviewing, and editing an installment contract.
Further, if the contract has already been executed, an attorney can help you understand the installment provisions of the contract and your legal obligations and duties. Additionally, a contract attorney can help you understand your legal rights and options under your state’s specific contract laws. Finally, an attorney will also be able to represent you in court, as needed, should any legal issues arise.
