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Suggested Additional Assignments
Research: Lawyers and Public Opinion
Students should conduct an informal survey of friends and associates to gather ideas on public perception
of lawyers. They should categorize the comments and evaluate what types of people have a negative
opinion of lawyers and what type have a positive opinion.
Drafting: Contracts
Students should draft a simple contract from the perspective of a provider of a service, such as house
painting. Students must include specific terms on (1) price, (2) time and place of delivery, (3) method of
payment, and (4) warranties. They should then pair with another student who will be the “buyer.” The
“buyer” student should try to change the terms to more favorable ones. The “seller” students must do
their best to ensure that any resulting contract stays close to the original terms. They should negotiate
until they agree.
Chapter Overview
Chapter Theme
You have been studying the theory of contract law. This chapter is different – its purpose is to demonstrate
how that theory operates in practice. We will look at the structure and content of a standard agreement and
answer questions such as: Do you need a written agreement? What does all these legal terms mean? Are
any important provisions missing? By the end of the chapter, you will have a roadmap for understanding a
written contract.1(Note that we do not repeat here what you have learned in prior chapters about the
substantive law of contracts.) This chapter has another goal, too: We will look at the relationship between
lawyers and their clients and their different roles in creating a contract.
Quote of the Day
“We talk about a contract as a meeting of the minds of the parties, and thence it is inferred in various
cases that there is no contract because their minds have not met; that is, because they have intended
different things or because one party has not known of the assent of the other. Yet nothing is more certain
than that parties may be bound by a contract to things which neither of them intended, and when one does
not know of the other's assent.” –Justice Oliver Wendell Holmes, Jr.
Do You Need a Written Contract?
Some cases work out well without a written contract, but there are times when you should definitely sign
an agreement: (1) The Statute of Frauds requires it. (2) The deal is crucial to your life or the life of your
business. (3) The terms are complex. (4) You do not have an ongoing relationship with the other party.
The Lawyer
Lawyers and Clients
Businesspeople often expect deals to go well. Lawyers are trained to be pessimists—they try to foresee
and protect against everything that can possibly go wrong. Their primary goal is to protect their
clients by avoiding litigation, now and in the future.
1 For further reading on practical contracts, see Scott Burnham, DRAFTING AND ANALYZING
CONTRACTS, LexisNexis; Charles M. Fox, WORKING WITH CONTRACTS, Practical Law Institute;
George W. Kuney, THE ELEMENTS OF CONTRACT DRAFTING, Thomson/West.
Lawyers also prefer to negotiate touchy subjects at the beginning of a relationship when everyone is on
friendly terms and eager to make a deal, rather than waiting until trouble strikes.
The Contract
How to Read a Contract
Reading a contract should be a focused, multi-step process where you ask yourself “what-if” questions
and determine the answers to those questions.
Mistakes
Vagueness
Vagueness means that the parties to a contract deliberately include a provision that is unclear. It may be
that they are not sure what they can get from the other side, or in some cases, even what they really want.
So they try to form a contract that leaves their options open. They hope that they can decide later what the
provision really meant. However, as the following case illustrates: Vagueness is your enemy.
You Be The Judge: Quake Construction v. American Airlines2
Facts: Jones Brothers Construction was the general contractor on a job to expand American Airlines
facilities at O’Hare International Airport. Jones Brothers invited Quake Construction to bid on the
employee facilities and automotive maintenance shop (“the project”). After Quake bid, Jones Brothers
orally informed Quake that it was awarding Quake the project and would soon forward a contract. Jones
Brothers wanted the license numbers of the subcontractors that Quake would be using, but Quake could
not furnish those numbers until it had assured its subcontractors that they had the job. Quake did not want
to give that assurance until it was certain of its own work. So Jones Brothers sent a letter of intent that
stated, among other things:
We have elected to award the contract for the subject project to your firm as we discussed on April 15. A
contract agreement outlining the detailed terms and conditions is being prepared and will be available for
your signature shortly.
Your scope of work includes the complete installation of expanded lunchroom, restaurant and locker
facilities for American Airlines employees as well as an expansion of American Airlines existing
Automotive Maintenance Shop. A sixty (60) calendar day period shall be allowed for the
construction of the locker room, lunchroom and restaurant area beginning the week of April 22. The
entire project shall be completed by August 15.
Subject to negotiated modifications for exterior hollow metal doors and interior ceramic floor tile
material as discussed, this notice of award authorizes the work set forth in the [attached] documents
at a lump sum price of $1,060,568.00
Jones Brothers Construction Corporation reserves the right to cancel this letter of intent if the
parties cannot agree on a fully executed subcontract agreement.
The parties never signed a more detailed written contract, and ultimately Jones Brothers hired another
company. Quake sued, seeking to recover the money it spent in preparation and its loss of anticipated
profit.
You Be The Judge: Was the letter of intent a valid contract?
Argument for Quake: This letter was a valid contract. It explicitly stated that Jones awarded the
contract to Quake. It also said, “This notice of award authorizes the work.” The letter included
significant detail about the scope of the contract, including the specific facilities Quake would be
working on. Furthermore, the work was to commence approximately 4 to 11 days after the letter
2 141 Ill. 2d 281, 565 N.E.2d 990, 1990 lll. LEXIS 151 Supreme Court of Illinois, 1990
was written. This short period of time indicates that the parties intended to be bound by the letter
so that work could begin quickly. And, the letter contained a cancellation clause. If it was not a
contract, why would anyone need to cancel it?
Argument for Jones: This letter was not a contract. It referred several times to the execution of
a formal contract by the parties, thus indicating that they did not intend to be bound by the letter.
Look at the cancellation clause carefully: It could also be interpreted to mean that the parties did
not intend to be bound by any agreement until they entered into a formal contract.
Ambiguity
Ambiguity occurs in contracts when the parties think only about what they want a provision to mean,
without considering the literal meaning or the other side’s perspective.
Any ambiguity is interpreted against the drafter of the contract.
Minkler v. Safeco Ins. Co. of America
49 Cal. 4th 315
Supreme Court of California, 2010
Facts: Scott Minkler alleged that when he was a child, his Little League baseball coach, David
Schwartz, had molested him. During the period when these terrible events occurred, David was
living at the home of his mother, Betty Schwartz, and some of the episodes had taken place at her
house. Scott sued Betty, alleging that she had been negligent in supervising events in her own
home.
Betty had a homeowners’ policy with Safeco Insurance Company, which covered any harm
caused by the unintentional acts of the home’s residents, including David. Since David’s acts
were intentional, Safeco was not responsible for the claims against him. But Safeco also argued
that it was not responsible for claims against Betty because the wrongdoing that had caused the
harm (that is, David’s acts) had been intentional. Safeco’s interpretation of this provision was
valid under California law. However, her policy had an additional provision that stated, “This
insurance applies separately to each insured.”
In short, Betty’s policy was ambiguous. Safeco said the policy did not provide coverage if any
insured had engaged in intentional wrongdoing while Betty argued that it did cover her if her
own actions had been merely negligent.
Issue: How should the court interpret ambiguous provisions in a contract?
Excerpts from Justice Saxe’s Decision: Our goal in construing insurance contracts, as with
contracts generally, is to give effect to the parties’ mutual intentions. If contractual language is
clear and explicit, it governs. If the terms are ambiguous i.e., susceptible of more than one
reasonable interpretation, we interpret them to protect the objectively reasonable expectations of
the insured.
Only if these rules do not resolve a claimed ambiguity do we resort to the rule that
ambiguities are to be resolved against the insurer. The “tie-breaker” rule of construction against
the insurer stems from the recognition that the insurer generally drafted the policy and received
premiums to provide the agreed protection.
Safeco could easily have removed any uncertainty. Safeco’s intent was not clearly expressed, and
the ambiguity must be resolved in a way that preserves the objectively reasonable coverage
expectations of the insured seeking coverage. Betty had no reason to expect that David’s
residence in her home, and his consequent status as an additional insured on her homeowners
policies, would narrow her own coverage, and the protection of her separate assets, against
claims arising from his intentional acts, Betty’s coverage must be analyzed on the basis of
whether she herself committed an act or acts that fell within the intentional act exclusion.
Question: Why is ambiguity interpreted against the drafter?
Answer: According to the text: 1) To protect laypeople from the dangers of form contracts that
Question: How does the court define “ambiguous?”
Question: How must the ambiguity in the contract at issue be resolved?
Typos
What is the law of typos? First of all, the law has a fancier word than typo – it is scrivener’s error. (A
scrivener is a clerk who copies documents.) In the case of a scrivener’s error, a court will reform a
contract if there is clear and convincing evidence that the mistake does not reflect the true intent of the
parties.
You Be the Judge: Heritage Technologies v. Phibro Tech3
Facts: Heritage wanted to buy a substance called TBCC from Phibro but, because of uncertainty in the
industry, the two companies could not agree on a price for future years. It turned out, though, that the
price of TBCC tended to rise and fall with that of copper sulfate, so Heritage proposed that the amount it
paid for TBCC would increase an additional $15 per ton for each $0.01 increase in the cost of copper
sulfate over $0.38 per pound.
3 2008 U.S. Dist. LEXIS 329 United States District Court for the Southern District of Indiana
Two top officers of Heritage and Phibro met in the Delta Crown Room at LaGuardia Airport to negotiate
the purchase contract. At the end of their meeting, the Phibro officer hand wrote a document stating the
terms of their deal and agreeing to the Heritage pricing proposal.
Negotiations between the two companies continued, leading to some changes and additions to their
Crown Room agreement. In a draft prepared by Phibro, the $.01 number was changed to $0.1, that is,
from 1¢ to 10¢. In other words, in the original draft, Heritage agreed to a first increase if copper sulfate
went above 39¢ per pound, an additional price rise at 40¢, and so on. But in the Phibro draft, Heritage’s
first increase would not occur until the price of copper sulfate went to 48¢ a pound, with a second rise at
58¢. In short, the Phibro draft was much more favorable to Heritage than the Heritage proposal had been.
At some point during the negotiations, the lawyer for Heritage asked his client if the $ 0.1 figure was
accurate. The Heritage officer said that the increase in this amount was meant to be payment for other
provisions that favored Phibro. There is no evidence that this statement was true. The contract went
through eight drafts and numerous changes but, after the Crown Room meeting, the two sides never again
discussed the $0.1 figure.
After the execution of the agreement, Heritage discovered a different mistake. When Heritage brought the
error to Phibro’s attention, Phibro agreed to make the change even though it was to Phibro’s disadvantage
to do so.
All was peaceful until the price of copper sulfate went to $ 0.478 per pound. Phibro believed that,
because the price was above $.38 per pound, it was entitled to an increased payment. Heritage responded
that the increase would not occur until the price went above $.48. Phibro then looked at the agreement and
for the first time noticed the $ 0.1 term. Phibro contacted Heritage to say that the $ 0.1 term was a typo
and not what the two parties had originally agreed in the Delta Crown Room. Heritage refused to amend
the agreement and Phibro filed suit.
You Be the Judge: Should the court enforce the contract as written or as the parties agreed in their Crown
Room meeting? Which number is correct -- $.10 or $.01?
Argument for Phibro: In the Delta Crown Room, the two negotiators agreed to a $15 per ton increase in
the price of TBCC for each 1¢ increase in copper sulfate price. Then by mistake, the contract said 10¢.
The two parties never negotiated the 10¢ provision and there is no evidence that they had agreed to it. The
court should revise this contract to be consistent with the parties’ agreement, which was 1¢.
Also, the 10¢ figure makes no economic sense. The point of the provision was that TBCC went up at the
same rate as copper sulfate. One cent for each ton is a much more accurate reflection of the relationship
between these two commodities than 10¢ per ton.
Argument for Heritage: The Delta Crown Room agreement was nothing more than a draft. The contract
went through eight rounds of changes. The change in price was in return for other provisions that
benefited Phibro.
The parties conducted negotiations by sending drafts back and forth, rather than by talking on the phone.
Both parties were represented by a team of lawyers, the agreement went through eight drafts and this
pricing term was never altered despite several other changes and additions. There is no clear and
convincing evidence that both parties were mistaken about what the document actually said. Ultimately
the parties agreed to 10¢ and that is what the court should enforce.
Ethics: When Heritage found a different mistake in the contract, Phibro agreed to correct it, even though
the correction was unfavorable to Phibro. But when a mistake was found in Heritage’s favor, Heritage
refused to correct it. Is Heritage behaving ethically? Does Heritage have an obligation to treat Phibro as
well as Phibro behaved towards Heritage? Is it right to take advantage of other people’s mistakes? What
principles would you apply in this situation?
Holding: the Court finds in favor of the plaintiff, Heritage Technolgies, L.L.C. The court declares that
the term means a dime, $0.10.
Preventing Mistakes
Before signing a contract, check carefully and thoughtfully the names of the parties, the dates, dollar
amounts and interest rates.
Suggested rules for a sensible client:
Complain if your lawyer gives you a contract with provisions that are irrelevant to your situation.
If you do not know what a provision means, ask.
Remember that a contract is also a reference document. During the course of your relationship
with the other party, you may need to refer to the contract regularly.
The Structure of a Contract
Title
Contracts have a title, which generally is in capital letters, underlined and centered at the top of the page,
and should be as descriptive as possible.
Introductory Paragraph
The introductory paragraph includes the date, the names of the parties and the nature of the contract and
should also include specific language indicating that the parties entered into an agreement. Traditional
contracts tended to use archaic words—whereas and heretofore were common. Modern contracts are
more straightforward, without so many linguistic flourishes.
definition
Most contracts have some definitions. Usually, the names of the parties are defined [eg, “Joe Jones
(Seller)”] in the introductory paragraph. Other definitions are included in a separate section or they can
appear throughout the contract.
Covenants
Now we get to the heart of the contract: What are the parties agreeing to do? Failure to perform these
obligations constitutes a breach of the contract and damages will result. A legal term for a promise in a
contract is covenant.
Language of the Covenants
To clarify who exactly is doing what, covenants in a contract should use the active, not passive voice.
For important issues where disputes are likely to arise, the language should be precise, detailed and
complete.
Breach
To constitute a violation of the contract, the breach must be material. A material breach is important
enough to defeat an essential purpose of the contract.
Many of the covenants in a contract provide that the right must be exercised reasonably or theta decision
must be made in good faith. Reasonable means ordinary or usual under the circumstances. Good faith
means an honest effort to meet both the spirit and letter of the contract. A party with sole discretion has
the absolute right to make any decision he wants on that issue.
Dick Broadcasting Co. v. Oak Ridge FM, Inc.
395 S.W.3d 653
Supreme Court of Tennessee, 2013
Facts: Oak Ridge FM, Inc. and Dick Broadcasting Company (DBC) entered into a contract that
gave DBC a right of first refusal to purchase all the assets of Oak Ridge’s radio station
WOKI-FM. The agreement also provided that:
No party may assign its rights, interests or obligations hereunder without the prior written
consent of the other party, and any purported assignment without such consent shall be null and
void and of no legal force or effect
When DBC asked permission to assign its rights to Citadel Broadcasting Company, Oak Ridge
refused because it wanted to make its own deal directly with Citadel
DBC sued Oak Ridge, alleging that it had breached the contract’s implied covenant of good faith
and fair dealing. The trial court dismissed the suit on a motion for summary judgment but the
Court of Appeals overturned that decision. The Supreme Court of Tennessee agreed to hear the
case.
Issues: Is a covenant of good faith and fair dealing implied in this contract? In all contracts?
Excerpts from Justice Lee’s Decision: It is well-established that in Tennessee, the common law
imposes a duty of good faith in the performance of contracts. These decisions are in accord with
section 205 of the Restatement (Second) of Contracts, which provides that “every contract
imposes upon each party a duty of good faith and fair dealing in its performance and its
enforcement. In some cases, the courts have expressed this principle as allowing the qualifying
wordreasonable and its equivalentreasonably to be read into every contract.
The Defendants argue that the trial court was correct in finding that the Right-of-First-Refusal
Agreement was unambiguous and complete and holding that to interpret the contract in
accor
dance with the implied covenant of good faith and fair dealingwould be in effect to add a
new provision to the contract which the parties were free to add themselves.
We disagree. The implied covenant of good faith and fair dealingdoes not create new
contractual rights or obligations, it protects the parties’ reasonable expectations as well as their
right to receive the benefits of their agreement. To avoid the imposition of the implied covenant
of good faith and fair dealing, the parties must explicitly state their intention to do so.
This case reflects the standard in Tennessee and in the Restatement (Second) of
Contracts. Note, however, that about half the states disagree and do not imply a standard of good
faith and fair dealing in contracts.
Question: According to the court, what does the implied covenant of good faith and fair dealing
protect?
Question: How is it possible for approximately half the states to disagree with the Court and not
imply a standard of good faith and fair dealing in contracts?
Question: What was Oak Ridge’s argument?
Answer: That to interpret the contract in accordance with the implied covenant of good faith and
