Environmental Engineering Chapter 12 Deal Memo Required PTI Use Commercially

Chapter 12

PRACTICAL CONTRACTS

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

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

Do You Need a Written Contract?

Some cases work out well without a written contract, but there are times when you should definitely have

a signed written agreement. You should have a signed written agreement when: (1) The Statute of Frauds

The Lawyer

Businesspeople often expect deals to go well. Lawyers are trained to be pessimists. Their primary goal is

to protect their clients by avoiding litigation, now and in the future.

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.

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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.

2 Unit 2 Contracts and the UCC

The Contract

How to Read a Contract

Reading a contract should be a focused, multi-step process, asking yourself “what–if” questions and

determining the answers to those questions.

Mistakes

There are many common mistakes.

Vagueness

Businesspeople sometimes deliberately choose vagueness. They do not want the terms of the contract to

be clear. 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. However, as the

following case illustrates: Vagueness is your enemy.

Case: Quake Construction v. American Airlines.

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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

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

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.

Issue: Was the letter of intent a valid contract?

Excerpts from Justice Calvo’s Decision: [A]lthough letters of intent may be enforceable, such letters are

not necessarily enforceable unless the parties intend them to be.

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141 Ill. 2d 281, 565 N.E.2d 990, 1990 lll. LEXIS 151 Supreme Court of Illinois, 1990

Chapter 12 Practical Contracts 3

agreement contains many or few details, whether the agreement involves a large or small amount of

money, whether the agreement requires a formal writing for the full expression of the covenants, and

whether the negotiations indicated that a formal written document was contemplated at the completion of

the negotiations.

[We conclude that] the letter was ambiguous. The letter of intent included detailed terms of the parties’

agreement. The letter stated that Jones awarded the contract for the project to Quake. The letter stated

further “this notice of award authorizes the work.” Moreover the letter indicated that the work was to

commence approximately 4 to 11 days after the letter was written. This short period of time reveals the

parties intent to be bound by the letter so that work could begin on schedule. We also agree that the

NOTE: The court stated that letters of intent are enforceable only if the parties intend them to be. In

determining the intent of the parties, the following factors are important: is this type of agreement usually

put into writing, how detailed the letter is, how much money is involved, whether the letter indicates that

the parties intended a more formal agreement would follow.

Because the letter of intent in this case was so ambiguous, the appellate court remanded to the trial court

to determine the intent of the parties when they signed the document.

Answer: Yes, if the parties intend so.

Question: What is another type of incomplete bargaining?

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.

Case: Cipriano v. Patrons Mutual Insurance Company of Connecticut

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Facts: Juacikino Cipriano purchased an insurance policy on his house from Patrons Mutual Insurance

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2005 Conn. Super. LEXIS 3577 SUPERIOR COURT OF CONNECTICUT

4 Unit 2 Contracts and the UCC

After Cipriano’s house had been vacant for more than 30 days, an arsonist burned it down. Patrons

denied his claim on the grounds that arson is vandalism, which his policy did not cover. Cipriano filed

suit against Patrons. The insurance company filed a motion for summary judgment.

Issue: Is arson a type of vandalism?

Excerpts from Judge Devine’s Decision: [T]here are no genuine issues of fact that the fire was the result

of arson and that the dwelling house was vacant for more than 30 days prior to the fire. The defendant

laymen contend for different meanings.

In the present case, the defendant has drafted an insurance policy where “vandalism” and “fire” are

undefined terms. Reading the insurance policy as whole, the terms “vandalism” and “fire” are found to be

responsible for its drafting.

ORDER: The defendant’s motion for summary judgment is hereby denied.

Question: What is a preventive measure in negotiating and drafting contracts?

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 Tech

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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

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2008 U.S. Dist. LEXIS 329 United States District Court for the Southern District of Indiana

Chapter 12 Practical Contracts 5

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

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¢.

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.

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.

Question: What does this case teach us?

Preventing Mistakes

Before signing a contract, check carefully and thoughtfully the names of the parties, the dates, dollar

amounts and interest rates.

6 Unit 2 Contracts and the UCC

Suggested rules for a sensible client:

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

straightforward, without so many linguistic flourishes.

Definitions

Most contracts have some definitions. Usually, the names of the parties are defined [eg, “Joe Jones

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

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.

the absolute right to make any decision he wants on that issue.

Case: LeMond Cycling, Inc. v. PTI Holding, Inc.

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Facts: American Greg LeMond won the Tour de France, cycling’s most prestigious race. Sports

• use commercially reasonable efforts to produce and market LeMond bicycle accessories

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2005 U.S. Dist. LEXIS 742 US DISTRICT COURT FOR THE DISTRICT OF MINNESOTA

Chapter 12 Practical Contracts 7

• keep LCI apprised of PTI’s efforts, including information about marketing and media plans

PTI tried to sell LeMond products to Target, Walmart and Toys R Us. Only Target was interested and

then only in a minor way. It agreed to allocate just six feet of shelf space to LeMond products. It also

rejected PTI’s proposal to install a video kiosk that featured LeMond. PTI did not tell LCI about this deal.

LeMond accessories sold poorly at Target. PTI itself did not do any promotional activities or advertising

LCI filed suit against PTI for breach of contract. In response, PTI filed a motion for summary judgment,

seeking to have the suit dismissed.

Issue: Did PTI breach its contract with LCI?

Excerpts from Judge Magnuson’s Decision: To prevail on a breach of contract claim, LCI must prove

that PTI breached a material term of the contract. A material breach goes to the root or essence of the

contract, and is so fundamental to the contract that the failure to perform that obligation defeats an

essential purpose of the contract. Even when express conditions of the contract are violated, the breach is

not necessarily material.

The Deal Memo fails to define commercially reasonable. LCI is convinced that commercially reasonable

requires an examination of customary practices within the licensing industry. LCI‘s broad argument that

only industry standards are relevant to the commercial reasonableness determination is unpersuasive.

Although an objective component is instructive as to whether or not PTI acted with commercial

reasonableness, there must be a subjective evaluation as well. No business would agree to perform to its

detriment, and therefore whether or not PTI performed with commercial reasonableness also depends on

the financial resources, business expertise, and practices of PTI.

Order. Question: The court denied what part of the motion?

8 Unit 2 Contracts and the UCC

Question: What action by PTI could be considered bad faith?

Reciprocal Promises and Conditions. A contract may provide a list of what each party promises to do.

In this format, each party is responsible for performance whether or not the other party breaches. These

Representations and Warranties

some other specific, designated time)

.

Exam Strategy

Question: Producer does not want Artist to pilot an airplane during the term of the contract. Would that

provision be a warranty and representation or a covenant? How would you phrase it?

Strategy: Warranties and representations are about events in the past or present. A covenant is a promise

Boilerplate

These standard previsions are typically placed in a section entitled Miscellaneous; they play an important

protective role. In essence, boilerplate creates a private law that governs disputes between the parties.

Choice of Law and Forum. Choice of law provisions determine which state’s laws will be used to

interpret the contract. Choice of forum determines the state in which any litigation would take place. (One

state’s courts can apply another state’s laws.)

Modification. Contracts should contain a provision governing modification.

If a contract has a provision requiring that amendments be in writing, there are three ways to amend it:

• Signing an amendment (or rider)

Assignment of Rights and Delegation of Duties. An assignment of rights is a transfer of your benefits

under a contract to another person, while delegation of duties is a transfer of your obligations.

Chapter 12 Practical Contracts 9

Arbitration. Some contracts prohibit the parties from suing in court, and require that disputes be settled

by an arbitrator. Arbitration has its advantages – flexibility and savings in time and money. It also has

downsides.

Attorney’s fees. As a general rule, parties to a contract must pay their own legal fees, no matter who is in

Integration. During contract negotiations, the parties may discuss many ideas that are not ultimately

Exam Strategy

Question: Daniel and Annie signed a contract providing that Annie would sell craft beers to Daniel’s

Strategy: If a contract has an integration provision, then side agreements made during negotiations are

unenforceable unless included in the written contract. Without a modification provision, oral agreements

made after the contract was signed may be enforceable.

Severability. If, for whatever reason, some part of the contract turns out to be unenforceable, a

severability provision asks the court simply to delete the offending clause and enforce the rest of the

contract.

Force Majeure. A force majeure event is a disruptive, unexpected occurrence for which neither party is to

blame that prevents one or both parties from complying with the contract. Force majeure events typically

include war, terrorist attack, fire, flood or general Act of God.

Additional Note: Force Majeure Clauses

You are an executive vice-president of StikM, a company that manufactures various adhesive

You are negotiating with ToxIck for a three-year requirements contract for Apocryphonium.

Question: First, a refresher: what is a requirements contract?

Answer: In a requirements contract, the buyer (StikM) agrees to purchase 100 percent of its needs for a

10 Unit 2 Contracts and the UCC

You are able to agree with ToxIck on most of the important contract terms, including the quantities that

you expect to require, the price ToxIck will charge, and delivery times. Then ToxIck requests a force

majeure clause, excusing the company from performing its contract obligations in the event of “acts of

God, fire, labor disputes, accidents, or transportation difficulties.”

Question: What problems might this force majeure clause cause you?

Answer: Its language is quite broad. Although such open-ended clauses are very common, you may

Question: What steps can one take to protect against nonperformance based on force majeure?

Answer: Attempt to pass through the risk in contracts with your own buyers with a clause that

Notices. After a contract is signed, there may be times when the parties want to send each other official

notices – of a breach, an objection, or an approval, for example. In this section, the parties list the

addresses where these notices can be sent.

Closing. To indicate that the parties have agreed to the terms of the contract, they must sign it. A simple

Title:

Multiple Choice Questions

1. In the Quake case, the appellate court ruled:

(a) The Letter of Intent was a valid contract.

(b) Letters of Intent are never a valid contract.

(c) A Letter of Intent can be a valid contract, but this one was not.

(d) The trial court had to determine if the Letter of Intent was a valid contract.

2. In the Cipriano case:

(a) The jury decided in favor of Cipriano because arson is vandalism.

Chapter 12 Practical Contracts 11

(b) The jury decided against Cipriano because arson is not vandalism.

(c) The judge dismissed the motion for summary judgment because the contract was ambiguous.

(d) The judge granted the motion for summary judgment because the contract was not ambiguous.

3. In the case of a scrivener’s error:

(a) A court will not reform the contract. The parties must live with the document they signed.

(b) A court will reform the contract if there is clear and convincing evidence that the clause in

question does not reflect the true intent of the parties.

(c) A court will reform the contract if a preponderance of the evidence indicates that that the clause

in question does not reflect the true intent of the parties.

(d) A court will invalidate the contract in its entirety.

4. In the LeMond case, the court ruled:

(a) PTI’s failure to supply marketing and media plans was a material breach of the contract because,

without those plans, LCI could not monitor sales.

(b) PTI’s failure to supply marketing and media plans was a material breach of the contract because

PTI had agreed to supply the plans.

(c) The requirement that PTI use commercially reasonable means to promote the Product Line was

not enforceable because the term was ambiguous.

(d) PTI’s failure to supply marketing and media plans was not a material breach of the contract.

5. A contract states (1) that Buzz Co. legally exists and (2) will provide 2,000 lbs. of wild salmon each

week.

(a) Clause 1 is a covenant and Clause 2 is a representation.

(b) Clause 1 is a representation and Clause 2 is a covenant.

(c) Both clauses are representations.

(d) Both clauses are covenants.

Essay Questions

1. List three types of contracts that should definitely be in writing. and one that probably does not need

to be.

Answer: Should be in writing: The sale of stock, a merger agreement, the sale of land, anything that

2. Make a list of provisions that you would expect in an employment contract.

12 Unit 2 Contracts and the UCC

Answer: Duties, Status (job title), period of employment, full-time and energy, compensation – fixed

3. List three provisions in a contract that would be material and three that would not be.

4. Slimline and Distributor signed a contract providing that Distributor would use reasonable efforts to

promote and sell Slimline’s diet drink. Slimline was already being sold in Warehouse Club. After the

contract was signed, Distributor stopped conducting in-store demos of Slimline. It did not repackage

the product as Slimline and Warehouse requested. Sales of Slimline continued to increase during the

term of the contract. Slimline sued Distributor, alleging a violation of the agreement. Who should

win?

5. You Be the Judge: WRITING PROBLEM Chip bought an insurance policy on his house

from Insurance Co. The policy covered damage from fire but explicitly excluded coverage for harm

caused “by or through an earthquake.” When an earthquake struck, Chip’s house suffered no fire

damage but the earthquake caused a building some blocks away to catch on fire. That fire ultimately

spread to Chip’s house, burning it down. Is Insurance Co. liable to Chip? Argument for Insurance

Co.: The policy could not have been clearer or more explicit. If there had been no earthquake, Chip’s

house would still be standing. The policy does not cover his loss. Argument for Chip: His house was

not damaged by an earthquake, it burned down. The policy covered fire damage. If a contract is

ambiguous, it must be interpreted against the drafter of the contract.

against the drafter – in this case Insurance Co.

Discussion Questions

1. In the movie contract, which side was the more successful negotiator? Can you think of any terms

that either party left out? Are any of the provisions unreasonable?

2. What are the advantages and disadvantages of hiring a lawyer to draft or review a contract?

Answer: Advantages: Lawyers understand the law. They can protect you against unexpected events in

3. What are the penalties if Artist breaches the movie contract?

Chapter 12 Practical Contracts 13

Answer: Producer does not have to pay Artist any further compensation but Artist gets to keep what

4. ETHICS In the Heritage case, the two companies had agreed to a price change of $0.01. When

Heritage’s lawyer pointed out to his client the change to $0.10, the Heritage officer did not tell

Phibro. The change was subtle in appearance but important in its financial impact. Was Heritage’s

behavior ethical? When the opposing side makes a mistake in a contract, do you have an ethical

obligation to tell them? What Life Principles would you apply in this situation?

5. Blair Co.’s top officers approached an investment bank to find a buyer for the company. The Bank

sent an engagement letter to Blair with the following language:

If, within 24 months after the termination of this agreement, Blair is bought by anyone with whom

Bank has had substantial discussions about such a sale, Blair must pay Bank its full fee.

Is there any problem with the drafting of this provision? What could be done to clarify the language?