Third PartiesPerformance and DischargeRemediesContract Drafting

Class 3

Don’t be afraid to start with a form Use simple (non-legal) language Be consistent throughout the

contract Make sure all essential terms are

included in the contract Review for inconsistencies and

ambiguities Review for contradictions

Drafting Contracts

The contract should be clear to the contracting parties.

It should be complete. The terms and methods of

enforcement should be clear.

Drafting Contracts

Preamble (parties, date) Recitals (background; not enforceable) Words of agreement (consideration) Definition of important terms Action Section (subject matter,

consideration, term of the agreement) Substantive business (warranties,

conditions, etc.) Endgame provisions General provisions (boilerplate) Signature lines

Parts of the Contract

The first paragraph – its purpose is to identify the contract. It sets out the name of the agreement, the parties and date the contract is signed:

License Agreement, dated April 10, 2009, between May Licensing, LLC, and Gray Manufacturing, Inc.

Preamble

Explain the background. They are not contract terms and are not enforceable.

1.The Bank has a greed to lend funds to the Borrower in accordance with the Credit Agreement they are signing today.

2.The Borrower is a wholly-owned subsidiary of the Parent

3.The Bank will lend to the Borrower only if the Parent guarantees the Borrower’s debt. . . .

Recitals

State – for the record – that the parties agree to the terms of the contract:

Accordingly, the parties agree:

(Traditionally, it might say NOW, THEREFORE,in consideration of $10 paid in hand and other

good and valuable consideration, receipt of which is here by acknowledged, the parties hereto hereby agree as follows . . . )

Words of Agreement

Usually follow words of agreement. Definitions in the contract are a good way of referring to complex concepts and ensure that the concepts have the same meaning throughout the agreement.

“Litigation expense” means any expense incurred in connection with asserting, investigating, or defending any claim . . . .

Definitions

In this section, the parties make their promises or covenants.

At the Closing, Seller shall sell the house to Buyer, and Buyer shall buy the house from Seller.

Action Sections: Subject Matter

The next provision usually sets out the consideration – purchase price, salary, etc.

With respect to each calendar month, the Licensor shall pay the Licensee royalties equal to 2 percent times Net Sales for that calendar month, payment to be made no later than the third Business day of the following calendar month.

Action Sections: Consideration

This provision sets out how long the contract will continue.

Term: The term of this Lease is three years. It begins on the date that the parties sign and deliver this Agreement and ends at 5:00 p.m. on the date immediately preceding the third anniversary of the date that the parties sign and deliver this Agreement.

Action Sections:Term

This part would include

Representations and warranties Conditions (walk away rights)

Substantive Business Provisions

These relate what happens when the contract ends . . . Release of collateral . . What happens on default …

Late submission of manuscript: If the Author does not submit his manuscript before November 1, 2009, the publisher may refuse to publish the Book.

Endgame Provisions

These tell the parties how to govern their relationship and administer the contract. This may include: Notice Choice of law Choice of forum Anti assignment clause Modification Severability

General Provisions

To evidence the parties agreement to this Contract, they have signed and delivered it on the date set forth in the Preamble.

May Corporation

By____________________Meg Pearson, President

Craven Company

By___________________Frank Foster, President

Signature Lines

Third Party Rights A third party (someone not a party

to the underlying contract) may have a legal interest in a contract and be able to enforce the contract, if there is: A “beneficiary” interest An assignment A delegation

Beneficiary Interests A third party beneficiary is someone

who was not a party to the contract but stands to benefit from it. Two types:

Intended beneficiaries (can enforce the contract)

Incidental beneficiaries (cannot enforce the contract)

DIA v. Rose Jr.

Contract Action

(Or Custody Battle?)

PromisorRufus Rose

Meeting of the MindsContract formed

PromiseeNBC

Contract Should Benefit

Third Party BeneficiaryDIA Puppet Museum

1. Did Rose intendto benefit DIA ?

2. Did NBC intendto benefit DIA?

3. Did NBC (a) have a dutyto DIA or (b)intend to makea gift to DIA?

Assignment and Delegation A contracting party may transfer his

or her rights under a contract – this is an assignment.

A contracting party may transfer his or her duties under a contract – this is a delegation.

Assignment

A contract must first exist. There will be an obligor and an obligee.

One of the parties (the obligee) transfers his rights under a contract to a third person. The person transferring – or assigning –

his rights is the assignor. The person receiving the assignment is

the assignee. The obligor now owes the money to

the assignee.

SellerAssignor

BuyerObligorContract for

GoodsSeller agrees to sellBuyer agrees to pay

Seller delivers goods

Buyer owes $$$ to Seller

AssigneeBuyer pays $$$ to Assignee

Delegation A contract must first exist.

There will be an obligor and an obligee. One of the parties (the obligor) transfers his

duties under a contract to a third person. The person transferring – or delegating – his

duties is the delegator.

The person receiving the delegation is the delegatee.

The delegatee now owes the money to the obligee.

The delegator remains ultimately responsible for the performance under the contract.

SellerObligor

Delegator

BuyerObligeeContract for

GoodsSeller agrees to sellBuyer agrees to pay

Seller owes goods

Buyer pays $$$ to Seller

DelegateeDelegatee owes Buyer the goods

Novation A novation is a three-way agreement

in which one party transfers all her rights and duties to a third party.

Both original parties agree to the novation.

Essentially the third party substitutes in for one of the original parties to the contract.

The obligee agrees to look only to the third party for performance.

When does a contract end?

A contract is finished (executed) when performance is complete.

A contract also may come to end upon “discharge” of a non-performing party.

Discharge of Duties Contractual duties may be

discharged by: Performance of all contractual duties

OR A condition excusing the duty Agreement Impossibility of performance Commercial Impracticability

Conditions

A condition is an event that must occur before a a duty to perform arises or which discharges a duty that has already arisen.

How are they created? By words or conduct; by law No special language is necessary to

create a condition.

Performance The contract ends when it is fully

executed – that is when both parties fully perform their obligations under the contract. Strict performance Substantial performance

Personal Satisfaction

In some contracts the performance must be done to the personal subjective satisfaction of the promisee.

Dissatisfaction results in termination of the contract. In Washington the dissatisfaction must

be based on reasonable grounds. Omni Group, Inc. v. Seattle-First Nat’l Bank, 32 Wn. App.22 (1982).

Good Faith Every contract imposes upon each

party a duty of good faith and fair dealing in its performance and its enforcement.

Restatement (Second) of Contracts § 205

Breach Any failure or refusal to perform a

contractual duty constitutes a breach.

When one party breaches a contract, the other party is discharged.

Courts only discharge (or cancel) a contract if a party has committed a material breach of the contract.

Anticipatory Repudiation Occurs when one of the parties to a

bilateral contract either expressly or impliedly repudiates the contract prior to the time of performance. Must be a positive statement or action

indicating distinctly and unequivocally that the repudiating party will not substantially perform.

Discharge By Agreement

Parties can end the contract by agreement through Rescission Novation Accord and satisfaction

Impossibility of Performance

If a party is unable to perform a contract because performance becomes “impossible,” then the performance is excused.

Commercial Impracticality

If circumstances change (that neither party anticipated), leaving one party at a significant commercial disadvantage, that party may be excused from the contract under the theory of commercial impracticality. If the change could have been

foreseen, the court will generally not afford relief.

Remedies If one party fails to live up to the

terms of the contract, the other party may sue. The remedy is how the court compensates the injured party. Money damages based on

Expectation of contract performance Actions taken in reliance on

Performance of the Contract Rescission and Restitution Reformation of the Contract

Compensatory Damages

These damages flow directly form the contract – damages that inevitably result from the breach.

Washington law The general measure of damages for

breach of contract is that the injured party is entitled (1) to recovery of all damages that accrue naturally from the breach, and (2) to be put into as good a pecuniary position as he would have had if the contract had been performed.

Diedrick v. School Dist. No. 81, 87 Wn.2d 598 (1976)

Consequential Damages These are damages that result from

the unique circumstances of the injured party. The injured party must prove that

the breaching party had reasonable notice of the special circumstances and that a breach would cause the damages suffered.

Incidental Damages The minor costs associated with

responding to a breach of performance.

Rescission & Restitution Rescission results in a cancellation

of the contract. (Generally where there was fraud, mistake, duress or undue influence (something affecting the genuiness of assent).

If a contract is rescinded, both parties must make restitution to each other. Both parties are returned to the position

they were in prior to the contract.

Reliance Interest Where the expectation interest of a

contract cannot be established, a party injured by a breach may be entitled to damages that will restore the party to the position he would have been in if he had not entered into the contract.

Equitable Remedies Specific performance Injunction Reformation of the contract

Mitigation The law does not permit a party to

recover damages for breach of contract if the damages could have been avoided without undue risk, burden or humiliation.

A party must exercise reasonable efforts to mitigate damages.

Liquidated Damages Damages specified within the

contract itself – a liquidated damages clause states, in advance, how much a party must pay if he or she breaches the contract.

Washington upholds these clauses unless it is a “penalty” and so long as the agreement is fair.

Attorney Fees & Costs A court will enforce a contract term

requiring the losing party in an action on the contract to pay the other party’s attorney fees and litigation costs.