How to Read, Interpret, and Troubleshoot Contracts

Term Definition Introduced in:

Battle of the forms A legal dispute when both parties accept the offer, but disagree on the terms Module 1

Bilateral contract An agreement where each party makes a promise to another party in the contract Module 1

Course of DealingA record of previous conduct between the parties to a particular transaction which sets a precedent of conduct for future dealings Module 4

Expressed contract A contract in which the terms are expressed verbally (oral or written) Module 1

Gap fillersUsed to mitigate situations that are not explicitly addressed within the text of a contract or dealing Module 5

Implied contract A contract in which some of the terms are not expressed in words Module 1

JointThe promises of singular people appearing in a single instrument are presumed tobe joint unless a contrary intent is expressly stated Module 3

Joint and ServerableOffers the safest language to use when trying to bind the parties individually and jointly Module 3

Letter contract A writing that contains the terms and conditions of the deal Module 1

Letter of IntentA negotiation tool commonly used in business acquisitions and mergers that establishes ground rules for the negotiation Module 1

Mailbox ruleA rule that determines when a contract is formed where parties are conducting the deal by commercial communication Module 4

Mirror imageWhen one does not accept the offer and in essence makes a counter offer, that rejects the original offer terms Module 1

Offer A legal act that creates the power of acceptance only to the offeree Module 2

Options offerAn agreement made for consideration to keep an offer open for a certain period of time Module 2

 Glossary Page 1

How to Read, Interpret, and Troubleshoot Contracts

Term Definition Introduced in:

Parol Evidence

A rule that forbids alteration of the agreement words through the introduction of evidence of communications between the parties which is not contained in the language of the contract itself Module 1

Promissory Estoppel

A doctrine allowing recovery on a promise made without consideration when the reliance on the promise was reasonable and the promisee relied to his or her detriment Module 2

Res ipsa loquiturLatin for "the thing speaks for itself," refers to negligence, but offers no guidance on a clash over terms Module 5

Revocation The act of an offeror withdrawing the offer Module 3Several A contract where each party has separate liability Module 3

SpoliationThe destruction of a thing by the act of a stranger that has no effect to destroy its character or legal effect Module 5

Unilateral contractAn agreement where the acceptance of the requirement is not necessary by the offeror Module 1

Usage of Trade

Any practice or method of dealing having such regularity of observance in a place vocation trade as to justify an expectation that it will be observed with respect to the transaction in question Module 4

 Glossary Page 2

READ & TROUBLESHOOT CONTRACTS MODULE ONE – CONTRACT BASICS Module One – Contract Basics. Contracts, as I’m sure most of you realize even if you

haven’t verbalized it, contracts are promises that the law will enforce. And a

contract is a legally binding enforceable agreement between two or more

persons or entities. And by entering into a contract, rights required by one side

to acts or forbearances on the other side. Basically it’s an agreement to do or

not to do something. And of course the law will provide remedies if a promise is

breached. Before we go on any further, I want to point out how absolutely vital

and important it is that you capture all of the terms of your agreement in some

sort of written document. The reason I say that is that there is actually a

difference between an agreement and a contract. Let me give you an example.

Let’s say it’s freezing cold outside and I’m afraid that my gasoline line is going to

freeze over. So I drive up to a gas station and I notice that they’ve got an outside

display on a rack of that HEET gasoline antifreeze additive. So I get out of my

car, go over, pick up a bottle of this HEET, and I hold it up. I wave my arm and

the clerk inside the building sees me. So I point at the bottle of antifreeze in my

hand, point at my car, and the clerk bobs his head up and down, yes gesture. So

I go and I put the antifreeze into my gas line. And then everyone, I get in my car

and I drive off. You say, “Whoa!” Everyone, I think you all realize that when I

held up the antifreeze, pointed at it, and pointed at my car I was basically asking

if it would be all right if I went ahead and put it in there. And presumably I would

then come in and pay for it. When the clerk bobbed his head yes, we had an

agreement. But everyone, what were the terms of payment? Could I just get in

and drive off and have him call the police and hunt me down? Or did I have to

come right in and pay him? Could I send him a check? What were the terms?

So there you are. I think all of you would agree, when he bobbed his head based

on my actions, we had an agreement. But everyone, what was the contract?

What were the contract terms? That’s why I want to reiterate that it’s really

important that you capture all of your understandings in a written document. Now

although lots of contracts are filled with mind-bending legal gibberish, for most

contracts legalese is not essential and it’s not even helpful. On the contrary, the

agreements you’ll want to put into a written contract are best expressed in simple

everyday English. Now I think most of you know that the vital inclusions each

contract has to have to be complete and to be binding are an offer, an

acceptance, and consideration. In addition, there must be a meeting of the

minds. In other words, the parties have agreed to the same deal. Basically all

that’s necessary for most contracts to be legally binding are two elements,

namely number one, all parties are in agreement after an offer has been made by

one party and accepted by another; and two, something of value has been

exchanged, such as cash, services or goods, or everyone, simply a promise for a

promise, all right? And that’s enough to give rise to the value. Now to be legally

binding as a contract, a promise does have to be exchanged for adequate

consideration. And everyone, I want to say this one last time then I want to move

on. Even though common sense would tell you it needs to be some money, etc.,

etc., it really is enough if someone that has the right to do something promises I

won’t do it, or they promise to do something they’re not otherwise obligated to

perform – some sort of duty, some sort of thing. And if they receive the same

promise back from the other side, there you are – a promise for a promise, okay?

Now understand that there are different kinds of contracts. A contract can either

be an expressed contract or an implied contract. An expressed contract is one in

which the terms are expressed verbally, either orally or in writing. An implied

contract is one in which some of the terms are not expressed in words. Now the

most common type of contract is the expressed contract where the terms are

openly stated in writing or orally. In that regard, you’ve got a full contract where

all the terms and conditions are spelled out. But you know, you can also have a

letter of intent. And a letter of intent is a negotiation tool commonly used in

business acquisitions and mergers. It summarizes the major economic terms

under which the parties are willing to proceed toward the negotiation of a

definitive agreement. Typically it’s drafted by the buyer and countersigned by the

seller. Perhaps the most important purpose of a letter of intent is to establish

certain ground rules for further negotiation, such as confidentiality, freedom to

pursue other transactions, publicity, and allocation of expenses without binding

the parties to consummate the deal on specific economic terms. This protection

can create an atmosphere of cooperation in which the parties are more willing to

open their records for review and negotiate freely toward a more formal

agreement. Additionally, the process forces the parties to focus on the major

issues in which the deal was founded. Unfortunately, despite a common

understanding among business people and legal practitioners, that letters of

intent are generally nonbinding, some courts have enforced their terms under

certain circumstances. Because the letters are typically signed by the buyer and

seller and often signal the beginning of significant investments of time and

money, the basic terms of a binding agreement offer acceptance and

consideration can often be found in them. So although an agreement to

negotiate a contract in the future purports to be nonbinding, I’ll say it again –

some courts have found that an agreement to agree obligates the parties to

negotiate in good faith toward a definitive agreement. So that can limit a party’s

ability to withdraw arbitrarily from the negotiation. So here’s the bottom line

regarding a letter of intent. If you want to make sure it’s nonbinding, the offeror

should be sure to include express and explicit language that indicates that the

letter of intent is in fact nonbinding. All right, let’s discuss a slightly different kind

of contract – a letter contract. A letter contract is a writing that contains the terms

and conditions of the deal, and it’s signed by the parties. You can also have a

simple note. A simple note could be deemed to constitute a contract if it satisfies

what’s called the statute of frauds. Well, let’s discuss what that is. A state law –

and all the states have these, by the way – a state law that requires certain

classes of contracts, engagements, and/or transfers of interest in real estate to

be made in writing in order to be enforceable in a court of law, those kinds of

statutes are called statutes of frauds. The details of the statute of frauds vary

from state to state. By the way, the original one was passed in England in 1677.

The whole idea is that someone doesn’t come into court and say, “Yeah, me and

this other guy had a deal, and to prove that I’ve got five of my drunken buddies

who have come in here to testify on my behalf.” That’s why again, way, way

back 1677, countries and then obviously here in the United States, states,

passed these things saying look, there are certain things that must be in writing.

Now a partial list of contracts that are within the statute of frauds includes

promises to answer for the debt or duty of another person; contracts not to be

performed within one year of their making; contracts to sell any interest in real

estate; contracts not to be performed within the lifetime of the promisor; and

contracts for the sale of goods in the amount of $500 or more. All right, let me

address implied contracts. An implied contract is an actual contract. The thing

is, it’s circumstantially proven. Basically the circumstances and the actions and

statements of the parties indicate that they’ve actually agreed to something. A

super simple example would be that I go to a doctor’s office and the doctor sees

me, examines me. Now it’s obvious that he or she agreed to see me and I

agreed to pay him or her for their services, even though we never openly

discussed those issues. Now some of you may wonder if a written agreement

can be changed by verbal testimony evidencing that the parties actually intended

something else, and that there is an implied agreement different than whatever

the parties put down in writing. Well everyone, it’s fairly well settled American

law that when contractual intent is sought to be determined from several different

expressions of the parties, and earlier tentative agreement is superseded by a

later expression that’s final, basically when determining a contract’s contact and

intent, earlier tentative agreements and negotiations are inoperative. That’s what

the parol evidence rule is all about. The parol evidence rule stands for the

proposition that a writing intended to be a party’s final expression of agreement

can’t be contradicted by certain types of evidence. And the parol evidence rule

only comes into play where the last expression of the parties is in writing and is a

binding agreement. Sometimes verbal contracts will hold up that generally, you

need to get it in writing. Now later on during our session here, I’m going to talk

about something called a “merger clause.” It’s very, very important that it kind of

snuffs out anything that came out before that. So I’ll tell you about that in just a

little bit. Now there’s also constructive contracts that are created by law for

reasons of fairness, of equity, of justice. And a contract which is implied in law is

also called a quasi-contract because in fact there’s not a contract. Rather, it’s

simply a mechanism – a means for the courts to remedy situations in which one

party would be unjustly enriched were they not required to compensate the other

party. And a simple example would be where an ambulance service transports

an unconscious person to a hospital for treatment. Now the victim didn’t agree to

pay for the transport, but would be unjustly enriched by the company’s services if

he or she didn’t have to pay for the services rendered. Now note that contracts

can be bilateral or unilateral. The more common of the two, a bilateral contract,

is an agreement in which each of the parties to the contract makes a promise or

promises to the other party. For example, in a contract for the sale of a home,

the buyer promises to pay the seller $200,000 in exchange for the seller’s

promise to deliver title to the property. In a unilateral contract, only one party to

the contract makes a promise. A typical example is a reward contract. Person A

promises to pay a reward to B if B finds A’s dog. So B isn’t obligated to find A’s

dog. But A is obligated to pay the reward to B if B does in fact find that dog. So

in that example, the finding of the dog is what’s called a “condition precedent” to

A’s obligation to pay. Now an offer of a unilateral contract can often be made by

you to many people – basically to the world – by means of an advertisement. In

that situation, acceptance will only occur on satisfaction of the condition – like in

my silly example, finding the offeror's dog. If the condition is something that only

one party can perform, both the offeror and offeree are protected. In other

words, the offeror is protected because they’ll only ever be contractually

obligated to one of the many offerees, and the offeree is protected because if

they do perform the condition, then the offeror is contractually obligated to pay

them. Now in unilateral contracts, the requirement that acceptance be

communicated to the offeror is waived. The offeree accepts by performing the

condition, and the offeree’s performance is also treated as the price, or the

consideration, for the offeror’s promise. Now the most common type of unilateral

contract is an insurance contract. The insurance company promises to pay the

insured a stated amount of money on the happening of an event if the insured

pays the premiums. Note that the insured doesn’t make any promise to pay the

premiums. Now courts definitely favor bilateral contracts. And the general rule in

the United States is in case of doubt, an offer is interpreted as inviting the offeree

to accept either by promising to perform what the offer requests, or by rendering

the performance as the offeree chooses. Now here the law attempts to provide

some protection from the risk of revocation in a unilateral contract to the offeree.

Note that if the offer specifically requests performance rather than a promise, a

unilateral contract will exist. Okay, let me tell you about Article 2 of the Uniform

Commercial Code, which is generally called the UCC or the Code. Article 2 of

that deals with the sale of goods. Contracts are mainly governed by state,

statutory, and common law and private law. What the words “common law”

mean is judge-made law. In other words, court cases and the impact of those

judgments – that’s what common law means. Now private law principally

includes the terms of an agreement between the parties exchanging the

promises. They’re doing something between them. They’re obligating one

another. Statutory law – legislatures pass black letter law, regulations and so

forth – can require some contracts to be put in writing and excited with particular

formalities. Otherwise the parties can enter into a binding agreement without

signing a formal written statement. Now in the United States, laws are passed, of

course, by national and state legislatures as well as by some local governments,

and they’re all subject to the United States Constitution. It became important for

those laws, particularly regarding commerce, to be uniform as people began to

move between states more often, and with the rise of interstate commerce. In

1892, the National Conference of Commissioners on Uniform State Laws was

created on recommendation from the American Bar Association. The National

Conference and the American Law Institute created the Uniform Commercial

Code in a joint effort. Now it took years and years for this to pass through. And

everyone, what they came up with is a uniform code. However, each state has to

adopt its provisions individually. Now they all have done that – all the states

have adopted some form of the UCC. But it is important to understand that

you’re going to find some differences in your own state’s version of that law. It’s

important to take a look at it, all right? Now the UCC allows commercial

organizations to do business across jurisdictional boundaries with confidence

because then, these organizations are fairly certain that the same rules are going

to apply in each jurisdiction, all right? By the way, I misspoke a moment ago.

Louisiana has not fully adopted the UCC. The main articles of the UCC that deal

with the law of contracts are Article 1 called General Provisions and what I’ve

already mentioned, Article 2, Sales. Section 9, or rather Article 9 of the UCC, is

titled Secure Transactions. It governs contracts assigning the rights to payment

in security interest agreements. I’m not going to cover that during this session

today, all right? In a nutshell, the UCC allows people to make contracts they

want. But to fill in any missing provisions where the agreements they make are

silent. The law often, by the way, distinguishes between merchants who

customarily deal on a commodity and are presumed to know well the business

they’re in, and consumers who are not. Everyone, that is important because

again, the law is going to treat people that it deems to be merchants – people

who should know what it is they’re doing – they’re going to hold them to a higher

standard than you and me, just general consumers. Now please note carefully

that private law and common law govern transactions dealing with things other

than the sale of goods, while private law or contracts – common law, judge-made

law – as well as statutory law like the UCC govern contracts for the sale of

goods.

[End of recording.]

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READ & TROUBLESHOOT CONTRACTS MODULE TWO – THE OFFER Let’s get into module two and begin to revisit one of the foundation stones of contract

creation. That would be the notion of an offer. An offer is an invitation to come

do business with me on these terms. It’s a promise made to the other party that

if the terms proposed are satisfactory, there’s going to be a contract. An offer is

more than a mere proposal or invitation. It’s a legal commitment to the other

party to form a contract if that person agrees. An offer, therefore, is a legal act.

And for an offer to be genuine, there are three essentials required. Number one,

there must be intent on the part of the offeror to make a valid and binding offer;

number two, this intended offer must be communicated to the offeree; and

number three, the offer must be specific and definite insofar as the subject matter

is concerned. An offer basically is a promise to do or to refrain from doing some

specified thing in the future. Now generally, offers are revocable. That is they

can be withdrawn at any time before the offer is accepted. An offer doesn’t stay

open indefinitely unless the offeree has an option, which is an irrevocable offer.

And I’ll explain options in just a moment. Now an offer ends when number one,

the time to accept it is up, which can either be a reasonable amount of time or

the deadline actually stated in the offer; or number two, the offeror councils – in

other words revokes the offer; or number three, the offeree rejects the offer. And

everyone, note carefully a counteroffer automatically rejects the original offer and

makes a different offer back - very important. So you’ve rejected it. If you say,

“Well I would agree to it except for ...” and then you throw in some stuff, well then

you have now rejected that offer. Or the last thing that would cause an offer to

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end, number four is if the offeree dies or is mentally incapacitated. Now an offer

is also closed even if the offeree has an option if there is a change in law that

makes the contract illegal or something destroys the subject matter of the

contract – it burns down or whatever. Now as I’ve indicated, an offer can in fact

be irrevocable. Now that’s where an offer is made on the condition that it’s not

going to be revoked until a specified time has elapsed, all right? Obviously now

I’m beginning to talk about options. So an option, everyone, is an agreement

made for consideration to keep an offer open for a certain period of time. For

example, in return for a $50 payment today, you might agree to give your friend

until next Friday to accept your offer to sell him or her your car for $1000. Well,

now that’s an option contract. The $50 is not a down payment or a deposit. It is

a stand-alone price to purchase that option. So selling an option puts a limit on

your ability to revoke an offer – a limit that the optionee, the option holder,

bargained for with you in return for that $50. As I mentioned earlier, the UCC

treats merchants differently than everyday consumers. That difference really

shows up when discussing for how long an offer must stay open. For example,

UCC 2-205 titled Firm Offer Says an offer by a merchant to buy or sell good in a

signed writing by which by its terms gives assurance that it will be held open is

not revocable for lack of consideration during the time stated, or if no time is

stated, for a reasonable time. But in no event may such period of irrevocability

exceed three months. But any such assurance on the form supplied by the

offeree must be separately signed by the offeror. By the way, you may wonder

just who exactly a merchant is. Well, UCC Section 2-104(1) defines “merchant”

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as, and I’m quoting now, “A person who deals in goods of the kind or otherwise

by his occupation holds himself out as having knowledge or skill peculiar to the

practices or goods involved in the transaction, or to whom such knowledge or

skill may be attributed by his employment of an agent or broker or other

intermediary who by his occupation holds himself out as having such knowledge

or skill.” Okay, I’ve already discussed unilateral contracts. Now I want to explain

the concept of promissory estoppel. Now this is a doctrine allowing recovery on

a promise made without consideration when the reliance on the promise was

reasonable and the promisee relied to his or her detriment. Now this doctrine is

only going to be used by the courts when an injustice can be avoided only by

enforcement of a non-enforceable promise. Let me give you an example. Let us

say that – everyone, I live in the Kansas City area. Let’s say you live in New

York. I approach you and I say, “Hey listen, come move to the Kansas City area

and I’ll pay you $200,000 a year.” So you say to me, well Max, if I do that, I

would have to pull my kids out of school, my significant other would have to give

up their job, we’d have to sell our home, and all of that. And I go, “Well listen, it’s

not a problem. There’s a good job. You really ought to do it,” etc. Then I

mention to you by the way, the job isn’t going to open up for 60 days. And you

say, well that’s all right. That will give me a chance to sell my house, etc. And

then you say to me, now if I do this, if I move to Kansas City, pull my kids out of

school, sell my house, disrupt the life of my significant other, etc., etc., this job’s

for real? And I go, “Absolutely.” Now I say – by the way, I will guarantee this job

for one year. So we agree, but we don’t put anything in writing. We shake

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hands. So a couple of months later, you show up in my office in Kansas City,

and I go, “What are you doing here?” You go, “I’m here for the job.” I say, “Well

I’m sorry, that job fell through. That was dependent on my picking up this new

client. That never happened. Sorry.” Well do you all remember the statute of

frauds? That deal could not be completed within one year. Therefore if it wasn’t

in writing, it’s not enforceable. We all understand we’ve got a terrible injustice. I

made a promise knowing that the other person was going to rely on it to their

detriment. I knew that once they did all these things there was no returning to

the condition as existed before we made that deal. So this would be a situation

where the court would estop me – they would estop me from asserting that there

was no deal. They would at least give the other person their day in court. Okay?

That’s what that is all about. Now let me review some of the things I’ve already

said by going over six questions to ask when you have to review contracts

quickly and accurately. Number one, you ought to ask are all the necessary

parties signatories to the agreement? Now in just a minute, I want to talk about

business types – sole proprietorship, corporations, and so forth. So make sure

that all the correct parties – the people you’re actually negotiating with and that

you’re looking to be bound by the deal – are signatories. They actually signed

this thing. Or if it’s a corporation, that someone has the authority to sign on that

corporation’s behalf. Number two, is the subject matter clearly described?

Everyone, if you can't figure out what the subject matter of the deal is, then in fact

there is no deal. Now I do want to mention to you that the words incorporated

herein by reference are what are known as legal words of art. They have an

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actual meaning. If I say – I’m trying to describe the subject matter, and I say “the

description contained in exhibit B incorporated herein by reference,” or “it will be

of the same nature and type as the model,” and I identify the model, and then I

say “incorporated herein by reference.” It is as though that physical item is

actually part of the contract. So again, incorporated herein by reference is really

important if in fact you want to take something that is external to the physical

document itself, and yet make it part of it. Now notice that I didn’t say

“incorporated herein by reference and attached hereto.” That isn’t necessary,

that last thing about attached hereto, and in my mind, that often causes more

confusion than it’s worth. I also want to mention just in passing, there’s another

phrase you might be interested in, and it’s “time is of the essence.” What that

means is that any payments that are due in the deal must be made on time.

There’s not grace period, there’s no slippage. It has to be done on time,

otherwise the party that’s supposed to make the payment has defaulted. Now

number three, you ought to ask yourself is the effective date clearly defined?

And everyone, it really is important that you nail down dates and things like that

in a contract. In other words, actually use a specific date that the effective date is

on June 20th, 2013 or something like that. Or five business days, including the

date on which this contract is signed – is last signed. In other words, the last

signatory. In other words, don’t leave things vague like “it will be effective in five

days.” I mean what does five days mean? Five business days? Five calendar

days? Are we including the day that it was signed? Are we not including the day

that it was signed, and so forth? So be really careful. Nail it down so that it’s

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clear, when will this thing go into effect? Now number four, is the consideration

clearly described? Again, you don’t want this deal to fail simply because no one

could figure out what the price actually was. Now I had mentioned earlier merger

clauses. And so the fifth question that you ought to be looking at is does your

contract have a merger clause? Very important. A merger clause states that the

written document contains the entire understanding of the parties, and the

purpose of merger clauses is to insure that evidence outside the written

document will not be admissible in court to contradict or supplement the terms of

the written agreement. In complex contracts, the parties often go through several

rounds of negotiations before they reach their final agreement. So when a

contract contains a merger clause, the final outcome of all previous discussion

and drafts is considered to be merged into the written document. And everyone,

think about it. Let’s say that we’re negotiating and I say to you, or rather you say

to me, “Listen, will you also throw in XYZ?” And my response is maybe I could

do that. If we could agree on everything else, I might be able to do that. Now

everyone, I never agreed to it. Now I think what you might have heard me say is,

yeah. If we agree to everything else, I’ll throw that in. So it doesn’t end up being

in our final agreement and we sign the final agreement without whatever that was

included. And there’s a merger clause. Well, that’s going to prevent you or me

or anyone from later on saying oh hey, that was part of our deal. Don’t you

remember? Okay? And common language to a merger clause would sound

something like this. “This writing is intended by the parties to be the final

expression of their agreement and is intended to be a complete and exclusive

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statement of the terms of their agreement. No course of prior dealings between

the parties and no usage of trade shall be relevant to supplement or explain any

term used in this agreement. The acceptance or acquiescence in a course of

performance under this agreement shall not be relevant in determining the

meaning of this agreement, even though the accepting or acquiring party has

knowledge of the nature of the performance and has opportunity to object.” The

last thing you ought to ask yourself is, is there an insurance clause? Now this

might not be necessary in all your different contracts, but where there is an

insurance clause, everyone, be sure that if the other party is the one that’s

supposed to get the insurance that you are named as an additional named

insured. An insurance policy is a two party contract. It’s between the insured

party and the carrier. You’re not in there. And so if there’s a loss situation, and

they pay the other party, there’s no guarantee you’re going to end up with the

money, all right? So again, you want to make sure that you become an

additional named insured on that policy. This generally does not cost the other

party or you anything. Where there is a cost to it, it’s very nominal. I have never

in my entire career heard of being named an additional insured costing more

than roughly $100. And believe me, if something bad happens you’ll be happy

that you have that. You also want to make sure in an insurance clause that the

insurance carrier has an obligation to let you know in advance if they’re going to

cancel that policy. In other words, it should contain the clause that says that the

insurance carrier is going to give you X number of days of prior written notice

before they cancel that policy out. If that’s not in there, then the other party might

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stop paying the premiums or might get canceled out for other reasons and you’ll

never know about, even though at the front end of the deal, they actually did

have insurance. Now this notification clause is not part of the standard insurance

policy, but it is a standard rider. It’s absolutely as common as dirt. But you’re not

going to get it if you don’t ask for it. Very, very important. Then of course in an

insurance clause, you want to make sure that they have adequate insurance and

that it’s from a company that has the resources to actually pay if there’s a loss

situation. What I mean is like in larger deals, you might want to make sure that

it’s an A-rated company by a rating service like AM Best or someone like that. All

right, here are a couple of final thoughts on offers. An expression of opinion isn’t

an offer, all right? It doesn’t evidence an intention to enter into a binding

agreement. An example – let’s say that some guy, Hawkins, takes his son to

McGee, a doctor, and asks McGee to operate the son’s hand. McGee said that

the boy would be in the hospital three or four days and that the hand would

probably heal in a few days after that. Now the son’s hand ends up not healing

for a month. Well, the father sues for breach of contract. Why? Because the

court held – this is a real case – that McGee had not made an offer to heal the

son’s hand in three or four days. He had merely expressed an opinion as to

when the hand would heal. Now statements of intention also aren’t offers. If

George says, “I plan to sell my stock in ACME Company for $150 per share,” a

contract is not created if John accepts and tenders $150 per share for the stock.

George merely expressed his intention to enter into a future contract for the sale

of the stock. If John accepts and tenders $150 a share, no contract is formed

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because a reasonable person would conclude that George is only thinking about

selling his stock – not actually promising to sell it.

[End of recording.]

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READ & TROUBLESHOOT CONTRACTS MODULE THREE - ACCEPTANCE Everyone, let’s move into module three – Acceptance. An offer – common sense,

everyone – an offer creates a power of acceptance in the offeree. Note some

things, however. There has to be knowledge of the offer. It has to be

communicated to the offeree or there’s no acceptance or a contract. There also

has to be an attempt on the offeree’s part to accept it. Now that intent, though,

can be inferred from their actions – not from what they actually intended to do.

So if they take certain actions, they exercise control and dominion over the

subject matter of the contract and so forth, they may have actually accepted the

deal. If they start using the item or whatever, then obviously that’s a

manifestation that they actually intended to go forward with it. A really important

issue is who can actually accept the offer? First of all, the parties to a contract

have to have a legal capacity to even contract. And minors have limited capacity

to enter into an agreement. Contracts with persons under guardianship or who

lack sufficient mental capacity contract – those are what are called “voidable

agreements.” They’re called voidable contracts – not void. And what that means

is that the contract could be disaffirmed by the person who lacks the capacity to

contract or by his or her guardian. Now a void contract is unenforceable by

either party. In other words, a gambling contract isn’t going to be enforced by the

courts even if neither party raises the defense of illegality. Now a voidable

contract is enforceable at the option of the person with the power to declare it null

and void. When a party elects to disaffirm a contract, the law will require a return

of whatever was received subject to equitable principles. So if I sell something to

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a minor – a car or something to a minor – and then when they reach the age of

their majority they disaffirm it, I at least should get the value of the reduced value

of that vehicle. Now as I’ve already said, a void contract is just done. No one

really needs to do anything except just not honor it. In addition, there’s

something called unconscionability. Some contract provisions may be so unfair

that basically the law isn’t going to enforce them. Sometimes this unfairness is in

the language of the contract itself. For example, would it be fair to allow a lease

to disclaim the landlord’s liability for all kinds of negligence – even really serious

and gross negligence? Probably not. Sometimes the unfairness arises from

gross inequality and bargaining power. And many statutory protections arise

because the legislatures feel that they want to prevent unconscionable contracts,

and therefore you’ve got intensive regulation of insurance contracts and

regulation of brokerage contracts – things like that. Now please note that only

the party to whom the offer was made can accept it. In that regard, as I alluded

to earlier, you’ve got to pay attention to the type of business entity you’re dealing

with. In a sole proprietorship, the individual is operating the business on their

own. There’s no officers, no board of directors, and that person has unlimited

liability down to the last nickel they have in a deal like that. Now in a partnership,

you can have a general partnership and all the general partners can bind that

partnership all the way down to the last nickel of all of the general partners. In

limited partnerships, the limited partners themselves are only liable up to the

amount of their investment in the deal. So if the deal fails, they don’t have any

personal liability. They’re just out whatever money they put into it. The general

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partner who’s running the place, they have unlimited liability. Now with a

corporation, there’s different forms of corporations, but basically everyone,

irrespective of whether it’s a C Corporation, an S Corporation, all of that sort of

thing, or Limited Liability Company, it’s a corporation. It’s a legal person. So

there you want to make really sure that whoever’s signing the contract with you

has the legal authority to actually do it. And if you really – now think about this –

if it’s really a small, closely held corporation, and in reality you want to bind the

principles, not the corporation itself, but you want to bind their bank account, then

you better have them sign not only as an officer or director of the corporate

entity, but as a private individual as well. Now that brings up who’s liable. Well,

if you have in your deal that there’s joint liability, it’s basically that promises of

individual people appearing in a single document are presumed to be joint unless

a contrary intent is expressed. So if several people sign this thing and there’s no

expression that hey, I’m not jointly liable with these other guys who are signing,

everybody’s deemed to be liable. Now if it says that liability shall be several,

then in fact each person has separate liability. Now your best bet if you’re trying

to protect yourself is to put in the words “joint and severable liability.” That’s the

safest language to use if you’re trying to bind both an individual and their

company, their corporation, or the other signatories to the deal. Can you have

acceptance by silence? Ordinarily, no you cannot. Ordinarily you cannot. By

the way, that’s true even if the offeror states you buy your silence in an action,

you will be deemed to have accepted this agreement. And everyone, I mean

think about this – can someone bind you simply by sending you a letter saying

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that by opening this letter, you have accepted this deal and so forth, and then

you just throw it in the trash? Well, you know, you didn’t agree to anything and

your silence can’t be held against you, basically. Now there are times, though,

that the offeree does have a duty to speak. Then their silence or inaction could

operate as an acceptance. For example, silence can be an acceptance when an

offeree takes the benefit of offered services, even though he or she had the

opportunity to reject them, and they knew that what they were offered was

offered with the expectation of compensation. So let’s say that a person watches

while a stronger rakes his leaves, even though the stronger hasn’t been asked to

rake the yard. They know that the stronger expects to be paid and does nothing

to stop that individual. Their silence would constitute acceptance that would be

kind of an implied-in-fact contract, okay? Now silence can also operate as an

acceptance when the offeree has had prior dealings with the offeror. In other

words, suppose that a merchant routinely receives shipments from a certain

supplier and always notifies the supplier when defective goods are rejected. In a

situation like that, silence regarding a shipment will almost certainly constitute full

acceptance of it. Additionally, if a person solicits an offer specifying that certain

terms and conditions are acceptable and the offeror makes the offer and makes

a response to the solicitation, the offeree has a duty to reject – in other words

they have a duty to tell the offeror that the offer isn’t acceptable. So there again,

there could be circumstances, peculiar circumstances, where a failure to reject

something through silence or inaction could operate as an acceptance. We

already talked about unilateral contracts. Let’s talk about something – some

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aspect of bilateral contracts. In a bilateral contract, the offeree’s promise or

acceptance has to be communicated to the offeror or their agent to form an

agreement. This brings up what’s called the mailbox rule, or the postal

acceptance rule. It’s a term of common law dealing with contracts. What it does,

it determines when a contract has been formed where the parties are

communicating by mail. The basic thrust of the rule is that an acceptance of an

offer that’s sent before a revocation of the offer is received forms a deal.

However, if a communication is sent rejecting the offer and a later

communication is sent accepting the contract, then the first one to be received by

the offeror will prevail. Let me give you an example. Suppose A makes an offer

to B on January 1. A then decides to revoke the offer on January 2nd and puts a

letter in the mail to B revoking the offer. However, B puts a letter accepting the

offer in the mail on January 3rd and does not receive A’s revocation letter until

January 4th. Because B sent his acceptance before receiving A’s revocation, the

mailbox rule dictates that B’s acceptance is effective. A will therefore be bound

by the contract and can’t revoke the offer. Suppose, on the other hand, that A

makes an offer to B on January 1, and B decides to reject the offer on January

2nd and puts a letter in the mail to A rejecting the offer. However, the next day B

changes his mind and sends a fax, or an email or something, accepting the offer.

In that situation, whichever communication A receives first will govern. Under the

mailbox rule, performance is a means of acceptance. If A orders 1000 blue coat

hangers and B ships them out, that shipment is considered to be a conveyance

of acceptance of A’s offer to buy the coat hangers. Defective performance is

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also an acceptance, unless accompanied by an explanation. For example, if A

orders 1000 blue coat hangers and B mistakenly ships 1000 red coat hangers,

that is still an acceptance of the contract. However, if B ships the red coat

hangers with a note that they sent these because they had run out of the blue

coat hangers, that is not an acceptance, but rather an accommodation which is

really a counter offer. Now with the advent of modern technology, the mailbox

rule has been expanded to cover all technology by which commercial

communications can reasonably be conducted, including telephone, fax, email,

text message, so forth. Now if the offeree were to convey acceptance by

commercially unreasonable means – by cross country Pony Express or

something silly – the acceptance would not be effective until it has actually been

received. Now do note that the mailbox rule doesn’t apply to option contracts

where acceptance is still only effective upon receipt. Because of the electronic

age, in the last few years courts have had to deal with issues about how the

mailbox rule can be adapted to the electronic age, and which documents are

transmitted instantaneously via various and sundry electronic systems. An

emerging issue has to do with whether clicking on the “yes” or “I consent” or “I

agree” box in response to an online offer constitutes acceptance by conduct.

And everyone, generally the answer is yeah. Not every court is universally has

held this, but generally speaking, the trend is that you click yes, I accept this, I

accept this offer, I accept the terms and conditions of the use and all that – you

click yes and everyone, it means yes. Now you could also accept by conduct or

acts of dominion. In this regard, the Uniform Commercial Code Section 2-04(1)

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says, “A contract for the sale of goods may be made in any manner sufficient to

show agreement, including conduct by both parties which recognizes the

existence of such contract.” So once again, when you exercise dominion over

something, it’s yours. Let’s talk about when the power of acceptance could be

canceled under revocable offers. One of the things that might cause that is lapse

of time. Generally once the time to accept an offer lapses, the offer ends. In

other words, the offer terminates automatically by law when the period of time

specified in the offer has in fact passed. For example, suppose Alejandro offers

to sell his camper to Kelly if she accepts within 20 days. Well, Kelly must accept

within the 20-day period or the offer will lapse. It will terminate. The time period

specified in an offer normally begins to run when the offer is actually received by

the offeree – not when it is sent or drawn up. When the offer is delayed through

mis-delivery of mail or something like that, the period begins to run from the date

the offeree WOULD have received the offer, but only if the offeree knows or

should have known that the offer is delayed. If no time for acceptance is

specified in the offer, the offer terminates at the end of a reasonable period of

time. What constitutes a reasonable period of time depends on the subject

matter of the contract – business and marketing conditions, and other things like

that that are relevant. An offer to sell farm produce, for example, would terminate

sooner than an offer to sell farm equipment because the farm produce is

perishable and subject to greater fluctuations in market value. Now everyone, I’ll

say it again. It really is important that you have specificity as to how long an offer

will remain open for, okay? What about late acceptance? In other words the

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offeree wants to accept it once the offer terms have expired. Well everyone, that

is no acceptance. Once it expires, it’s done. Now what about through death or

lack of capacity? Well, in that regard an offeree’s power of acceptance is

terminated when the offeror or the offeree – either one of them – dies or is

deprived of legal capacity to enter into a proposed agreement. Now an offer is

personal to both parties and can’t pass to the decedent’s heirs, guardian or

estate of either of them, all right? Now obviously you can have a deal where it

says this will continue on, etc. But that would be very unusual. By the way, the

rule that I just gave you applies whether or not the other party had notice of the

death or of the incompetence. You also could have these things end as far as

the power to accept through revocation. And the offeror’s act of withdrawing is

called a revocation. So once again, unless the offer is irrevocable and the offeror

revokes the offer, it’s done as long as they do it in a manner that’s communicated

to the offeree before there is acceptance. The general rule followed by most

states is that a revocation becomes effective when the offeree or the offeree’s

agent acting on their behalf actually receives the revocation. Therefore for

example, a letter of revocation mailed on April 1 and delivered at the offeree’s

residence or place of business on April 3rd becomes effective on April 3rd, okay?

Now an offer made to the general public can be revoked in the same manner the

offer was originally communicated. So suppose that a department store offers a

$10,000 reward to anyone giving information leading to the apprehension of the

persons who burglarized the store’s downtown branch? The offer is published in

three local newspapers and four papers in neighboring communities. To revoke

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the offer, the store must publish the revocation in all seven papers for the same

number of days it published the original offer. The revocation is then accessible

to the general public even if some particular offeree doesn’t even know about it.

Now I’ve said this several times and I’ll say it one more time. There is what’s

under the common law called the “mirror image rule.” Basically if you don’t

accept the offer as made and you in essence make a counter offer, that rejects

the original offer. Then you really can’t revive it simply by saying, well okay, I’ve

changed my mind. Now that might not be true. In a real estate contract, if

there’s a period in there where after home inspections, the deal can either be

renegotiated, the party that’s buying the house can simply capitulate and say,

“Okay look, I’ll take it as-is,” or the deal could be broken. So if they’re negotiating

back and forth, well this is wrong, that’s wrong, I want you to fix it and all that,

and the selling party says no, no, no, I’m not going to fix it – even though they’ve

rejected that original offer, so to speak, because of the peculiarities of a real

estate contract, if the buyer in that circumstance says look, I give up. I’ll just take

it as-is. If it happened during that time period, that period of renegotiation, then

that deal will still go through. Now I’ve mentioned that if there is a supervening

death or destruction of something, that ends the deal as well. So basically an

offer is automatically terminated if the specific subject matter of it is destroyed, all

right? Now I want to take you into something called the battle of the forms.

You’ll find this in UCC Section 2-207. The actual language of that section is in

your participant materials. But let me tell you what’s going on there. Everyone,

let us say that I’m a merchant. And I make you an offer – I send you a thing

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saying hey, I want to buy 100 widgets from you on the terms stated on my

document. So you write me back and you say, “Hey, I accept your offer.” And

then it says in there “subject to the terms of my document.” So your document

and my document aren’t the same. Now if you look at the mirror image rule,

what happens is you have rejected my offer. You didn’t accept any part of it.

You’ve rejected it. So we don’t have a deal. You can’t force a deal on me. Now

if I go ahead and I go forward, then I’ve accepted your terms. You didn’t accept

mine. So what would happen historically is merchants would play a little game

where they were trying to send each other their forms with their terms and

conditions and they were trying to be the last one to put that forward to have the

other person agree to their terms and so forth. Well, because of the Uniform

Commercial Code now, the courts have now taken the approach that where the

terms of the two documents match each other, that’s part of the contract. That’s

part of the contract. Where they disagree, then there’s just general common law

principles and the parties can fight it out. That’s basically what that boils down

to.

[End of recording.]

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CONTRACTS MODULE FOUR – GAP FILLERS Let’s move into module four. I want to tell you that these are gap fillers that are put out

there. Once again, in your materials you’re going to see various quotes from

these various relevant things. For example, a course of dealing is a sequence of

events that are previous conduct that the parties have had. So if they’ve acted

toward one another in some particular way in the past, that is going to govern

unstated terms in future agreements. Also if there is a disagreement –

something wasn’t in a contract – but there’s been a usage of trade – in other

words, they’re in an industry. Everybody acts in a certain way towards certain

things. There are certain definitions that are common to the industry, yet the

actual contract is silent, then the UCC imposes this idea of usage of trade.

Whatever is common in that industry will govern. Then course of performance,

once again just the way that the parties act are going to fill things in. Where

there’s a gap in terms of delivery terms, basically the UCC jumps in and it says

that where the delivery point isn’t stated, then the place of delivery is the seller’s

place of business, or if there is none, the seller’s residence. In other words, the

price of the sale doesn’t ordinarily include the cost of delivery. So that’s the rule

that applies to generic goods not specifically identified, okay? Now if the time

delivery isn’t stated, then the UCC says that if the contract doesn’t provide for a

specific time of delivery, then delivery will be a reasonable time, okay? There is

gap filler on payment terms. You know what it says? That payment is due on

delivery unless otherwise agreed. There are various gap fillers on price, and I

would urge you to look at your participant materials. You’ve got material in there

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on that. Do notice that if your contract is silent on quantity, there is no contract.

There is no gap filler. You just don’t have a contract.

[End of recording.]

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READ & TROUBLESHOOT CONTRACTS MODULE FIVE – THINGS TO WATCH OUT FOR The last thing, module five, deals with various things to watch out for. Everyone, in

terms of the things to watch out for is first of all, don’t hesitate to negotiate. Even

though the other party says no, this is the final deal, take it or leave it and all that,

that doesn’t necessarily mean that it’s final. You can always say, “Well, I’d like

you to consider.” And more often than not, I think you’re going to find out that

yeah, there is room for negotiations. Also failure to understand. Everyone, it is

imperative that if you do not understand a word in a contract, a term, a condition,

a date, what something means, you owe it to yourself to nag at it, to drill down, to

find out what it means. Look at what happened after all that horrible stuff that

happened after Katrina. There are a lot of insurance policies. There was a big

battle of was the damage done by wind or water? If it was wind, it wasn’t

covered. If it was water, it was. So obviously, come on. Common sense, a lot of

the insurance carriers said oh, it’s not covered because it was this rather than

that. So and there was all kinds of litigation and so forth. The point being that

the people that had the agreements, the contracts, didn’t really understand what

the individual terms meant. Now lack of specificity. I have said over and over

again: be very careful in describing things. And in your participant materials, I

give you some tips on some things that you might want to include when you’re

actually trying to describe the goods in question. Be sure, as I’ve said several

times, be sure about deadlines, when those come and when they go, etc. And

do have liability clauses as to who is going to be liable for what. If you can, it’s

always a good idea to get the other party to hold you harmless for any actions

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that they cause – any bad things they cause – to hold you harmless from all

liabilities including reasonable attorneys’ fees. Everyone, I know the old joke

about the words “reasonable attorneys’ fees” is an oxymoron. I know, I know.

The thing is, though, in a contract you can only recover in damages what you

contracted for. If your contract is silent on your right to get back attorneys’ fees,

you will not get them. And do put in the word “reasonable attorneys’ fees” so that

a court, as many courts have said, say that where it just says “attorneys’ fees,”

that’s not valid. That’s over reaching. So you want to put that language in there.

Also everyone, another mistake that’s commonly made is where people only buy

on price rather than buying not only on price, but also what the best terms are as

well. Be sure that especially in any kind of service agreement that you take a

look at what’s called the “negative option to renew.” Almost every service type of

agreement, whether it’s for trash removal, computer repair, you name it, is going

to have a clause that sounds something like this. “This agreement shall

automatically renew itself for periods of 12 months each at the end of the then

current term unless and until either party provides written notice to the other party

no less than 30 days before the end of any then-current term that they want to

cancel.” So basically the contract renews itself, renews itself, renews itself.

Those are enforceable. So everyone, either negotiate that out – you don’t want

that in there. But if there is an option, you want it to be what’s called a positive

option to renew where you have the right to renew it if you want to by giving them

prior written notice. I want to tell you something. There is nothing terrible,

horrible and wrong with a negative option to renew. And some of you will have

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heard these things called “evergreen clauses.” But just be aware that they’re

there. So if you don’t want these things to automatically renew, do something

about it. Then everyone, do demand strict adherence to the contract terms

because if you acquiesce to a default, you might be stuck with that to the end of

time. The last thing I want to mention is that we did provide a checklist in your

materials that should form the basis of a step by step process by you for reading

and understanding the various contracts. It’s got the various contract terms that

you need to think about.

[End of recording.]