Contract Law Basics and Tips

typesetting

Some people prefer one space after the period at the end of a sentence. Some prefer two. I’m a one-spacer myself.

After I read this Slate article written by Farhad Manjoo strongly supporting one-spacing a few years ago, I posted One Space, Two Spaces…Potato, Potahto? In the piece I noted that the AP Stylebook, Chicago Manual of Style, and MLA Style Manual all recommend using one space after terminal punctuation marks. I also explained my understanding of the evolution of spacing conventions:
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document comparisonIt’s important not to lose control when you’re negotiating a contract. I’m not talking about losing your cool, but staying on top of contract versions. Here’s an example from my professional youth:

I was negotiating a contract for a large company during my first or second year of practice. There was a lot of back and forth between the lawyer on the other side and me with contract drafts being sent both ways over a period of weeks. Suddenly, I realized that I’d completely lost track of which draft was current and that I’d made revisions to the wrong draft some point along the way, creating a confusing mash-up of old, intermediate, and new contract language. I had to call opposing counsel for help — a bit embarrassing, to be sure.

Documents, documents, everywhere

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It’s not unusual for parties to a contract to want the written agreement to cover a period before it’s actually signed. There are any number of contexts where this comes up — some legitimate and others not exactly aboveboard — but the logistics of negotiating and signing contracts are such that the issue is unavoidable. (Jason Mark Anderman illustrates the logistics problem well in this comment to a backdating post on Ken Adams’s blog.)

There’s nothing inherently illegal or unethical about backdating contracts, although backdating can certainly be both unethical and illegal, depending on the situation. For those with an hour to kill thinking about the issues, Jeffrey Kwall and Stuart Duhl wrote an excellent article on backdating that was published in Business Lawyer in 2008. For a shorter piece with a few practical tips see Backdating – it’s illegal isn’t it?

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When people enter into a contract, everything changes. Before the contract is formed, people can change their minds. They can walk away from negotiations, ask for a higher price, or decide to do business with someone else. After the contract is formed, they have to do what they promised.

Contracts are promises that courts will enforce, but courts won’t get involved for just any promise. Courts require that the parties intend to be bound by their promises at the time of their contracting. And they require contracts to be a two-way street. That’s where consideration comes in. Each party has to bring something to the table.

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Signing contracts correctly is important, not just as a matter of dotting i‘s and crossing t‘s. How a contract is signed can affect whether it’s enforceable and who’s on the hook. Here’s a basic “how-to” on signing contracts.

The correct legal persons should sign the contract

Only legal persons are parties to contracts. Legal persons can be humans (which are legally known as “individuals”) or corporations, limited liability companies, and other entities. As a general rule, if an entity wasn’t formed by filing a document with the Secretary of State, individuals are going to be on the hook for its contracts.

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If your friend invites you to a dinner party, but no one’s home when you arrive, can you sue for breach of contract? Of course being so litigious could harm your social life, but could you prevail? Probably not.

Dinner invitations involve the basic elements of contract formation — there’s an offer, acceptance, and arguably consideration — but something critical is missing: the intent to be bound by the agreement. According to Calamari and Perillo (The Law of Contracts § 2.4), “if, from the statements or conduct of the parties or the surrounding circumstances, it appears that the parties do not intend to be bound or do not intend legal consequences, then, under the great majority of the cases, there is no contract.”

While someone extending a dinner invitation has a social obligation to be around when their guests arrive, social conventions are such that neither snubbed dinner guests nor the absent host would expect legal consequences to follow.

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I recently made a presentation for fellow business lawyers entitled “Contractual Limitations: Why Are You Suing Me When Our Contract Says You Can’t?” (Here’s a copy of my presentation notes.) The answer is that in Missouri contractual provisions that limit the time within which suit may be brought are unenforceable, although, as with many rules, there are exceptions.

It’s common to see contractual limitations provisions in commercial contracts. For example, a contract might state, “No action on this agreement may be brought more than 12 months after it accrues.” As a commercial attorney, I’ve often pushed back on such clauses, arguing that the statute of limitations provides adequate protection against stale claims and that the contractual limitations provision could unfairly trip up my client even when there’s a legitimate claim. But in many cases, the provision isn’t enforceable anyway. [click to continue…]

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I read a fair number of Missouri contracts cases for the blog and to stay abreast of the law, and I’ve noticed that Missouri appellate judges often cite ITT Commercial Finance Corp. v. Mid-American Marine Supply Corp., 854 S.W.2d 371 (Mo. banc 1993), which has been referred to as the bible for summary judgment motions (a Shepard’s search shows it’s been cited over 2,000 times). Missouri Supreme Court Rule 84.04 is also cited frequently (about 1,400 times). References to ITT Commercial Finance Corp. are generally routine and are found in the standard of review section. Citations to Rule 84.04, however, are never good and the judges are often clearly irritated.

Rule 84.04 sets out the requirements for appellate briefs. The rule’s requirements seem simple enough, at least to the untrained eye (I don’t do appellate work), but parties often run afoul of the rule. Generally, the court merely notes the non-compliance, but then moves on with its analysis of the merits of the appeal: “Although Appellant fails to comply with the requirements of Rule 84.04 because … ” Other times, one of the parties is clearly trying to use the rule offensively and the court states something like, “Respondent asserts that Appellant’s brief should be stricken for failure to comply with Rule 84.04. Appellant’s brief will not be stricken because it sufficiently apprises this Court of his points on appeal.”

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The Second Circuit struck down an arbitration provision in an American Express Card Acceptance Agreement, which contained a class action waiver, for the third time Wednesday. I found the case yesterday via a post on Howard Ullman’s My Distribution Law blog.

Probably no case has been more affected by the Supreme Court’s recent arbitration decisions, as the case was sent back down to the appeals court after the Supreme Court’s April 2010 decision in Stolt-Nielsen v. AnimalFeeds and it was revisited again after the Supreme Court’s April 2011 decision in AT&T Mobility v. Concepcion.

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Legal triage is an everyday part of business. It’s rarely anything so dramatic as the action you see on TV hospital dramas, but businesses constantly have to decide which legal issues are critical, which are important, and which can be put off for a while — or even ignored altogether.

I’ve often advised people to give important contracts special attention. That might mean a full-blown negotiation with rooms full of lawyers and business negotiators, bland pastries, and tubs of Red Bull. But sometimes it’s sufficient to have an executive higher on the corporate org chart read the contract closely and consider the pros and cons of its terms.

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