Transcript Basics of US Contract Law

Basics of U.S. Contract Law
David J. Mack
Dorsey & Whitney LLP
51 West 52nd Street
New York, New York 10019
P:212.415.9200 F:646.390.6575
http://www.dorsey.com/
[email protected]
©2011 Dorsey & Whitney LLP. This presentation and the textual content hereof are intended for
general information purposes only and should not be construed as legal advice or legal opinions on
any specific facts or circumstances. An attorney-client relationship is not created or continued by
reading this material. Dorsey & Whitney LLP will be pleased to provide further information regarding
the matters discussed therein.
October 2011
Table of Contents
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Contracts Around the World
What is a Contract?
Do I Need a Written Contract?
Common Business Contracts
Elements of a Contract
Contract Enforceability
Negotiating a Contract
Drafting and Reviewing a Contract
Performing the Contract
Breach of Contract
Remedies for Breach
Contracts Around the World
 The laws governing contracts vary throughout the
world and can affect the legality, enforceability,
performance requirements and even the available
remedies for breach.
 While there are often differences among the laws of
the various countries, provinces or states, U.S.
contract law concepts described in this presentation
should be generally applicable to most situations
around the world.
 However, before you enter into any contract, make
sure to consult with a qualified attorney in your local
jurisdictions.
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What is a Contract?
 A contract is an agreement between two or more parties that
creates an obligation on all parties to perform (or not perform) a
particular action or set of related actions.
 Contract law determines what makes a particular contract
enforceable, and provides remedies when a contract is breached.
 If you are not careful, a contract may not be enforceable when you
want it to be, and may be enforceable when you don’t want it to be.
 Working with a qualified attorney on all significant issues is the
only certain way to make sure your contract works how you intend.
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Do I Need a Written Contract?
 Whether a contract exists depends on whether parties
have reached a mutual agreement – which can be oral.
 Generally a written contract is entered into to protect
the parties against misunderstandings and to clarify the
obligations and particular agreement between parties.
 Contracts can cover a wide range of circumstances,
both in business settings and personal relationships.
Business contracts are varied and can cover all
aspects of a business, including those with customers,
employees, investors and business partners.
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Do I Need a Written Contract?
The importance of having a detailed written contract
depends on:
(1) the amount of money involved,
(2) the value of the products or services involved,
(3) the duration of the contract,
(4) the risk of not entering into the contract, and
(5) other factors specific to each case.
Check with an attorney periodically about your
business dealings to determine whether a contract
is important, and if so, what it should look like.
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Common Business Contracts
There are dozens of different types of contracts. Selecting the
type that best fits your intended agreement is a critical ‘art’.
Below are a few common types of contracts for commercial
businesses:
 Sales/Service Contracts: spells out terms of sale of goods or
services, payment terms, warranties, rights and obligations of
parties;
 Confidentiality/Non-Compete Contracts: protects confidential
information of a business including client lists, inventions, trade
secrets, and other important information. Non-compete provisions
must be reasonable as to time, place and scope; and
 Partnership Agreements: spells out the obligations between
partners and their responsibilities with regard to the ownership and
management of a business.
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Other Types of Business Contracts
Below is a list of other types of contracts that are commonly
used in commercial businesses:
 Arbitration Agreement
 Equipment Lease
 Asset Purchase Agreement  Franchise Agreement
 Repurchase Agreements
 Assignment Agreement
 Guaranty Agreement
 Bonus Agreement
 Indemnification Agreement  Services Agreement
 Collaboration Agreement
 Joint Venture Agreement
 Shareholder Agreement
 Consulting Agreement
 Lease
 Stock Option Agreement
 Credit Agreement
 License Agreement
 Stock Purchase Agreement
 Deferred Compensation
Plan
 Loan Agreement
 Supply Agreement
 Manufacturing Contract
 Trademark License Agreement
 Development Agreement
 Merger Agreement
 Underwriting Agreement
 Distribution Agreement
 Non-Disclosure Agreement  Voting Agreements
 Employee Stock Plan
 Operating Agreement
 Employment Agreement
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 Promissory Note
 Sales Contract
 Waiver Agreement
Elements of a Contract
 A legally enforceable contract requires the following:
Element
Description
Example
An Offer
One party must promise to do
or refrain from doing some
specified thing in the future,
conditioned on an act,
forbearance, or return promise
given in exchange
“I will build a house for you, if you
pay me $1,000”
Acceptance
The agreement by one who
receives an offer, by express
act or implied conduct, to the
terms of the offer
“I accept your offer to build my
house” or “Here is $1,000”
Consideration
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Something (such as an act, a
forbearance or a return
promise) that was bargained
for and received by each party
to a contract
The built house and the $1,000
Elements of a Contract: The Offer
 An offer is a communication that gives the
recipient the power to create a contract
through his or her acceptance.
 Offers must contain sufficient terms, such as price,
quantity, quality, time and place of delivery, in order to
determine the specific obligations to be created.
 Once an offer is made, it may be accepted at any time
until it expires by its terms or is expressly revoked.
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Elements of a Contract: Acceptance
 Acceptance is an offer recipient’s agreement to perform
according to the terms of the offer, and the act of
acceptance of a valid offer creates a binding contract.
 Acceptance can be express (e.g., stating “I accept the
deal”) or implied (e.g., paying for the goods or services
offered for sale).
 Some offers contain limitations on how and when the
offer may be accepted, and the acceptance must
conform to those limitations (e.g., an offer may include
a time limit for responses and may require written
acceptance).
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Elements of a Contract: Contractual Intent
 A binding contract requires a “meeting of the minds” of the
parties, in that both intend to be bound to the same
contractual terms.
 Offers clearly made in jest or frustration likely lack the
requisite intent to be valid offers. Similarly, general
statements, such as advertisements, are not definite
enough to be offers.
 Acceptance of the offer must be clear and unambiguous.
An offer cannot be partly accepted, or accepted with a
caveat. A partial acceptance is actually a rejection and is
considered a counter-offer on the new terms.
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Elements of a Contract: Consideration
 “Consideration” means something of value
given by both parties to a contract that
induces them to enter into the agreement to
exchange mutual performances. For
example, a promise to make a gift is not
enforceable because it is one-sided.
 Consideration is an essential element for the formation of a
contract. It may consist of a promise to perform a desired act or a
promise to refrain from doing an act that one is legally entitled to
do.
 Consideration must have a value that can be objectively
determined. For example, a promise of love or affection is not
enforceable because of the subjective nature of the promise.
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Elements of a Contract: Governing Laws
Contract law is governed by two main sources:
 Common law, created by courts through the
interpretation of prior facts and circumstances. This is
the primary source of contract law in many countries,
as courts generally interpret and define the other
sources as well; and
 Specific statutes in each jurisdiction, generally at the
state level. For example, the Uniform Commercial
Code (“UCC”) of each state in the United States
governs contracts pertaining to the sale of goods in
that state.
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Contract Enforceability – Written or Oral Contracts
Contracts may generally be written or oral, and both
types may be equally binding. However, there are
restrictions and dangers associated with oral contracts:
 The Statute of Frauds is a common law principle that
prevents enforcement of oral contracts relating to (1)
the sale of land, (2) the sale of goods with a value in
excess of a small number of dollars (e.g., $500), or
(3) contracts that are unable to be fully performed
within one year.
 The terms of oral contracts may be impossible to
prove, presenting difficulty in enforcement.
Written contracts can reduce or eliminate confusion and
are best to protect the interests of a business or
individual. Oral contracts should be avoided!
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Contract Enforceability – Bars to Enforcement
 Contracting parties must have the capacity to
contract, meaning they may not be: (1) minors; (2)
under duress; (3) intoxicated; (4) mentally
handicapped; or (4) pressured by outside forces in
ways that deprive them of their free will.
 A contract will not be enforced if the subject matter
of the contract is illegal or contrary to public policy,
such as contracts dealing with crimes.
 A contract will not be enforced if it is “unconscionable”,
meaning that no rational person would make that
contract, and no fair or honest person would accept,
the contract terms. These include contracts that are
grossly unfair or against public policy.
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Negotiating a Contract
Begin contract negotiations with the following steps:
 Understand what it is you want to accomplish with the contract and what
the other party wants to accomplish;
 Identify your position and the other party’s position (strengths vs.
weaknesses);
 Be prepared and provide room for negotiation; and
 Bring solutions to the table – try to work towards resolution of
disagreements rather than just butting heads!
 Until a final definitive agreement is reached, all draft agreements, term
sheets or letters of intent should clearly state the following:
“This document is not intended to create or
constitute any legally binding obligation between
the parties hereto, and no party shall have any
liability or obligation to another with respect to this
document until a fully integrated definitive
agreement is prepared, authorized, executed, and
delivered by all parties.”
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Negotiating a Contract: Other Considerations
 In some circumstances, a party will insist on using its
contract form and will not be willing to negotiate terms.
This is called an “adhesion contract” and the other
party will not be able to obtain the desired product or
service unless it acquiesces to the form contract.
Adhesion contracts may not be enforceable to the
extent they contain unreasonable terms.
 When dealing with government entities or political
subdivisions such as cities and towns, be aware of
legal requirements applicable to those entities,
including public bidding requirements, fair wage laws,
open door laws and others.
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Drafting a Contract
Once the basic outline of terms is negotiated, contract
drafting may begin:
 When given the opportunity, it is generally best to be
the party that drafts the contract.
 Advantages of “controlling the draft”:
• Provides extra control over the negotiations;
• Allows you to define the issues;
• Prevents hidden or surprise issues;
• Enables the deal to be structured on
your terms; and
• Helps you influence the timing of the
drafting process.
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Drafting a Contract: Basics
 Consult with an Attorney!
 Ambiguities in contract provisions are generally construed
against the draftsman.
 It is acceptable to begin drafting from a sample contract, but
do not be controlled by or become overly reliant on its
provisions – one size does not fit all!
 Take the time to draft a contract that protects your interests
and is clear and complete. For routine or recurring types of
transactions, create a thorough but flexible form that allows
easy selection of common options for terms.
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Drafting a Contract: Major Elements
 Parties
 Performance Standards
 Effective Date
 Remedies
 Statement of Service
 Risk Allocation
 Pricing
 Miscellaneous Provisions
 Indemnities
 Governing Law and
Dispute Resolutions
 Representations and
Warranties
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 Signatures
Reviewing a Draft Contract
A draft contract or comments on a draft contract
received from the other party should be carefully
reviewed.
 Review should include:
• Careful reading of all contract terms;
• Obtaining clarification on terms that
appear ambiguous, confusing or vague;
• Adding terms that are necessary to the transaction;
• Confirmation that your important comments have been
reflected in the draft; and
• Final confirmation that your objectives are met by the
contract before signing.
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Performing the Contract
 Once a valid contract is signed by all parties, its terms are
binding on the parties, and they must fully perform their
respective obligations that the contract requires.
 Whatever is written in the contract becomes the complete
agreement.
• Make sure all terms are in the final contract, and be sure not to
verbally agree to modify the terms. Verbal agreements to
modify a written contract have all the problems of oral contracts
and may or may not be enforceable.
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Breach of Contract
 A breach of contract occurs where a party to a
contract fails to perform, precisely and exactly,
that party’s obligations under the contract.
This can happen in two ways:
• Party states: “I will not perform the contract”; or
• Actually not performing.
 The non-breaching party may then take legal
action against the breaching party for
damages and other remedies.
 Don’t knowingly breach a contract unless you
have consulted with an attorney about the
risks of such a breach!
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Breach of Contract: What Now?
 If you believe you or another party is in breach of a contract,
consult with an attorney right away!
 Contract breaches may be addressed in a variety of ways:
• The parties may agree upon a waiver or amendment to eliminate
the breach;
• The non-breaching party may take the breaching party to court
(or arbitration) in order to obtain damages and other remedies; or
• The parties may agree to mediate a solution to the breach.
 Consult with an attorney before taking
any action, or you may lose some of
your rights, and you may subject
yourself to penalties as well.
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Remedies for Breach
 Upon proving that a party has breached a contract, a
court may impose a variety of remedies to remedy the
breach.
 Types of possible remedies:
• Monetary damage awards to compensate the nonbreaching party;
• Equitable remedies that will enable the contract to
continue or prevent further breach;
• Reformation of the contract to reflect the actual intent of
the parties; or
• An order to compel the breaching party to perform its
actions under the contract.
 Remedies are not exclusive, and generally multiple
types of remedies may be awarded to the nonbreaching party.
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Remedies for Breach: Monetary Damages
 The most common remedy for a breach of contract is a
monetary award, which can come in many forms:
• Compensatory – this award will compensate the nonbreaching party for actual losses incurred from the breach;
• Consequential – this award will cover damages that were
suffered as a result of the breach, but not directly caused by it;
• Expectation – this award will provide value equal to what
should have been received had the breach not occurred; or
• Nominal – this award is a small amount that recognizes a
breach occurred but that it did not result in actual loss.
 Damage awards for breach of contract may not be punitive
(more than actual damages) unless the breaching party
acted with recklessness, malice or deceit.
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Remedies for Breach: Equitable Remedies
 Courts may also award equitable remedies, which are
designed to prevent or address a wrong when monetary
damages are not appropriate or sufficient:
• Injunction – a court can order a party to either continue
performing or stop performing an action. A party seeking an
injunction must show that there is no other sufficient remedy
and that irreparable injury will result without the injunction; or
• Specific Performance – a court may order a party to perform,
as nearly as practicable, its performance as promised under
the breached contract. This is not likely to be awarded
unless monetary damages are inadequate, damages are
impossible to determine or the subject of the contract is
unique, such as in the sale of land. This remedy will never
be granted against an individual when it would require him or
her to personally perform services.
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Useful Sites
 Additional Information on Contracts
• Lawyers.com
http://contracts.lawyers.com
 Sample Business Contracts
• OneCLE Sample Business Contracts
http://contracts.onecle.com
• FindLaw Sample Business Contracts
http://contracts.corporate.findlaw.com
 General Business Assistance
• Small Business Guidance
http://www.allbusiness.com/
• Business Services
http://www.legalzoom.com/
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 Dorsey was founded in 1912 when two prominent Minneapolis lawyers, one of whom was
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