This book is intended to provide accurate and authoritative information, but it is sold with the understanding that neither the author nor the publisher is engaged in providing legal advice or representation. If legal advice is required regarding specific facts and circumstances, the services of a qualified lawyer licensed in the appropriate jurisdiction should be retained. © Business Law Seminar Group, LLC – 2018. All rights reserved.
No copyright is claimed or asserted in the excerpts of any court opinions quoted within this work. Permission to copy material exceeding fair use, 17 U. § 107, may be licensed from Business Law Seminar Group, LLC at businesslawseminargroup@gmail. Library of Congress Control Number: 2018942264 eBook ASIN# - B07DM3J7B2 Paperback ISBN# - 978-0-692-13830-4 This book is dedicated to my wife Serena and to my children Matthew and Stephanie.
Thank you Serena, Kurt Zumdieck, Jim Swegle and Johanna Fuhr for the unique perspectives each of you provided in reviewing and editing my manuscript. Contents Introduction The Unforgiving Law of Contracts Hidden Hazards Leveraging the Business Mindset Perspective Caveats Chapter One CONTRACT LAW Contracts as Private Law Contract Formation Mutual Assent Authority Consideration Offer and Acceptance Defenses to Contract Formation The Parol Evidence Rule Exceptions to the Parol Evidence Rule Promise versus Condition Rules of Interpretation Implied Covenant of Good Faith and Fair Dealing Waiver, Modification Letters of Intent and Oral Contracts Breach, Damages and Remedies Summary of Contract Law Chapter Two COMMON MISTAKES Performance before Agreement Failing to Shop and Compare Inadequate Descriptions of Performance Obligations Weak or Nonexistent Remedies Poor Vetting of Vendors, Suppliers and Others Blindly Accepting “Standard Contracts” Duration Too Long or Too Short Poor Document Change Tracking and Proofing Chapter Three NEGOTIATION Negotiation Training Demeanor and Attitude Body Language Get the Other Side Talking Negotiating Chips Do Not Negotiate Against Yourself Conflicts of Interests Protection of Confidential Information Get Technical Documents and Specifications Early Chapter Four DRAFTING Clarity Drafting Red Flags Completeness Technical Details Understand the Deal Active Analysis Draft Marking Initial Draft Issues Handwritten Changes in Final Drafts Chapter Five COMMON CONTRACT TERMS Introduction Title/Caption Opening Paragraph/Recitals/Background Recitals or “Whereas” Clauses Definitions Obligations of the Parties/Services Fees/Pricing/Fees and Payments Intellectual Property/Proprietary Rights Confidentiality/Confidential Information Term and Termination Effects of Termination Remedies for Breach Representations and Warranties Disclaimers/Warranty Disclaimer Limitations/Limitation of Liability Indemnification Insurance Modification and Waiver Arbitration Severability Assignment Governing Law, Venue and Jurisdiction Notices Force Majeure Entire Agreement/Integration/Merger Legal Expenses/Legal Fees Survival Authority Counterparts Signature Block Chapter Six IMPLEMENTATION Signing and Filing Tracking Contract Management Technology Performance Deal Evolution Chapter Seven AMENDMENTS AND ADDENDUMS Changing Circumstances Addendums Amendments - Contract Surgery Tactical Considerations Consistency and Good Contract Management Too Many Amendments Chapter Eight DISPUTE RESOLUTION Dispute Avoidance Be Right Keep Emotions in Check Disputes are Just Difficult Negotiations Initial Assessment Cats in Trees Sand Traps Code Red – Zero Sum Disputes Use of Counsel Introduction The Unforgiving Law of Contracts In 1990, a massive floating bridge between Seattle and Mercer Island used by thousands of cars every day sank in a storm while being refurbished. The state’s agreement with the contractor was apparently unclear on who should pay for the sinking. After years of litigation, the contractor’s insurers agreed to pay $20 million without admitting responsibility.
In 2013, Bertha, the largest and most expensive drill ever built, overheated and ground to a halt under Seattle. Again it was not clear who should pay the resulting repair and delay costs, estimated at one point to be $480 million. In 2006, the Canadian Radio-television Telecommunications Commission weighed in on a very expensive punctuation dispute between Rogers Cable Communications and Aliant Telecom. The CRTC ruled that Aliant could terminate an agreement between the two parties much sooner than Rogers believed was permitted under the following passage: [the Structure Support Agreement] shall.
continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party. Rogers had written the above passage intending that Aliant would not be able to terminate the agreement until after the initial five year term. In its ruling, the CRTC found that placement of the comma before the phrase “unless and until terminated by one year notice in writing by either party” permitted “termination of the SSA at any time, without cause, upon one year's written notice….” The CRTC’s ruling allowed Aliant to terminate years earlier than Rogers had expected, apparently costing Rogers $2.4 million, all because of an errant comma. Obviously, even professional contract negotiators and drafters miss important issues.
Missteps like these happen both in government and in business. In business, cost constraints can limit access to competent legal counsel. Sometimes in high pressure business environments there is also pressure to act quickly and apologize later. But commercial agreements are unforgiving.
No apology will raise a sunken bridge, unwind an agreement that unexpectedly transfers your intellectual property, or otherwise re-write a deal that calls for the wrong goods or services or that spawns legal or regulatory liabilities. Hidden Hazards Unfortunately, many contract drafting traps are invisible to non-lawyers. It takes much less skill to critique what is in an agreement than it does to identify and correct what is not – things like remedies for breach, rights of termination, intellectual property protections, or correct descriptions of what the other party is supposed to do. As a result, entrepreneurs and other business persons can overestimate their ability to competently negotiate commercial agreements without legal assistance.
Sometimes this leads to painful surprises. Leveraging the Business Mindset On the other hand, entrepreneurs and other business persons with strong contract drafting and negotiation skills can be the most valuable individuals at the table. They often understand the economics and business logic of commercial relationships better than attorneys, and they usually take a more pragmatic and creative approach to finding the compromises needed to get deals done. And unlike counsel, who bring professional “malpractice” concerns to any project, sophisticated and well-informed business persons can be better positioned to weigh calculated risks regarding novel and complex commercial relationships.
Perspective Most commercial agreements involve one party purchasing some type of good or service from another party, or a combination of goods and services. Thus, one party is often considered a “buyer,” “customer” or “client,” and the other a “seller,” “vendor,” “provider” or “supplier.” For simplicity, we’ll think in terms of buyers and sellers. Many of the topics in this book are discussed largely from the perspective of the buyer. One reason for this is brevity.
There are several others though. First, sellers often have standard contracts that they routinely present to buyers. In many cases, these standard contracts were drafted by the seller’s lawyer months or years earlier and were loaded up with terms, both relevant and irrelevant, that favor the seller. Consequently, it is often the buyer who is faced with reviewing a new and potentially confusing agreement.
Second, the buyer is often at an informational disadvantage. This is because sellers generally know more than their buyers about the goods or services being sold and about how to protect their interests in transactions involving those goods or services. Third, sellers might be slightly more apt to breach their commitments than buyers, given the generally more significant performance challenges facing sellers – e., producing and transporting goods on time, developing software on time, competently providing specialized services, and so forth. In most contract situations, therefore, it is the buyer who needs more coaching on how to protect his or her interests.
That said, where relevant, issues of particular importance from the seller’s perspective are also addressed – e., developing solid but workable template agreements, avoiding over-promising, and limiting downside risk through warranty and liability limitation clauses, among others. Keep perspective in mind and consider both sides of each issue. The ability to evaluate the other party’s concerns is an advantage in contract negotiations, as discussed in Chapter Three, Negotiation. Caveats Nothing in this book is legal advice.
Legal advice is always based on specific facts and requires an attorney-client relationship. Also, this book also does not address the Uniform Commercial Code (“UCC”) in detail. Article 2 of the UCC, adopted in varying forms by every state, applies to all contracts for “goods.” Goods are defined as any tangible thing that is moveable. Readers who regularly buy or sell “goods” should work with counsel to ensure UCC issues are covered.
Chapter One CONTRACT LAW Contracts as Private Law Contracts create “private law” between two parties. Courts enforce valid contracts in order to provide predictability in private relationships and to facilitate commerce. Enforceability is a double-edged sword though, rarely distinguishing between good deals and bad. Throughout this book, there are references to “case law.” Case law, also called “precedent,” and “common law,” means the general body of law created by state and federal courts of appeals.
Contract Formation A contract is formed when there is “mutual assent” (also known as a "meeting of the minds") between two parties to enter into an agreement supported by “consideration” (money or something else given in exchange). Issues of “contract formation” are often relevant to a party seeking to get out of an agreement by arguing that a contract never occurred. We will consider what it takes to form a contract, and then several common "defenses" to contract formation, i., arguments that no contract was ever formed. Additional defenses to formation appear below in the discussion of the Parol Evidence Rule.
Mutual Assent Mutual assent means that two parties over the age of “majority” (18 years) and of sound mind have voluntarily agreed to enter into an agreement under which each will do or provide certain things. Where fraud or duress is used to convince a party (i., gunpoint) to enter into an agreement, the requirement of voluntary assent is absent and the contract can be voided. Interestingly, most contracts involving minors can be voided, but minors are generally not permitted to “disaffirm” contracts involving “necessities” like food, clothing and shelter. Mutual assent can also be undermined by mutual mistake about a material fact or assumption, as discussed below under Parol Evidence Rule.
Authority Another concept falling under “assent” is “authority” – the question of whether the individual signing for a party is actually authorized to enter into it on behalf of that party. Or, alternatively, has the other party held that person out as having such authority? This should not be a concern where you are dealing directly with the president, chief financial officer, general counsel or sole proprietor of a company. But an unusually generous deal signed by a sales person or business development vice president, for example, might later be disputed as “unauthorized.” For any contract involving substantial risks, commitments or monetary value, consider demanding proof of actual authority. In the case of corporations or partnerships, this may involve requiring the other side to produce board resolutions, partnership operating agreements, or delegations of authority outlining the signing authorities of persons in certain positions.
Consideration Each party has to agree to do or give something of value in exchange for the performance of the other party. If one party is not obligated to do or give anything of value, or their performance is otherwise voluntary or “illusory,” there is no enforceable contract under law and either party may back out. Even where the value of the consideration from one party is substantially greater than that from the other, courts generally do not intervene to invalidate such agreements. That said, contracts citing “$1” or “love and affection” in exchange for goods or services of measurably higher value might not survive attack in some states.
The case law varies from one jurisdiction to another. Courts in most states will not set aside a contract unless the “inadequacy” of one party’s consideration “is so gross as to be conclusive evidence of fraud and as to shock the conscience of the court.