A Practical Approach to Contract Review and Negotiations

A Practical Approach to Contract Review and Negotiations
Contract Law Basics A Practical Approach to Contract Review and Negotiations

Three Parts of The Presentation
Practical Educational Legal

Critical Basics to Remember
The Practical Critical Basics to Remember

Communication & Common Sense
The stuff lawyers make confusing and corporations hope you don’t have!

RULE NUMBER ONE Read each contract completely, ask questions and utilize additional resources if you need answers

Critical Basics to Remember
Who is the most commonly utilized resource that should NEVER be a resource unless all facts are verified?

Your well trained sales advisor.

Contract “Sign On” Bonus
The customer signs on and the vendor gets the bonus. Close the deal based on the needs of the hospital, not the sales promotion timetable of the needs of the sales person’s wallet.

Important Resources Corporate Compliance Officer Risk Manager
JCAHO Team Leader Subject Expert Hospital Attorney Outside Review

Contract Review Considerations
Include hospital terms and conditions as an addendum to the vendors contract. It MUST be stated that hospital terms and conditions SUPERSCEDE vendor terms and conditions. Have an “authorized agent” of the company sign the hospital purchase order.

BEWARE of the third party confidentially clause. NEVER sign away the right for third party review!!!!!!!!!!!!!!!!!!!!!!!

Address automatic contract renewal, sometimes known as “Ever Green” clause. Review state law jurisdiction. Consider meditation clauses. Use historical data for volume commitment contracts & project conservatively.

Create a Negotiation Plan
To negotiate the sky is the limit, but understand your essential needs. Utilize a subject expert. Set your time line, the best deal is the next one! Know when to “close”.

Items to Negotiate Extended Payment Terms or Discounted Quick Pay.
Late Payment Terms, be very wary of % of sale! Buy out terms. Taxes and other fees. Freight, fuel charges, hazmat fees, if applicable. Price Increases.

Writing Your Addendum Clearly define expectations in writing.
Craft your language clearly and easy to understand. The courts normally support the clearest definition of intent. GET THE LAST WORD IN!

The 800 pound guerilla theory
Corporate attorneys write one sided agreements, look for balance. Who has the bigger legal resources? Leverage Resources. Bring your own guerilla!

The Educational Suggested Resources and Practical Advice, Four Books to Read to Help Win with Contracting & Personal Life

How to Negotiate Without Giving In
Getting to Yes How to Negotiate Without Giving In

What They Didn’t Teach You at Harvard Business School
I don’t know I need help I’m sorry

The Four Agreements, A Practical Guide To Personal Freedom
Assume nothing. Be true to your word. Always do your best. Don’t take anything personal.

Continue to grow and refine your skill set!
Repacking Your Bags Continue to grow and refine your skill set!

Stuff Written by a Real Attorney
The Legal Stuff Written by a Real Attorney

I. What Is a Contract? Some concepts:
A contract is an agreement between parties to perform or not perform certain acts in the future, the conduct is of a kind that the parties intend to be legally binding, and the agreement is such that a court may measure the loss suffered as a result of a breach. A contract is a promissory agreement between two or more persons that creates, modifies, or destroys a legal relation. A contract is an agreement upon sufficient consideration to do or not to do a particular thing. In order to be a contract, the promise made must be sufficiently definite “to justify a promisee in understanding that a commitment has been made.” Restatement (Second) of Contract § 2.

I. What Is a Contract? Historically, the concept involved promises to be kept -- pacta sunt servando -- “That every man kept his given word”. The concept is at least as old as the covenant between Israel and God . The concept of “social contract” is the basis of the Constitution -- government by the mutual consent of the governed. The principles of justice supporting the basic structure of society (i) are the object of the original agreement which formed the government, (ii) regulate all further agreements and (iii) specify the forms of government that can be established. J. Rawls, A Theory of Justice 11 (1971). Early American jurisprudence regarded contract rights as a natural product of the immutable principles that preceded human law.

I. What Is a Contract? C. Requirements for a contract:
Promise: A commitment that something will or will not be done in the future. It must be definite enough to qualify as a promissory. Exchange: Something of value (“consideration”) is exchanged between the parties. Enforcement: The parties intend to be bound. Failure to abide by the promise results in legal sanctions.

I. What Is a Contract? Sometimes “contract” is thought only to be the writing between the parties. The writing itself is not the contract. Certain types of contracts must be evidenced by a writing, but other contracts that are evidenced by oral communications or conduct may be enforceable. A contract is an “abstract legal relationship between the parties.” J. E. Murray, Jr., Contracts: Cases and Materials, 5.

I. What Is a Contract? Importantly, a contract is whatever the court says it is. Case law has modified, elaborated, refined and expanded general common law principles and has construed and interpreted statutory requirements. Legal research may find case law that will determine the applicability of these basic concepts to any given situation Promise: A commitment that something will or will not be done in the future. It must be definite enough to qualify as a promissory. 1. An “implied contract” or “quasi-contract” is an obligation imposed by law for the purpose of bringing about justice and equity, without reference to the parties’ intention. Although it is not a contract, it is treated as a contract. Restitution and unjust enrichment are two important principles: a person who has been unjustly enriched at the expense of another is required to make restitution to the other.

II. Promise: Offer and Acceptance
An offer is a promise to perform, conditional on receiving acceptance. 1. Sometime there is “lack of mutuality”: one party may have made no promise at all or made a promise that will permit that party to decline to perform. In this case, the contract is “illusory” because one party is not under any obligation at all.

An advertisement is usually not considered to be an offer. Consider the problems with mass advertising if each flyer were considered to be an offer. Advertisements are seen as invitations for the buyer to submit an offer.

A price quote could be an offer or may be viewed as “inviting an offer rather than as making one.” Restatement on Contracts (Second) § 26, comment (c). The seller quotes a price or bid for a product, and the buyer notifies the seller that it wants the product. This may be seen as an invitation to make an offer (seller) and the offer (the buyer). But, if the seller started supplying the product, and then increased its price, the buyer may be able to argue that there was a valid contract, as evidenced by the seller’s conduct.

Acceptance: may be made verbally, in writing, or it may be inferred from silence or conduct.

To be enforceable, the promise must be definite.

An offer may be revoked before acceptance, unless it is a firm offer, under the Uniform Commercial Code, § [1]: An offer by a merchant to buy or sell goods in a signed writing 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 term of assurance on a form supplied by the offeree must be separately signed by the offeror. [1] In Virginia, Article 2, the Uniform Commercial Code, codified at Title 8.2 of the Code of Virginia, governs contracts for the sale of goods. This Article will be referenced throughout this presentation as UCC § 8.2-xxx.

Example 1: “This offer will remain open for six months from the date of this letter. Sincerely, X” (The statute permits a firm offer to be open for just three months.) Example 2: “We can offer you this product at $100. This is a firm offer. Sincerely, X”(This offer will remain open for three months.) Example 3: “We offer you this product at $100. Sincerely, X” (This is not a firm offer).

Acceptance may be evidenced by a party’s conduct

III. “Mirror Image Rule” and the “Battle of the Forms”
Under the common law “Mirror Image Rule”, the acceptance has to be exactly the same as the offer or there was no contract. A party’s reply changing or adding terms not in the offer constitutes a counteroffer .

This results in the “Battle of the Forms”. The Mirror Image Rule, in transactions involving goods between merchants, has been modified by the Uniform Commercial Code (“UCC”) § : § Additional terms in acceptance or confirmation

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties, which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this act.

Pursuant to UCC § , "Merchant" means 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. “Between merchants” means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

UCC § was designed to regulate the conduct whereby each party sent back preprinted forms with different terms. Now, the mere presence of additional terms in one of the parties’ forms will not prevent the formation of the contract. If no contract is recognized, under (1), then the transaction is nullified. If performance by both parties evidences the intent to be bound by a contract, then under 2-207(3), the conduct is sufficient to establish a contract.

If there is a contract, the terms are those upon which the parties agree and any additional ones supplemented by the UCC. Example: One party’s “acceptance” had arbitration terms. The parties did not agree to arbitration inasmuch as the forms did not match. But both parties performed. There was a breach. Is arbitration required? Since there was no agreement as to the arbitration terms, the question is whether the UCC allows the parties to supplement that term under some other UCC provision. Some courts have held that the only supplemental terms that are allowed are those that are the “gap filler” provisions in Article 2, such as place of delivery (UCC § ) time for shipment (UCC § ) time payment is due (UCC § ) Other courts may allow a reasonable price term to be substituted, under UCC § if there was no agreement as to price.

The italics in the statute above clarifies that when an acceptance (absent conditional language in the acceptance) adds additional terms, those additional terms become part of the contract unless the terms listed in 2 (a)-(c) apply. Under section 2, the additional terms proposed by the buyer are deemed to be proposals for new terms to the contract.

If the acceptance of the additional terms is required for a contract to be formed, then a party can prevent the other’s terms from prevailing, but there is no contract. Look for the following wording to see whether additional terms constitute a counteroffer as contemplated by section (1): Examples: “Acceptance of this offer must be made on the exact terms set forth herein. If additional terms are proposed, these terms will constitute a counteroffer, and no contract will be formed without offeror’s assent to the counteroffer.” “This response supersedes any conflicting written or verbal terms of purchase.”

If there are differences in the terms, and the parties have performed, look to subsection (3) of the statute. The contract consists of the terms that match and any that may be supplemented by the UCC default provisions. Example: UCC § provides that if there is no price term, the contract would be for a reasonable price for the product.

Section is inadequately drafted. Frequently, there are two alternatives, but the statute only addresses one. 1. An acceptance containing additional terms may be a valid acceptance if it is “definite”. If the terms are substantially different (price, description of goods, quantity) is it definite? 2. What if the acceptance states that the agreement is subject to the conditions printed on the reverse side of “this form”? Is that a conditional acceptance? 3. Section (3) controls a contract established by conduct. This could be a problem for the offeror because the UCC may establish terms more favorable to the offeree. The UCC warranty terms, for example, are probably more favorable to the buyer.

4. What is an “additional” term? Is it the same as a “different” term? a. Not necessarily. b. The courts are split, but the better view is that documentation containing significantly different material terms is not an acceptance, but beware. Each party should ensure that the party’s intentions are clear. Consider the following language: “Acceptance. Acceptance of this offer must be made on its exact terms and if additional or different terms are proposed by Seller, its response will constitute a counteroffer, and no contract will come into existence without offeror’s assent to the counteroffer.”

Make sure that the material terms match. Generally, price, quantity, date of delivery, payment terms are material, but each contract is fact-specific. If it’s important, make sure the term is expressly written in the final agreement, or restated as a condition to the contract in the acceptance.

As a buyer, if you have a PO or a RFP that has terms that are essential and material, make the PO or the RFP part of the final contract. You can do this by stating: “The Purchase Order (or RFP) of (date) is incorporated herein by reference and is made a part of this Agreement as if set forth and restated herein.”

IV. Intention to be Bound
Many parties fail to adequately express their intention to enter into a contract and to be so bound. Sometimes a party does not intend that its offer be accepted without further negotiation. If so, the offeror should make this clear by indicating that the “offer” is only an invitation to negotiate.

Frequently, the parties carelessly draft a “letter of intent” that turns out to be a “letter agreement”-- even though the parties fully intended that further drafting/negotiation follow. The following type of language should be included in a letter of intent: “In order to be enforceable, the parties must enter into a written agreement signed by both parties.” “Among the conditions of closing the contemplated transaction, is the execution of a definitive agreement containing appropriate representations and warranties and requisite corporate approvals.”

Under the common law parties who “agree to agree” at a later date did not have a contract. Under the UCC, however, parties may contract for the sale of goods by leaving terms open, according to UCC § (3): § Formation in general. 1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

V. Consideration A contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

V. Consideration Consideration is what a party receives in exchange for his consideration or his promise. 1. It may be an act, a forbearance, or the creation, modification or destruction of a legal relation (e.g. a separation agreement between spouses). a. Mutual promises can be consideration. Look at each contract to determine consideration on both sides. b. It’s okay if the number of exchanges are not “equal” or the consideration is not equivalent. c But the consideration has to be adequate.

V. Consideration Without consideration, a promise to perform is a “gift promise” and is not enforceable. Example: Although I promise to give you half my house, without consideration or an exchange to me on your part, this is an unenforceable gift promise.

VI. Parol Evidence It is important that the parties are able to rely on the expression of their intent as stated in the written contract or, in the case of an oral contract, in their verbal expression. 1. It is wrong, however, to have a partially written and a partially verbal agreement if the contract is intended, or appears to be intended, to be entirely in writing.

VI. Parol Evidence The “Parol Evidence Rule”: When the parties to a contract embody their agreement in a writing, and intend that the writing is the final expression of their agreement, the terms of the writing may not be contradicted by evidence of a prior agreement. 1. Example: The parties had an agreement. Subsequently, there was another agreement. A party argues that the second agreement was intended to be the final and complete expression of the parties’ intention, replacing the first agreement. A court would decide the question of fact: Did the parties intend the second agreement to be the final, complete (“integrated”) agreement, or did they intend that the terms of both agreements be operative? a. Extrinsic (outside the 4-corners of the document) or parol (oral) evidence can be used to determine the meaning of their manifestations of intent, or the interpretation of their outward manifestations. b. Extrinsic or parol evidence cannot be offered to vary, add to, or contradict the terms of a written agreement.

VI. Parol Evidence The parol evidence rule applies to prior or contemporaneous agreements and does not have any application to subsequent modifications. The parties are free to modify contracts. 1. UCC § (1) allows good faith modifications to be effective without additional consideration. 2. Frequently, the parties have agreed that oral modifications are not permitted. An example of this “private statute of frauds” is: “All changes or modifications of this Agreement shall be in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought.”

VII. Merger Clauses Merger clauses (a/k/a “integration clauses” or “zipper clauses”) are contract clauses that read substantially as follows: 1. “This Agreement contains the whole agreement between the Seller and Buyer and there are no other terms, obligations, covenants, representations, statements or conditions, oral or otherwise of any kind whatsoever”; or 2. “This Agreement sets forth the entire understanding between the parties hereto and supersedes all other prior agreements between the parties with respect to the subject matter hereof. Each party acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, that are not embodied in this Agreement, and that no other agreement or promise not contained in this Agreement shall be valid or binding as between Company and Client.”

VII. Merger Clauses Merger clauses are usually interpreted to determine that the agreement is completely integrated. There is, however, minority opinion refusing to give such clauses exclusionary effect, if the clause is not negotiated and on a preprinted form.

VIII. Contract Interpretation
Some principles of contract construction 1. Purpose of the parties. Make it clear what the purpose of the contract is, and the purpose the parties intended to effect. 2. The contract should be construed as a whole. Courts favor interpretations that make sense when the contract is viewed as a whole. 3. The contract speaks for itself”. This traditional view considers that the contract says what it means, not what the parties say it means. A more modern view is: 4. The contract should be viewed in context.” The contract is part of the entire situation, the entire context or environment, all of which can be used to interpret the contract.

5. Expressio Unius Est Exclusio Alterius. (The inclusion of one is the exclusion of all others). If a clause in a contract lists specific items, other items not included will probably be excluded. a. Use of the wording “including but not limited to” makes it clear that any list of particulars/specifics is not inclusive. 6. The contract is construed against the party drafting it. The drafter is disadvantaged when courts consider the meaning of contractual terms, interpreting the terms in favor of the non-drafting party. 7. The reasonable, lawful meaning will be chosen over the unreasonable, farfetched or unlawful meaning. The interpretation supporting public policy arguments will be favored. 8. Ejusdem Generis. (“Of the same kind.”) If general contract language is followed by specific items, the general language will be limited in kind or classification to the enumerated specific terms. Specific controls the general.

9. A word or phrase used twice will be interpreted the same way for each usage. 10. Handwritten terms are favored over typed; typed are favored over printed; separately negotiated terms will be favored over preprinted forms. 11. The parties are presumed to have read the contract, all of it, even the small print on the reverse of the forms. 12. Conjunctive and Disjunctive. “And” can be used in a “several” sense (Dogs and Cats, either separately or together) or in a “joint” sense (Dogs and Cats, together only). “Or” may be inclusive (Dogs or Cats, or both), but sometimes it is used in an exclusive sense. (Dogs or Cats, but not both together). Be aware of the ambiguity and rewrite.

If you want to: Use this language: Create a right “entitled to” Create a requirement or duty “shall” Create a discretionary choice or to indicate a exercise of a right “may” Create a condition precedent “must”

IX. Oral or Written? An oral contract or a contract evidenced by conduct may be perfectly enforceable if the other essentials for contract formation exist. Under English law, law, however, certain exceptions were created by the State of Frauds, in 1677 and to a large extent apply today. The following contracts, among others, should be evidenced by a writing: Promise to marry (e.g. prenuptial agreements) Contract which cannot be performed within a year Contracts for the sale of land, or interest in land Contracts or promises made by an executor Sale of goods worth over $500 (UCC § ): Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker

X. Breach Disputes arising out of contracts for the sale of goods can be very complex. Proper analysis requires detailed knowledge of the UCC, Article 2. Here are some of the UCC statutes implicated by disputes (failure to perform; supply of defective goods) in the sale of goods. Be careful and seek legal counsel when disputes arise. Rejection of nonconforming goods: UCC § Anticipatory Repudiation: UCC § Retraction of Anticipatory Repudication: UCC § Right to Cure: UCC § Liquidated Damages: UCC § (1) Buyer’s Remedies: UCC § Right to “cover”: UCC § Seller’s Remedies: UCC §

XI. Indemnification Indemnify means “to save harmless; to secure against loss or damage; to give security for the reimbursement of a person in case of any anticipated loss falling upon him.” An indemnification clause in a contract is like a private insurance policy: one party (the indemnitor) promises to pay the damages, and sometimes, the legal expenses, of the other party (the indemnitee), arising out of the contractual relationship or transaction. The indemnification clause usually covers claims by third-parties.

XI. Indemnification Under what circumstance does the indemnitor have to pay? It depends on the language in the indemnification clause: 1. The indemnitor may be obligated to pay if the indemnitee is simply sued as a result of the transaction. 2. Sometimes it’s an absolute requirement to pay “all claims”, period: “The customer agrees to defend, indemnify and hold harmless XYZ Container Corporation from and against any and all claims for loss or damage to property, or injury to or death of person or persons resulting from or arising in any manner out of customer’s use, operation or possession of the equipment furnished under the Agreement.” Sometimes the indemnification provision is triggered if negligence is claimed; sometimes, the indemnification is triggered if the lawsuit is premised on the indemnitor’s intentional or reckless conduct. Or, depending on the language, the obligation is triggered if the legal action is successful.

XI. Indemnification 3. If the indemnification provision has the requirement “to defend”, it usually means the indemnitor has to pay the legal costs of the other party, but frequently may be able to chose the indemnitee’s legal counsel. 4. Frequently, the indemnification clause is written so it is triggered only if the claims have been successful.

XII. Warranty The UCC has transformed the law of warranties with respect to the sale of goods. UCC § , -314, -315. The express warranty is a warranty crated by a promise or affirmation of fact by the seller in relation to some quality or feature of the goods which are the subject matter of the sale of goods. UCC § (1)(a) 1. Trade usage, course of dealing or course of performance may affecct the interpreation. 2. Express warranties may be created by model or sample; oral or written representations of fact; plans or blueprints; technical specifications; reference to official standards; products supplied in the past. 3. Mere expression of opinion (“puffing”) is not a warranty.

XII. Warranty The implied warranty of merchantability” is the basic quality of goods that the buyer is entitled to receive -- goods fit for the ordinary purposes of such goods. The buyer may not be entitled to perfect goods, but those which a reasonable buyer would normally expect to receive. UCC § (2)(c) The implied warranty of fitness for a particular purpose” applies when the seller has reason to know of a particular purpose which the buyer expects the goods to fulfill. The seller may also know that the buyer is relying on his particular judgment and expertise and skill in supplying these goods.

XII. Warranty Disclaimers 1. Express warranties a. “Seller warrants that the goods are as described in this agreement, but no other warranty is made.’ b. “There are no express warranties.” 2. Specific or general disclaimer to disclaim implied warranties a. UCC §§ (2) or (3) b. “As Is” c. “Conspicuousness” requirement of UCC

A Practical Approach to Contract Review and Negotiations

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