slide 1 an introduction to contracts

An Introduction to Contracts

MSU School of EngineeringApril 16, 2008

Prof. Lumen Mulligan, M.A., J.D.

Contracts and Your Career

• Products and services you (your firm) sell to clients

• Products ultimately resold to consumers– Standard contract law is often altered by

state and federal consumer protection acts

• Employment contracts

What gives rise to a lawsuit for breach of contract?

• Mutual Assent• Consideration• Legality of the

Object• Capacity

Valid Contract(Material)Breach

Damages

• Substantial Impairment

•Anticipatory Repudiation

•Measuring Expectations

•Specific Performance

•Liquidated Damages

•Restitution

Defenses

What is a Contract

• A contract represents a series of (mostly) voluntarily assumed rights and duties (i.e., promises), the breach of which normally empowers the non-breaching party to sue for damages.

• Contrasted with torts that are mostly involuntarily assumed duties.

• “Contract” is a legal conclusion not a piece of paper (which is technically a memorandum).

• So What???

Examples of Agreement + Law = Contract

• The writing states that if A fails to buy my 3 acres on Oct. 5, A shall pay a $20,000 penalty. Despite the agreement, this is void as a matter of law (i.e., not part of the contract).

• The writing is silent as to warranties on my sale of microwaves to A,B and C. Despite the lack of agreement, the contract includes a warranty provision under UCC 2-314 (i.e., a warranty is imposed as a matter of law).

ActualAgreement

Legallyimposed

ContractualRights/duties

OR

Form Contracts

• An adhesion contract: “a standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who has little choice about the terms.” Thus the “take-it-or-leave-it” aspect

– Being adhesive is not alone enough to render the contract unenforceable.

– Have you ever signed a NON adhesive contract?

Overreaching?

Yes it’s a real K.

Can the Church of Scientology enforce this?

Illegal Bargains: Violations of Public Policy

• Employment Contracts: a contract prohibiting an employee from competing with his employer for a reasonable period following termination is enforceable if the restriction is necessary to protect legitimate interests (A/K/A as non-compete agreements or covenants-not-to-compete)– Magic number appears to be 1 year and “reasonable”

geographic area.

• Earthweb v. Schlack (quits his web job case)

Take Home Point

• Contracts important to you will be a function of both the terms of the agreement and other statutory and/or judge-made law.

• This affects contracts you make with clients, relations with consumers, and employment contracts.– You may not, for example, be able to

avoid warranties to consumers or liability for faulty designs.

What about writing it all down?

• As we noted, your non-compete clause may not be enforceable. But there is no punitive sanction under contract law for over-reaching.

• This is the case even if it written down.

• So do I need to write out a contract in order to be enforceable?

Written Employment Contracts

• The rule: If a person’s employment cannot be completed as a matter of logical necessity in under a year, it must be in writing to be enforceable.– Employment for life– Employment for 14 months

Statute of Frauds: Key notion

If you have such a contract it must be evidenced by a writing that is signed by the person to be charged to be enforceable.

At Will Employment

• Almost all employees, especially junior folks, are “at will” employees. – This means, even if there is a written

agreement, the parties agree that the employee can quit or be fired at any time with some minimal notice.

• Given this state of affairs (absent statutory claims for discrimination) most employee claims are not about being fired but not receiving full compensation for the time worked. – In such cases, the written terms will be

invaluable.

So What if I Have a Side Deal

• If I have a writing, but my employer and I made an oral “side deal.” Is that binding?

• This is a function of the parol evidence rule?

Parol Evidence Rule

• Where parties reduce their agreement to a written memorandum, the writing is entitled to special evidentiary weight in determining the terms of the agreement by the parties.

• This is the essence of the PER.

• That is, the oral side deal is almost never enforced.

Take Home Point

• Generally a written employment contract will not be a legal necessity (esp. early in your career).

• BUT … a writing will protect you in by ending fights at trial over this term or the other.

• To this same end, reliance upon hand-shake side deals to protect import interests is not wise.– “Hey, do project X and we will make sure you

are involved in cool project Y.”

Bonuses – Can I Count on Them as a Legal Matter?

• No.• Contract law requires “consideration” in

order to render promises enforceable.• Consideration, among other things, requires

a mutual exchange of benefits between the parties at the time the promise is made to render the promise enforceable.

• A bonus is so-called past consideration and therefore is unenforceable.– This is different from a mandatory incentive

structure.

Past Consideration

Y’s Past Action X’s Promise made

X’s Promise made

Y’s Promise made

Unenforceable

Enforceable

Take Home Point

• Don’t spend your bonus before you get it.

• Of course, if your firm doesn’t pay out expected bonuses it will suffer reputational and morale costs. But if there are hard financial times, bonuses are the first thing to go. This is especially true of junior people.

Remedies in General

• Remedies= What the nonbreaching party to a contract is awarded in case of breach.

• The Common Law and the UCC establish rules for remedies, but– Most rules for contract

remedies may be modified by the contract itself!

Remedies: The Goal

• In contract, the goal is generally speaking COMPENSATORY. – Does the remedy make plaintiff as well-off as she would

have been had defendant fully performed.– Contrast this with Tort where punitive damages are

available (they are never available in contract).

• The law takes a particularly amoral approach to breaches of contract. The breaching party, again unlike tort, is not a “wrong-doer” per se. – Thus, won’t see emotional damages for breaching a

contract, and (again unlike tort) a strong duty for plaintiff to mitigate damages

Remedies: Lay of the Land

(1) Valid contract, (2) Breach, (3) Damages

Does the ContractEntirely trump

Standard remedyRules?

Yes.Apply the contractualProvisions, subject

to rules limiting application

No.Does Plaintiff

Only want $$$?

If only money,then this is a

“legal” remedy

If NOT only money,

then this is an“Equitable”

remedy

**Note, Misrep. damages are Tort damages, not contract damages

Mitigation of Damages

• Non-breaching party has a duty to reduce (“mitigate”) damages via reasonable efforts without undue risk, burden or humiliation.

• So, even if you, or your company, did not breach, you cannot be assured of full payment from the breaching party, if you didn’t attempt to mitigate damages.

Specific Performance

• The Court orders defendant to go through with the contract.– When: The subject matter of the

contract is rare or unique. E.G.» Land is always unique » Original art» A piece of intellectual property» Impractical to otherwise determine $$

– But never: Court’s will never give specific performance of employment contracts. 13th Amd. to the Constitution.

Injunctions

• Court ordering defendant not to do x. Can be entered as a result of a contract.

• This is how non-competes are enforced.

Damages v. Net Recovery• Damages (or remedies) are what the court

will award to a victorious party at the end of the day.

• Net recovery is really what people care about.– How was the lawyer paid!!!– How long did it take to recover – What impact did the suit have on the client

• This greatly affects whether suits will actually be brought (despite mean letters etc.). That is, in a non-compete there is no money to be had from the employee. So there has to be a VERY big incentive to enforce the clause to make it financially worthwhile.

Financing Litigation: American Rule

• The American Rule:• Each side pays their own attorney’s fees

regardless of outcome

• English Rule:• The loser pays fees for both sides

– Why have we adopted this rule???

• The American Rule is often tempered.

Some Stats About Litigation• Contract cases:

• 55% of civil filings• 33% of all trials; most K trials are bench trials• Plaintiff wins 66% of the time winning a median

amount of $37,000 (mid 1990s)• Tort and Tort-like actions

• 45% of all civil filings• 66% of all trials; most tort trials are jury trials• Plaintiff wins 50% of the time winning a median

amount of $31,000 (mid 1990s)• Big Wins?

• Only 15% of plaintiff wins are over $250K• Only 5% of plaintiff wins are over $1M• The majority of punitive damages wins are in

business to business suits

• Knowing these statistics, why do Plaintiffs and Defendants litigate?

Take Home Point

• Bringing a contract suit involves a host of costs that are not recoverable.

• This is especially true in a non-compete context where there is no money to be had from the former employee.

• This affects incentives to sue.• BUT … contracts can alter remedies,

absent gross overreaching. Be mindful of such clauses in your employment contract.

slide 1 an introduction to contracts

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