contract law basics a practical approach to contract review and negotiations

Contract Law BasicsContract Law Basics

A Practical Approach to A Practical Approach to Contract Review and Contract Review and NegotiationsNegotiations

Three Parts of The Three Parts of The PresentationPresentation PracticalPractical EducationalEducational LegalLegal

The PracticalThe Practical

Critical Basics to RememberCritical Basics to Remember

Communication & Communication & Common SenseCommon Sense

The stuff lawyers make The stuff lawyers make confusing and corporations confusing and corporations hope you don’t have!hope you don’t have!

RULE NUMBER ONERULE NUMBER ONE

Read each contract completely, Read each contract completely, ask questions and utilize ask questions and utilize additional resources if you need additional resources if you need answersanswers

Critical Basics to Critical Basics to RememberRemember Who is the most commonly Who is the most commonly

utilized resource that should utilized resource that should NEVER be a resource unless all NEVER be a resource unless all facts are verified?facts are verified?

Your well trained sales Your well trained sales advisor. advisor.

Contract “Sign On” Contract “Sign On” BonusBonus The customer signs on and the The customer signs on and the

vendor gets the bonus.vendor gets the bonus. Close the deal based on the Close the deal based on the

needs of the hospital, not the needs of the hospital, not the sales promotion timetable of the sales promotion timetable of the needs of the sales person’s needs of the sales person’s wallet.wallet.

Important ResourcesImportant Resources

Corporate Compliance OfficerCorporate Compliance Officer Risk ManagerRisk Manager JCAHO Team LeaderJCAHO Team Leader Subject ExpertSubject Expert Hospital AttorneyHospital Attorney Outside ReviewOutside Review

Contract Review Contract Review ConsiderationsConsiderations Include hospital terms and conditions Include hospital terms and conditions

as an addendum to the vendors as an addendum to the vendors contract. It MUST be stated that contract. It MUST be stated that hospital terms and conditions hospital terms and conditions SUPERSCEDE vendor terms and SUPERSCEDE vendor terms and conditions.conditions.

Have an “authorized agent” of the Have an “authorized agent” of the company sign the hospital purchase company sign the hospital purchase order. order.

Contract Review Contract Review ConsiderationsConsiderations BEWARE of the third party BEWARE of the third party

confidentially clause.confidentially clause. NEVER sign away the right for NEVER sign away the right for

third party third party review!!!!!!!!!!!!!!!!!!!!!!!review!!!!!!!!!!!!!!!!!!!!!!!

Contract Review Contract Review ConsiderationsConsiderations Address automatic contract Address automatic contract

renewal, sometimes known as renewal, sometimes known as “Ever Green” clause.“Ever Green” clause.

Review state law jurisdiction.Review state law jurisdiction. Consider meditation clauses.Consider meditation clauses. Use historical data for volume Use historical data for volume

commitment contracts & project commitment contracts & project conservatively. conservatively.

Create a Negotiation Create a Negotiation PlanPlan To negotiate the sky is the limit, To negotiate the sky is the limit,

but understand your essential but understand your essential needs.needs.

Utilize a subject expert.Utilize a subject expert. Set your time line, the best deal is Set your time line, the best deal is

the next one!the next one! Know when to “close”.Know when to “close”.

Items to NegotiateItems to Negotiate

Extended Payment Terms or Extended Payment Terms or Discounted Quick Pay.Discounted Quick Pay.

Late Payment Terms, be very wary of Late Payment Terms, be very wary of % of sale!% of sale!

Buy out terms.Buy out terms. Taxes and other fees.Taxes and other fees. Freight, fuel charges, hazmat fees, if Freight, fuel charges, hazmat fees, if

applicable.applicable. Price Increases.Price Increases.

Writing Your Writing Your AddendumAddendum Clearly define expectations in Clearly define expectations in

writing.writing. Craft your language clearly and Craft your language clearly and

easy to understand.easy to understand. The courts normally support the The courts normally support the

clearest definition of intent.clearest definition of intent. GET THE LAST WORD IN!GET THE LAST WORD IN!

The 800 pound guerilla The 800 pound guerilla theorytheory Corporate attorneys write one Corporate attorneys write one

sided agreements, look for sided agreements, look for balance.balance.

Who has the bigger legal Who has the bigger legal resources?resources?

Leverage Resources.Leverage Resources. Bring your own guerilla!Bring your own guerilla!

The EducationalThe Educational

Suggested Resources and Suggested Resources and Practical Advice, Four Books to Practical Advice, Four Books to Read to Help Win with Read to Help Win with Contracting & Personal LifeContracting & Personal Life

Getting to YesGetting to Yes

How to Negotiate Without How to Negotiate Without Giving InGiving In

What They Didn’t What They Didn’t Teach You at Harvard Teach You at Harvard Business SchoolBusiness School I don’t knowI don’t know I need helpI need help I’m sorryI’m sorry

The Four Agreements, The Four Agreements, A Practical Guide To A Practical Guide To Personal FreedomPersonal Freedom Assume nothing.Assume nothing. Be true to your word.Be true to your word. Always do your best.Always do your best. Don’t take anything personal.Don’t take anything personal.

Repacking Your BagsRepacking Your Bags

Continue to grow and refine Continue to grow and refine your skill set!your skill set!

The LegalThe Legal

Stuff Written by a Real Stuff Written by a Real AttorneyAttorney

I. What Is a Contract?I. What Is a Contract?

A.A. Some concepts:Some concepts:1.1. A contract is an agreement between parties to perform or not A contract is an agreement between parties to perform or not

perform certain acts in the future, the conduct is of a kind that the perform certain acts in the future, the conduct is of a kind that the parties intend to be legally binding, and the agreement is such parties intend to be legally binding, and the agreement is such that a court may measure the loss suffered as a result of a breach.that a court may measure the loss suffered as a result of a breach.

2.2. A contract is a promissory agreement between two or more A contract is a promissory agreement between two or more persons that creates, modifies, or destroys a legal relation.persons that creates, modifies, or destroys a legal relation.

3.3. A contract is an agreement upon sufficient consideration to do or A contract is an agreement upon sufficient consideration to do or not to do a particular thing. not to do a particular thing.

4.4. In order to be a contract, the promise made must be sufficiently In order to be a contract, the promise made must be sufficiently definite “to justify a promisee in understanding that a definite “to justify a promisee in understanding that a commitment has been made.” Restatement (Second) of Contract § commitment has been made.” Restatement (Second) of Contract § 2.2.


B.B. Historically, the concept involved promises to be Historically, the concept involved promises to be kept kept -- pacta sunt servando -- “That every man -- pacta sunt servando -- “That every man kept his given word”.kept his given word”.

1.1. The concept is at least as old as the covenant between Israel and The concept is at least as old as the covenant between Israel and God .God .

2.2. The concept of “social contract” is the basis of the Constitution -- The concept of “social contract” is the basis of the Constitution -- government by the mutual consent of the governed. The principles government by the mutual consent of the governed. The principles of justice supporting the basic structure of society (i) are the object of justice supporting the basic structure of society (i) are the object of the original agreement which formed the government, (ii) of the original agreement which formed the government, (ii) regulate all further agreements and (iii) specify the forms of regulate all further agreements and (iii) specify the forms of government that can be established. J. Rawls, A Theory of Justice government that can be established. J. Rawls, A Theory of Justice 11 (1971). 11 (1971).

3.3. Early American jurisprudence regarded contract rights as a natural Early American jurisprudence regarded contract rights as a natural product of the immutable principles that preceded human law. product of the immutable principles that preceded human law.


C. Requirements for a contract:C. Requirements for a contract:

1.1. PromisePromise: A commitment that something will or will : A commitment that something will or will not be done in the future. It must be definite enough not be done in the future. It must be definite enough to qualify as a promissory. to qualify as a promissory.

2.2. ExchangeExchange: Something of value (“consideration”) is : Something of value (“consideration”) is exchanged between the parties. exchanged between the parties.

3.3. EnforcementEnforcement: The parties intend to be bound. : The parties intend to be bound. Failure to abide by the promise results in legal Failure to abide by the promise results in legal sanctions. sanctions.


D.D. Sometimes “contract” is thought only Sometimes “contract” is thought only to be the writing between the partiesto be the writing between the parties. . The writing itself is not the contractThe writing itself is not the contract. . Certain types of contracts must be Certain types of contracts must be evidencedevidenced by a writing, but other by a writing, but other contracts that are evidenced by contracts that are evidenced by oral oral communications or conduct communications or conduct may be may be enforceable. A contract is an “abstract enforceable. A contract is an “abstract legal relationship between the parties.” legal relationship between the parties.” J. E. Murray, Jr., J. E. Murray, Jr., Contracts: Cases and Contracts: Cases and MaterialsMaterials, 5. , 5.


E.E. Importantly, a contract is whatever the court says it is. Importantly, a contract is whatever the court says it is. Case law has modified, elaborated, refined and Case law has modified, elaborated, refined and expanded general common law principles and has expanded general common law principles and has construed and interpreted statutory requirements. construed and interpreted statutory requirements. Legal research may find case law that will determine the Legal research may find case law that will determine the applicability of these basic concepts to any given applicability of these basic concepts to any given situation situation PromisePromise: A commitment that something will : A commitment that something will or will not be done in the future. It must be definite or will not be done in the future. It must be definite enough to qualify as a promissory. enough to qualify as a promissory.

1. An “implied contract” or “quasi-contract” is an obligation imposed 1. An “implied contract” or “quasi-contract” is an obligation imposed by law for the purpose of bringing about justice and equity, without by law for the purpose of bringing about justice and equity, without reference to the parties’ intention. Although it is not a contract, it is reference to the parties’ intention. Although it is not a contract, it is treated as a contract. Restitution and unjust enrichment are two treated as a contract. Restitution and unjust enrichment are two important principles: a person who has been unjustly enriched at the important principles: a person who has been unjustly enriched at the expense of another is required to make restitution to the other. expense of another is required to make restitution to the other.

II. Promise: Offer and II. Promise: Offer and

AcceptanceAcceptance

A.A. An offer is a promise to perform, An offer is a promise to perform, conditional on receiving acceptance.conditional on receiving acceptance.

1. Sometime there is “lack of mutuality”: one party 1. Sometime there is “lack of mutuality”: one party may have made no promise at all or made a promise may have made no promise at all or made a promise that will permit that party to decline to perform. In that will permit that party to decline to perform. In this case, the contract is “illusory” because one party this case, the contract is “illusory” because one party is not under any obligation at all.is not under any obligation at all.



B.B. An advertisement is usually not An advertisement is usually not considered to be an offer. Consider considered to be an offer. Consider the problems with mass advertising if the problems with mass advertising if each flyer were considered to be an each flyer were considered to be an offer. Advertisements are seen as offer. Advertisements are seen as invitations for the buyer to submit an invitations for the buyer to submit an offer. offer.


AcceptanceAcceptance C.C. A price quote could be an offer or may be A price quote could be an offer or may be

viewed as “inviting an offer rather than as viewed as “inviting an offer rather than as making one.” Restatement on Contracts making one.” Restatement on Contracts (Second) § 26, comment (c). The seller (Second) § 26, comment (c). The seller quotes a price or bid for a product, and the quotes a price or bid for a product, and the buyer notifies the seller that it wants the buyer notifies the seller that it wants the product. This may be seen as an invitation product. This may be seen as an invitation to make an offer (seller) and the offer (the to make an offer (seller) and the offer (the buyer). But, if the seller started supplying buyer). But, if the seller started supplying the product, and then increased its price, the the product, and then increased its price, the buyer may be able to argue that there was a buyer may be able to argue that there was a valid contract, as evidenced by the seller’s valid contract, as evidenced by the seller’s conduct. conduct.



D.D. Acceptance: may be made verbally, Acceptance: may be made verbally, in writing, or it may be inferred from in writing, or it may be inferred from silence or conduct. silence or conduct.



E.E. To be enforceable, the promise must To be enforceable, the promise must be definite.be definite.



F.F. An offer may be revoked before acceptance, An offer may be revoked before acceptance, unless it is a firm offer, under the Uniform unless it is a firm offer, under the Uniform Commercial Code, § 8.2-205Commercial Code, § 8.2-205[1][1]::

An offer by a merchant to buy or sell goods in a signed writing An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree any such term of assurance on a form supplied by the offeree

must be separately signed by the offeror.must be separately signed by the offeror. [1][1] In Virginia, Article 2, the Uniform Commercial Code, codified at Title 8.2 of the Code of Virginia, governs In Virginia, Article 2, the Uniform Commercial Code, codified at Title 8.2 of the Code of Virginia, governs

contracts for the sale of goods. This Article will be referenced throughout this presentation as UCC § 8.2-contracts for the sale of goods. This Article will be referenced throughout this presentation as UCC § 8.2-xxx. xxx.


AcceptanceAcceptance Example 1: “This offer will remain open for six Example 1: “This offer will remain open for six

months from the date of this letter. months from the date of this letter. Sincerely, X” (The statute permits a firm Sincerely, X” (The statute permits a firm offer to be open for just three months.)offer to be open for just three months.)

Example 2: “We can offer you this product at Example 2: “We can offer you this product at $100. This is a firm offer. Sincerely, X”(This $100. This is a firm offer. Sincerely, X”(This offer will remain open for three months.)offer will remain open for three months.)

Example 3: “We offer you this product at $100. Example 3: “We offer you this product at $100.

Sincerely, X” (This is not a firm offer). Sincerely, X” (This is not a firm offer).



G.G. Acceptance may be evidenced by a Acceptance may be evidenced by a party’s conduct party’s conduct

III. “Mirror Image Rule” and the III. “Mirror Image Rule” and the “Battle of the Forms” “Battle of the Forms”

A.A. Under the common law “Mirror Image Under the common law “Mirror Image Rule”, the acceptance has to be Rule”, the acceptance has to be exactly the same as the offer or there exactly the same as the offer or there was no contract. A party’s reply was no contract. A party’s reply changing or adding terms not in the changing or adding terms not in the offer constitutes a counteroffer .offer constitutes a counteroffer .


B.B. This results in the “Battle of the This results in the “Battle of the Forms”. The Mirror Image Rule, in Forms”. The Mirror Image Rule, in transactions involving goods between transactions involving goods between merchants, has been modified by the merchants, has been modified by the Uniform Commercial Code (“UCC”) § Uniform Commercial Code (“UCC”) § 8.2-207:8.2-207:

§ 8.2-207. Additional terms in acceptance or § 8.2-207. Additional terms in acceptance or confirmationconfirmation


(1) (1) A definite and seasonable expression of acceptance or a written confirmation A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed though it states terms additional to or different from those offered or agreed uponupon, unless acceptance is expressly made conditional on assent to the , unless acceptance is expressly made conditional on assent to the additional or different terms. additional or different terms.

(2) (2) The additional terms are to be construed as proposals for addition to the The additional terms are to be construed as proposals for addition to the

contract. Between merchants such terms become part of the contractcontract. Between merchants such terms become part of the contract unless: unless:

(a) the offer expressly limits acceptance to the terms of the offer; (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (b) they materially alter it; or (c) notification of objection to them has already been given or is given within (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. a reasonable time after notice of them is received.

(3) (3) Conduct by both parties, which recognizes the existence of a contract is Conduct by both parties, which recognizes the existence of a contract is

sufficient to establish a contract for sale although the writings of the parties sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other together with any supplementary terms incorporated under any other provisions of this act. provisions of this act.


C.C. Pursuant to UCC § 8.2-104, "Merchant" means a Pursuant to UCC § 8.2-104, "Merchant" means a person who deals in goods of the kind or person who deals in goods of the kind or otherwise by his occupation holds himself out otherwise by his occupation holds himself out as having knowledge or skill peculiar to the as having knowledge or skill peculiar to the practices or goods involved in the transaction practices or goods involved in the transaction or to whom such knowledge or skill may be or to whom such knowledge or skill may be attributed by his employment of an agent or attributed by his employment of an agent or broker or other intermediary who by his broker or other intermediary who by his occupation holds himself out as having such occupation holds himself out as having such knowledge or skill. “Between merchants” knowledge or skill. “Between merchants” means in any transaction with respect to which means in any transaction with respect to which both parties are chargeable with the knowledge both parties are chargeable with the knowledge or skill of merchants. or skill of merchants.


D.D. UCC § 8.2-207 was designed to regulate the UCC § 8.2-207 was designed to regulate the conduct whereby each party sent back conduct whereby each party sent back preprinted forms with different terms. preprinted forms with different terms. Now, the mere presence of additional terms Now, the mere presence of additional terms in one of the parties’ forms will not prevent in one of the parties’ forms will not prevent the formation of the contract.the formation of the contract.

1.1. If no contract is recognized, under 2-207 (1), then the If no contract is recognized, under 2-207 (1), then the transaction is nullified.transaction is nullified.

2.2. If performance by both parties evidences the intent to be If performance by both parties evidences the intent to be bound by a contract, then under 2-207(3), the conduct is bound by a contract, then under 2-207(3), the conduct is sufficient to establish a contract.sufficient to establish a contract.

III. “Mirror Image Rule” and the III. “Mirror Image Rule” and the “Battle of the Forms”“Battle of the Forms”

3.3. If there is a contract, the terms are those upon which the parties If there is a contract, the terms are those upon which the parties agree and any additional ones supplemented by the UCC.agree and any additional ones supplemented by the UCC.

4.4. Example: One party’s “acceptance” had arbitration terms. The Example: One party’s “acceptance” had arbitration terms. The parties did not agree to arbitration inasmuch as the forms did not parties did not agree to arbitration inasmuch as the forms did not match. But both parties performed. There was a breach. Is match. But both parties performed. There was a breach. Is arbitration required? Since there was no agreement as to the arbitration required? Since there was no agreement as to the arbitration terms, the question is whether the UCC allows the arbitration terms, the question is whether the UCC allows the parties to supplement that term under some other UCC provision. parties to supplement that term under some other UCC provision. Some courts have held that the only supplemental terms that are Some courts have held that the only supplemental terms that are allowed are those that are the “gap filler” provisions in Article 2, allowed are those that are the “gap filler” provisions in Article 2, such assuch as

place of delivery (UCC § 8.2-308)place of delivery (UCC § 8.2-308)time for shipment (UCC § 8.2-309)time for shipment (UCC § 8.2-309)time payment is due (UCC §8.2-310)time payment is due (UCC §8.2-310)

Other courts may allow a reasonable price term to be substituted, under Other courts may allow a reasonable price term to be substituted, under UCC § 8.2 2-305 if there was no agreement as to price.UCC § 8.2 2-305 if there was no agreement as to price.


E.E. The italics in the statute above clarifies that The italics in the statute above clarifies that when an acceptance (absent conditional when an acceptance (absent conditional language in the acceptance) adds additional language in the acceptance) adds additional terms, those additional terms become part terms, those additional terms become part of the contract unless the terms listed in 2 of the contract unless the terms listed in 2 (a)-(c) apply. Under section 2, the additional (a)-(c) apply. Under section 2, the additional terms proposed by the buyer are deemed to terms proposed by the buyer are deemed to be proposals for new terms to the contract.be proposals for new terms to the contract.


F.F. If the acceptance of the additional terms is If the acceptance of the additional terms is required for a contract to be formed, then a required for a contract to be formed, then a party can prevent the other’s terms from party can prevent the other’s terms from prevailing, but there is no contract. Look for the prevailing, but there is no contract. Look for the following wording to see whether additional following wording to see whether additional terms constitute a counteroffer as contemplated terms constitute a counteroffer as contemplated by section (1):by section (1):

Examples: “Acceptance of this offer must be made on the exact Examples: “Acceptance of this offer must be made on the exact terms set forth herein. If additional terms are proposed, these terms set forth herein. If additional terms are proposed, these terms will constitute a counteroffer, and no contract will be terms will constitute a counteroffer, and no contract will be formed without offeror’s assent to the counteroffer.”formed without offeror’s assent to the counteroffer.”

““This response supersedes any conflicting written or verbal terms of This response supersedes any conflicting written or verbal terms of

purchase.”purchase.”


G.G. If there are differences in the terms, and the If there are differences in the terms, and the parties have performed, look to subsection parties have performed, look to subsection (3) of the statute. The contract consists of (3) of the statute. The contract consists of the terms that match and any that may be the terms that match and any that may be supplemented by the UCC default supplemented by the UCC default provisions.provisions.

Example: UCC § 8.2-305 provides that if there is no price Example: UCC § 8.2-305 provides that if there is no price term, the contract would be for a reasonable price for the term, the contract would be for a reasonable price for the product. product.


H.H. Section 8.2-207 is inadequately drafted. Frequently, Section 8.2-207 is inadequately drafted. Frequently, there are two alternatives, but the statute only there are two alternatives, but the statute only addresses one. addresses one.

1. 1. An acceptance containing additional terms may be a valid An acceptance containing additional terms may be a valid acceptance if it is “definite”. If the terms are substantially different acceptance if it is “definite”. If the terms are substantially different (price, description of goods, quantity) is it definite?(price, description of goods, quantity) is it definite?

2. What if the acceptance states that the agreement is subject to the 2. What if the acceptance states that the agreement is subject to the conditions printed on the reverse side of “this form”? Is that a conditions printed on the reverse side of “this form”? Is that a conditional acceptance?conditional acceptance?

3. Section (3) controls a contract established by conduct. This could 3. Section (3) controls a contract established by conduct. This could be a problem for the offeror because the UCC may establish terms be a problem for the offeror because the UCC may establish terms more favorable to the offeree. The UCC warranty terms, for example, more favorable to the offeree. The UCC warranty terms, for example, are probably more favorable to the buyer.are probably more favorable to the buyer.


4. What is an “additional” term? Is it the same as a “different” 4. What is an “additional” term? Is it the same as a “different” term? term?

a. Not necessarily. a. Not necessarily.

b. The courts are split, but the better view is that b. The courts are split, but the better view is that documentation containing significantly different material terms documentation containing significantly different material terms is not an acceptance, but beware. Each party should ensure is not an acceptance, but beware. Each party should ensure that the party’s intentions are clear. Consider the following that the party’s intentions are clear. Consider the following language:language:

““Acceptance. Acceptance of this offer must be Acceptance. Acceptance of this offer must be made on its made on its exact terms and if additional or different terms exact terms and if additional or different terms are proposed are proposed by Seller, its response will constitute a by Seller, its response will constitute a counteroffer, and no contract will come into existence without counteroffer, and no contract will come into existence without offeror’s assent to offeror’s assent to the counteroffer.” the counteroffer.”


I.I. Make sure that the material terms match. Make sure that the material terms match. Generally, price, quantity, date of delivery, Generally, price, quantity, date of delivery, payment terms are material, but each payment terms are material, but each contract is fact-specific. If it’s important, contract is fact-specific. If it’s important, make sure the term is expressly written in make sure the term is expressly written in the final agreement, or restated as a the final agreement, or restated as a condition to the contract in the acceptance. condition to the contract in the acceptance.


J.J. As a buyer, if you have a PO or a RFP that As a buyer, if you have a PO or a RFP that has terms that are essential and material, has terms that are essential and material, make the PO or the RFP part of the final make the PO or the RFP part of the final contract. You can do this by stating:contract. You can do this by stating:

““The Purchase Order (or RFP) of (date) is The Purchase Order (or RFP) of (date) is incorporated herein by reference and is made a incorporated herein by reference and is made a part of this Agreement as if set forth and restated part of this Agreement as if set forth and restated herein.” herein.”

IV. Intention to be BoundIV. Intention to be Bound

A.A. Many parties fail to adequately express their Many parties fail to adequately express their intention to enter into a contract and to be intention to enter into a contract and to be so bound. Sometimes a party does not so bound. Sometimes a party does not intend that its offer be accepted without intend that its offer be accepted without further negotiation. If so, the offeror should further negotiation. If so, the offeror should make this clear by indicating that the “offer” make this clear by indicating that the “offer”

is only an invitation to negotiate.is only an invitation to negotiate.


B.B. Frequently, the parties carelessly draft a Frequently, the parties carelessly draft a “letter of intent” that turns out to be a “letter “letter of intent” that turns out to be a “letter agreement”-- even though the parties fully agreement”-- even though the parties fully intended that further drafting/negotiation intended that further drafting/negotiation follow. The following type of language follow. The following type of language should be included in a letter of intent:should be included in a letter of intent:

““In order to be enforceable, the parties must enter into a In order to be enforceable, the parties must enter into a written agreement signed by both parties.”written agreement signed by both parties.” ““Among the conditions of closing the contemplated Among the conditions of closing the contemplated transaction, is the execution of a definitive agreement transaction, is the execution of a definitive agreement containing appropriate representations and warranties containing appropriate representations and warranties and requisite corporate approvals.”and requisite corporate approvals.”


C.C. Under the common law parties who “agree to agree” at Under the common law parties who “agree to agree” at a later date did not have a contract. Under the UCC, a later date did not have a contract. Under the UCC, however, parties may contract for the sale of goods by however, parties may contract for the sale of goods by leaving terms open, according to UCC § 8.2-204(3):leaving terms open, according to UCC § 8.2-204(3):

§ 8.2-204. Formation in general.§ 8.2-204. Formation in general.

1) A contract for sale of goods may be made in any manner sufficient to 1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes show agreement, including conduct by both parties which recognizes the existence of such a contract.the existence of such a contract.

(2) An agreement sufficient to constitute a contract for sale may be (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. found even though the moment of its making is undetermined.

(3) Even though one or more terms are left open a contract for sale does (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate and there is a reasonably certain basis for giving an appropriate remedy.remedy.

V. ConsiderationV. Consideration

A.A. A contract requires a bargain in which there A contract requires a bargain in which there is a manifestation of mutual assent to the is a manifestation of mutual assent to the exchange and a consideration. exchange and a consideration.


B.B. Consideration is what a party receives in Consideration is what a party receives in exchange for his consideration or his promise.exchange for his consideration or his promise.

1. 1. It may be an act, a forbearance, or the creation, It may be an act, a forbearance, or the creation,

modification or destruction of a legal relation (e.g. a modification or destruction of a legal relation (e.g. a separation agreement between spouses). separation agreement between spouses).

a. a. Mutual promises can be consideration. Look at Mutual promises can be consideration. Look at each contract to determine consideration on both sides. each contract to determine consideration on both sides.

b. It’s okay if the number of exchanges are not b. It’s okay if the number of exchanges are not “equal” or the consideration is not equivalent. “equal” or the consideration is not equivalent.

cc But the consideration has to be adequate. But the consideration has to be adequate.


Without consideration, a promise to Without consideration, a promise to perform is a “gift promise” and is not perform is a “gift promise” and is not enforceable. enforceable.

Example: Although I promise to give you half Example: Although I promise to give you half my house, without consideration or an exchange to my house, without consideration or an exchange to me on your part, this is an unenforceable gift me on your part, this is an unenforceable gift promise. promise.

VI. Parol EvidenceVI. Parol Evidence

A.A. It is important that the parties are able to It is important that the parties are able to rely on the expression of their intent as rely on the expression of their intent as stated in the written contract or, in the stated in the written contract or, in the case of an oral contract, in their verbal case of an oral contract, in their verbal expression.expression.

1. It is wrong, however, to have a partially written 1. It is wrong, however, to have a partially written and a partially verbal agreement if the contract is and a partially verbal agreement if the contract is intended, or appears to be intended, to be entirely intended, or appears to be intended, to be entirely in writing. in writing.


B.B. The “Parol Evidence Rule”: When the parties to a contract The “Parol Evidence Rule”: When the parties to a contract embody their agreement in a writing, and intend that the embody their agreement in a writing, and intend that the writing is the final expression of their agreement, the terms writing is the final expression of their agreement, the terms of the writing may not be contradicted by evidence of a prior of the writing may not be contradicted by evidence of a prior agreement.agreement.

1. 1. Example: The parties had an agreement. Subsequently, there was Example: The parties had an agreement. Subsequently, there was another agreement. A party argues that the second agreement was another agreement. A party argues that the second agreement was intended to be the final intended to be the final and complete expression of the parties’ and complete expression of the parties’ intention, replacing the first agreement. A court would decide the question intention, replacing the first agreement. A court would decide the question of fact: Did the parties intend the second agreement to be the final, of fact: Did the parties intend the second agreement to be the final, complete (“integrated”) agreement, or did they intend complete (“integrated”) agreement, or did they intend that the that the terms of both agreements be operative? terms of both agreements be operative?

a. Extrinsic (outside the 4-corners of the document) or parol (oral) evidence a. Extrinsic (outside the 4-corners of the document) or parol (oral) evidence can be used to determine the meaning of their manifestations of intent, or the can be used to determine the meaning of their manifestations of intent, or the interpretation of their outward manifestations.interpretation of their outward manifestations.

b. b. Extrinsic or parol evidence cannot be offered to Extrinsic or parol evidence cannot be offered to vary, add to, vary, add to, or or contradictcontradict the terms of a written agreement.the terms of a written agreement.


C.C. The parol evidence rule applies to prior or The parol evidence rule applies to prior or contemporaneous agreements and does not contemporaneous agreements and does not have any application to subsequent have any application to subsequent modifications. The parties are free to modify modifications. The parties are free to modify contracts.contracts.

1. 1. UCC § 2-209 (1) allows good faith modifications to be UCC § 2-209 (1) allows good faith modifications to be effective without additional consideration. effective without additional consideration.

2. 2. Frequently, the parties have agreed that oral Frequently, the parties have agreed that oral modifications are not modifications are not permitted. An example of this “private permitted. An example of this “private statute of frauds” is: statute of frauds” is:

““All changes or modifications of this Agreement shall be All changes or modifications of this Agreement shall be in writing signed by the party against whom enforcement of any in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought.” waiver, change, modification, extension or discharge is sought.”

VII. Merger ClausesVII. Merger Clauses

A.A. Merger clauses (a/k/a “integration clauses” or Merger clauses (a/k/a “integration clauses” or “zipper clauses”) are contract clauses that read “zipper clauses”) are contract clauses that read substantially as follows:substantially as follows:

1.1. “This Agreement contains the whole agreement between the “This Agreement contains the whole agreement between the Seller and Buyer and there are no other terms, obligations, Seller and Buyer and there are no other terms, obligations, covenants, representations, statements or conditions, oral or covenants, representations, statements or conditions, oral or otherwise of any kind otherwise of any kind whatsoever”; orwhatsoever”; or

2. 2. “This Agreement sets forth the entire understanding between “This Agreement sets forth the entire understanding between the parties hereto and supersedes all other prior agreements the parties hereto and supersedes all other prior agreements between the parties between the parties with respect to the subject matter hereof. with respect to the subject matter hereof. Each party acknowledges that Each party acknowledges that no representations, inducements, no representations, inducements, promises or agreements, orally or otherwise, have been made by promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, that are not any party, or anyone acting on behalf of any party, that are not embodied in this Agreement, and that no other agreement or embodied in this Agreement, and that no other agreement or promise not contained in this Agreement shall be valid or promise not contained in this Agreement shall be valid or binding as between Company and Client.”binding as between Company and Client.”

VII. Merger ClausesVII. Merger Clauses

B.B. Merger clauses are usually interpreted to Merger clauses are usually interpreted to determine that the agreement is completely determine that the agreement is completely integrated. There is, however, minority integrated. There is, however, minority opinion refusing to give such clauses opinion refusing to give such clauses exclusionary effect, if the clause is not exclusionary effect, if the clause is not negotiated and on a preprinted form.negotiated and on a preprinted form.

VIII. Contract InterpretationVIII. Contract Interpretation

A.A. Some principles of contract constructionSome principles of contract construction 1.1. Purpose of the partiesPurpose of the parties. Make it clear what the purpose of . Make it clear what the purpose of the the contract is, and the purpose the parties intended to contract is, and the purpose the parties intended to effect.effect.

2. 2. The contract should be construed as a whole.The contract should be construed as a whole. Courts favor Courts favor interpretations that make sense when the contract is viewed interpretations that make sense when the contract is viewed as a whole.as a whole.

3.3. The contract speaks for itself”.The contract speaks for itself”. This traditional view This traditional view considers that the contract says what it means, not what the considers that the contract says what it means, not what the parties say it means. A more modern view is:parties say it means. A more modern view is:

4. 4. The contract should be viewed in context.” The contract should be viewed in context.” The contract is The contract is part of the entire situation, the entire context or environment, part of the entire situation, the entire context or environment, all of all of which can be used to interpret the contract.which can be used to interpret the contract.


55. . Expressio Unius Est Exclusio AlteriusExpressio Unius Est Exclusio Alterius. (The inclusion of one is . (The inclusion of one is the exclusion of all others). If a clause in a contract lists the exclusion of all others). If a clause in a contract lists

specific specific items, other items not included will probably be items, other items not included will probably be excluded.excluded.

a. Use of the wording “including but not limited to” makes it clear that any list of a. Use of the wording “including but not limited to” makes it clear that any list of particulars/specifics is not inclusive. particulars/specifics is not inclusive.

6.6. TThe contract is construed against the party drafting it. he contract is construed against the party drafting it. The The drafter drafter is disadvantaged when courts consider the meaning is disadvantaged when courts consider the meaning of contractual of contractual terms, interpreting the terms in favor of the terms, interpreting the terms in favor of the non-drafting partynon-drafting party. .

7. 7. The reasonable, lawful meaning will be chosen over the The reasonable, lawful meaning will be chosen over the unreasonable, farfetched or unlawful meaning. The interpretation unreasonable, farfetched or unlawful meaning. The interpretation

supporting public policy arguments will be favored.supporting public policy arguments will be favored.

8. 8. Ejusdem Generis. Ejusdem Generis. (“Of the same kind.”) (“Of the same kind.”) If general contract If general contract language is followed by specific items, the general language will language is followed by specific items, the general language will

be limited in kind or classification to the enumerated specific be limited in kind or classification to the enumerated specific terms. Specific controls the general.terms. Specific controls the general.


9. 9. A word or phrase used twice will be interpreted the A word or phrase used twice will be interpreted the same way for same way for each usage.each usage.

10. Handwritten terms are favored over typed; typed are 10. Handwritten terms are favored over typed; typed are favored over printed; separately negotiated terms will be favored over printed; separately negotiated terms will be favored over preprinted forms. favored over preprinted forms.

11. 11. The parties are presumed to have read the contract, The parties are presumed to have read the contract, all of it, even the small print on the reverse of the forms. all of it, even the small print on the reverse of the forms.

12.12. Conjunctive and Disjunctive. Conjunctive and Disjunctive. “And” can be used in a “And” can be used in a “several” sense (Dogs and Cats, either separately or “several” sense (Dogs and Cats, either separately or together) or in a “joint” sense (Dogs and Cats, together together) or in a “joint” sense (Dogs and Cats, together only). “Or” may be inclusive (Dogs or Cats, or both), but only). “Or” may be inclusive (Dogs or Cats, or both), but sometimes it is used in an exclusive sometimes it is used in an exclusive sense. (Dogs or sense. (Dogs or Cats, but not both together). Be aware of the ambiguity Cats, but not both together). Be aware of the ambiguity and rewrite. and rewrite.


B.B. If you want to:If you want to: Use this language: Use this language: Create a right Create a right “entitled to” “entitled to”

Create a requirement or dutyCreate a requirement or duty “shall” “shall”

Create a discretionary choice or to Create a discretionary choice or to

indicate a exercise of a right indicate a exercise of a right “may” “may”

Create a condition precedent Create a condition precedent “must” “must”

IX. Oral or Written?IX. Oral or Written?

An oral contract or a contract evidenced by conduct may be An oral contract or a contract evidenced by conduct may be perfectly enforceable if the other essentials for contract perfectly enforceable if the other essentials for contract formation exist. Under English law, law, however, certain formation exist. Under English law, law, however, certain exceptions were created by the State of Frauds, in 1677 and exceptions were created by the State of Frauds, in 1677 and to a large extent apply today. The following contracts, to a large extent apply today. The following contracts, among others, should be evidenced by a writing: among others, should be evidenced by a writing:

Promise to marry (e.g. prenuptial agreements)Promise to marry (e.g. prenuptial agreements)

Contract which cannot be performed within a yearContract which cannot be performed within a yearContracts for the sale of land, or interest in landContracts for the sale of land, or interest in landContracts or promises made by an executorContracts or promises made by an executorSale of goods worth over $500 (UCC § 8.2-201): Sale of goods worth over $500 (UCC § 8.2-201):

Except as otherwise provided in this section a contract for the sale of goods for the price Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent and signed by the party against whom enforcement is sought or by his authorized agent or broker or broker

X. BreachX. Breach

Disputes arising out of contracts for the sale of goods Disputes arising out of contracts for the sale of goods can be very complex. Proper analysis requires can be very complex. Proper analysis requires detailed knowledge of the UCC, Article 2. Here are detailed knowledge of the UCC, Article 2. Here are some of the UCC statutes implicated by disputes some of the UCC statutes implicated by disputes (failure to perform; supply of defective goods) in the (failure to perform; supply of defective goods) in the sale of goods. Be careful and seek legal counsel sale of goods. Be careful and seek legal counsel when disputes arise.when disputes arise.

Rejection of nonconforming goods: UCC § 8.2-601Rejection of nonconforming goods: UCC § 8.2-601Anticipatory Repudiation: UCC §8.2-610Anticipatory Repudiation: UCC §8.2-610Retraction of Anticipatory Repudication: UCC § 8.2-611Retraction of Anticipatory Repudication: UCC § 8.2-611Right to Cure: UCC § 8.2-508Right to Cure: UCC § 8.2-508Liquidated Damages: UCC § 8.2-718 (1)Liquidated Damages: UCC § 8.2-718 (1)Buyer’s Remedies: UCC § 8.2-711Buyer’s Remedies: UCC § 8.2-711Right to “cover”: UCC § 8.2-712Right to “cover”: UCC § 8.2-712Seller’s Remedies: UCC § 8.2-703Seller’s Remedies: UCC § 8.2-703

XI. IndemnificationXI. Indemnification

A.A. Indemnify means “to save harmless; to Indemnify means “to save harmless; to secure against loss or damage; to give secure against loss or damage; to give security for the reimbursement of a person in security for the reimbursement of a person in case of any anticipated loss falling upon case of any anticipated loss falling upon him.” An indemnification clause in a contract him.” An indemnification clause in a contract is like a private insurance policy: one party is like a private insurance policy: one party (the indemnitor) promises to pay the (the indemnitor) promises to pay the damages, and sometimes, the legal damages, and sometimes, the legal expenses, of the other party (the expenses, of the other party (the indemnitee), arising out of the contractual indemnitee), arising out of the contractual relationship or transaction. The relationship or transaction. The indemnification clause usually covers claims indemnification clause usually covers claims by third-parties.by third-parties.


B.B. Under what circumstance does the indemnitor Under what circumstance does the indemnitor have to pay? It depends on the language in the have to pay? It depends on the language in the indemnification clause: indemnification clause: 1. 1. The indemnitor may be obligated to pay if the The indemnitor may be obligated to pay if the indemnitee is simply sued as a result of the transaction. indemnitee is simply sued as a result of the transaction.

2.2. Sometimes it’s an absolute requirement to pay “all Sometimes it’s an absolute requirement to pay “all claims”, period:claims”, period:

““The customer agrees to defend, indemnify and hold harmless XYZ Container The customer agrees to defend, indemnify and hold harmless XYZ Container Corporation from and against any and all claims for loss or damage to Corporation from and against any and all claims for loss or damage to

property, or property, or injury to or death of person or persons resulting from or arising in injury to or death of person or persons resulting from or arising in any manner out of any manner out of customer’s use, operation or possession of the equipment customer’s use, operation or possession of the equipment furnished under the Agreement.”furnished under the Agreement.”

Sometimes the indemnification provision is triggered if negligence is Sometimes the indemnification provision is triggered if negligence is

claimed; sometimes, the indemnification is triggered if the lawsuit is claimed; sometimes, the indemnification is triggered if the lawsuit is premised on the indemnitor’s intentional or reckless conduct. Or, premised on the indemnitor’s intentional or reckless conduct. Or, depending on the language, the depending on the language, the obligation is triggered if the legal action obligation is triggered if the legal action is successful. is successful.


3. 3. If the indemnification provision has the If the indemnification provision has the requirement “to defend”, it usually means the requirement “to defend”, it usually means the indemnitor has to pay the legal costs of the other indemnitor has to pay the legal costs of the other party, but frequently may be able to chose the party, but frequently may be able to chose the indemnitee’s legal counsel. indemnitee’s legal counsel.

4. 4. Frequently, the indemnification clause is Frequently, the indemnification clause is written so it is triggered only if the claims have been written so it is triggered only if the claims have been successful. successful.

XII. WarrantyXII. Warranty

A.A. The UCC has transformed the law of warranties with The UCC has transformed the law of warranties with respect to the sale of goods. UCC § 8.2-313, -314, -315.respect to the sale of goods. UCC § 8.2-313, -314, -315.

B.B. The The express warrantyexpress warranty is a warranty crated by a is a warranty crated by a promise or affirmation of fact by the seller in relation promise or affirmation of fact by the seller in relation to some quality or feature of the goods which are the to some quality or feature of the goods which are the subject matter of the sale of goods. UCC § 8.2-313(1)subject matter of the sale of goods. UCC § 8.2-313(1)(a) (a)

1. 1. Trade usage, course of dealing or course of performance may Trade usage, course of dealing or course of performance may affecct the affecct the interpreation. interpreation.

2. 2. Express warranties may be created by model or sample; oral or Express warranties may be created by model or sample; oral or written written representations of fact; plans or blueprints; technical representations of fact; plans or blueprints; technical specifications; specifications; reference to official standards; products supplied in the reference to official standards; products supplied in the past.past.

3. 3. Mere expression of opinion (“puffing”) is not a warranty. Mere expression of opinion (“puffing”) is not a warranty.


C.C. The The implied warranty of merchantability”implied warranty of merchantability” is the basic is the basic quality of goods that the buyer is entitled to receive quality of goods that the buyer is entitled to receive -- goods fit for the ordinary purposes of such goods. -- goods fit for the ordinary purposes of such goods. The buyer may not be entitled to perfect goods, but The buyer may not be entitled to perfect goods, but those which a reasonable buyer would normally those which a reasonable buyer would normally expect to receive. UCC §8.2-314 (2)(c)expect to receive. UCC §8.2-314 (2)(c)

D.D. The The implied warranty of fitness for a particular implied warranty of fitness for a particular purpose” purpose” applies when the seller has reason to know applies when the seller has reason to know of a particular purpose which the buyer expects the of a particular purpose which the buyer expects the goods to fulfill. The seller may also know that the goods to fulfill. The seller may also know that the buyer is relying on his particular judgment and buyer is relying on his particular judgment and expertise and skill in supplying these goods.expertise and skill in supplying these goods.


E.E. Disclaimers Disclaimers 1. Express warranties1. Express warranties

a. “Seller warrants that the goods are as a. “Seller warrants that the goods are as described in this described in this agreement, but no other warranty is made.’agreement, but no other warranty is made.’

b. “There are no express warranties.”b. “There are no express warranties.”

2. Specific or general disclaimer to disclaim 2. Specific or general disclaimer to disclaim implied warrantiesimplied warranties

a. UCC §§ 8.2-316 (2) or (3)a. UCC §§ 8.2-316 (2) or (3)

b. “As Is”b. “As Is” c. “Conspicuousness” requirement of UCC c. “Conspicuousness” requirement of UCC

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