Contracts Introduction PDF

A contract, by one definition, is "a promise that the law will enforce." These legally enforceable promises make up transactional documents under which property and services are exchanged, risks of loss and uncertainty are allocated, and the profits of human enterprise are divided among the interest...

A contract, by one definition, is "a promise that the law will enforce." These legally enforceable promises make up transactional documents under which property and services are exchanged, risks of loss and uncertainty are allocated, and the profits of human enterprise are divided among the interested parties. Contracts are everywhere. There are contracts to buy and sell things like homes, boats, and cars; there are employment contracts, apartment leases, settlement agreements, plea bargains, franchise and distributor agreements, property settlements, partnership agreements, merger agreements, licenses to view sporting events, licenses to view or copy intellectual property like books and movies, and more. The federal and state constitutions are contracts between the citizens and the states. At all levels of our society, contracts define relationships between people, both individual people and artificial juridical persons like corporations and limited liability companies. They specify who shall or may do what, to or for whom, when, and for how long, Contracts can be oral, in writing, or both. When the parties cannot agree on what the contract is or what the contract means, if there is enough at stake, the contract is likely to be the subject of litigation or some alternative form of dispute resolution. In any of these processes, the contract will be defined by those pieces of evidence that the courts or other decision-makers allow to be considered. Sometimes whole swaths of contract terms and other evidence are not considered in rendering the decision-they have been ruled "not to count" in the litigation process because, rightly or wrongly, evidence of their existence is barred by a substantive or procedural rule of law, like the parol evidence rule, Many of the cases that you will read in this book arise from instances where parties or their lawyers did not sufficiently document the parties' deal. In some instances, one party will even deny that a deal was made. In others, their contract did not make provision for a circumstance that later occurred. These contracts ended up in lawsuits. When a lawyer documents an agreement by drafting a contract, the lawyer should be thinking all the way through the possible courses of performance and changes of circumstance that may come to pass. After conceptualizing all of these possible future events, the lawyer should draft the contract making sufficient provision for each of them. Contracts are an opportunity to both prevent and plan for future disagreement and litigation. They are said to be "private legislation between the parties" or a set of rules that the parties are free to make up to define their relationship. vi This includes the rules that will define the demise of the relationship. This is the essence of "freedom of contract.” Too often, in the opinions that follow, the court was faced with a contract that has no provision for a particular circumstance. Unsure of what to do or unhappy with the terms of the contract when the unforeseen circumstance comes to pass, the parties fell into disagreement, neither one wanting to shoulder what they consider to be a disproportionate share of the unanticipated burden. Who wants to be told, after all, that one cannot sell one's land to a newly interested party for twice what one agreed to sell it for just the other day? What business is pleased to learn that its contract appears to require it to continue to supply goods at a price that is suddenly below the cost of manufacturing the goods because the price of oil has almost doubled? It is in these circumstances that the parties often turn to litigation to resolve matters for them-matters that they often could have resolved in advance had they had the foresight to allocate the risk of the circumstance they now face. This is one area where transactional lawyers can add value to a deal. These lawyers generally specialize in certain types of deals-real estate, public contracting, or entertainment, for example. Because they have seen many deals in their subject-matter specialty, they are able to foresee and provide for risks that their clients might otherwise miss. By tailoring the contract to address these risks, they present the parties with a solution to the problem if it arises. And they create the fodder for litigation should it come to that. So, contract law is about putting relationships together and defining them, as well as taking them apart or trying to mend or break them. The transactional lawyer is aware of the default rules of law that will apply if the contract does not address the matter and some that may apply even if the drafter tries to vary the rule. The transactional lawyer is planning for what remedies will be available should the deal falter and the parties find themselves on less than pleasant terms in the future. The transactional lawyer is planning, making a record, and providing tools for the litigator and the litigation that may follow. This text features 29 chapters that explore principles of contract law. Each is organized somewhat non-traditionally for a casebook. Although there is much to be said for forcing students to extract the law from raw cases, this is not the norm in practice. Practicing attorneys usually turn first to a statute or secondary source like a treatise to find the rules that apply and then turn to cases to illustrate and understand application of the rule. This is the approach used in this text. In the introductory portion of each chapter, the "black letter law" is discussed. Following this, a number of cases are presented in edited form to illustrate how courts apply these black latter rules. These cases are followed by notes, questions, and vii problems to reinforce the understanding of how particular rules can be applied. Where appropriate, the text contains references to outside materials for further illustration and exploration. The challenge for students of contract law is to be actively engaged in the reading and class discussion of the materials. Judicial opinions are working documents, not entertaining stories or objective reports to be swallowed uncritically. In each case, after understanding the court's presentation of the facts, students should seek to understand what rule or standard the court applied, whether there were any alternate rules or standards that could have been applied, and whether (and, if so, how) it would matter if a different rule or standard had been applied. Beyond that, though, students should also be thinking of how the dispute could have been avoided while the contract was being negotiated and documented. How, if at all, can the legal rule or standard be drafted around or incorporated into a contract? When a lawyer is consulted in the contracting process, there is the opportunity to plan almost every aspect of the relationship or interaction. If the plan--the contract-goes smoothly, there will be no lawsuit and no judicial opinion to read. When things do not go according to plan and a dispute arises, or where there has been a failure to plan, the law steps in with a set of default standards and rules to resolve the dispute. Those rules and standards make up the body of contract law. The rules and standards provide a flexible framework through which to weave the facts that have been created and preserved in order to paint a compelling picture for the decision-maker in later litigation. In practice, transactional lawyers use a knowledge of what these default rules are to draft around them or to harness them to advance their client's interest. When the relationship has broken down and litigation or other dispute resolution processes are in motion, litigators use the substantive law of contracts and the terms of the contract as drafted with the tools of advocacy, again to advance their client's interests. Counsel is well advised, then, to know contract law, apply it to the terms of a contract when planning and acting in a transactional capacity, and to envision the litigation down-side and how the contract is likely to fare in that process. Contracting is an opportunity to plan the parties' relationship-beginning, middle, and end. Note on Supplemental Authorities This book is designed to be used with reference to four bodies of authorities: the Uniform Commercial Code (the "U.C.C."), the Restatement (Second) of Contracts (the "R2d"), the Convention on the International Sale of Goods (the "CISG"), and the UNIDROIT Principles of International Commercial Contracts ("UNIDROIT"). These four sets of rules and viil standards outline the scope of the modern law of contracts for purposes of this text. A. The United States Materials The two sources of United States authority beyond the cases that are presented in this book are the U.C.C. and the R2d. 1. The U.C.C. The U.C.C. is a series of laws drafted by a group of lawyers and legal scholars for the purpose of facilitating commerce by making the laws governing business transactions rational and uniform throughout the United States. It was drafted after the first Restatement of Contracts and before the R2d. The U.C.C. consists of a dozen articles governing various types of business transactions. It has been adopted more or less uniformly in each of the United States. The only articles covered in this book are Articles 1 and 2, which govern the sale of goods. Articles 1 and 2 have been enacted into law by the legislature of all 50 states except Louisiana, which declined to adopt Article 2 explicitly when it adopted the rest of the U.C.C. but which has incorporated many of the same legal principles in its Civil Code. Article 1 consists of general provisions applicable across all the other articles. This includes general rules of statutory construction and interpretation and definitions, which are very important. You may want to read through Article 1 early on in your contracts course to get an idea of what is in there-you can always look it up when you need to use it, if you know it is there. Article 2 is basically a series of statutes setting out rules for contracts for the sale of goods. Article 2 does not provide a rule for all aspects of the sale of goods. In those situations where Article 2 does not provide a contrary rule, the general contracts rules--which are found in a jurisdiction's other statutes or judicial opinions or in the Restatement- apply. Where Article 2 does provide a rule, it usually differs from the common law rule, sometimes in a big way, sometimes only in a very minor way. In some instances, courts in some jurisdictions have changed their general contract law rules so that they follow the Article 2 rule even in cases not involving the sale of goods. Article 2 only applies to contracts for the sale of "goods." Generally, goods are property that is tangible but is not real estate. See U.C.C. § 2- 101. Thus, Article 2 would apply to a contract for the sale of a car but not to a contract for the sale of a house because a house (at least one that is attached to the land) is "real estate" rather than "goods." Article 2 would, however, apply to a contract for the sale of a mobile home not attached to land, ix Article 2 would not apply to a contract for the repair of a car because the repair of a car is a service rather than a sale of goods. This is true even if, as part of the repair job, the mechanic sold the car's owner the parts needed for the repair. In cases involving contracts for a mixture of goods and services, one looks to the predominant purpose of the contract to determine if it is goods or services. If it is the sale of goods with some incidental services, like one for the sale, delivery, and installation of a refrigerator, the U.C.C. applies. If it is a service contract with some incidental goods, like one for servicing an automobile, the U.C.C. does not apply. There is a common misconception that Article 2 only applies to transactions between businesspeople or "merchants," but it is just that, a misconception. Even though the basic purpose of the U.C.C. is to facilitate business transactions, Article 2 applies to all sales of goods. It applies to a law student selling a car to her next-door neighbor just as it applies to General Motors selling a truckload of Chevies to a dealer. Some of the provisions of the U.C.C. are applicable only to "merchants"-a term that is broader than you might expect and is defined in U.C.C. § 2-104--but these special merchant rules are only a small subset of Article 2. The U.C.C. has an Official Comment accompanying each section. In the Official Comment the drafters try to explain the purpose of the section and how it is to work. The Official Comment is not part of the statute. That is, it is not enacted by the legislatures that adopt Article 2 and courts are not required to follow the Official Comment. Nevertheless, where a U.C.C. section applies, courts seldom reach a result contrary to that suggested by the Official Comment. Whenever you read a U.C.C. section, you should also look at the accompanying Official Comment. An important part of the Official Comment is the Definitional Cross References. This part of the comment lists words or phrases used in the section in question that are defined elsewhere in the U.C.C. It's extremely important to check the Definitional Cross References because the U.C.C. often gives ordinary words a technical definition that you would not expect. 2. The R2d ~ The American Law Institute, an organization of law professors, practitioners, and judges formed for the purpose of systematically presenting the state of the law in various fields, produced the Restatement of the Law of Contracts in 1932. The Restatement was intended to help courts by presenting the range and pattern of judicial interpretations on various substantive points of contract law. The Restatement was not intended to be enacted by legislatures as law like the U.C.C. The Institute issued the Restatement (Second) of Contracts in 1979. In this text we largely make reference to the Restatement (Second) of Contracts, or the R2d, rather than the original Restatement. X B. The International Materials The United Nations Convention on Contracts for the International Sale of Goods (the “CISO"), opened for signature April 11, 1980, S. Treaty Doc. No. 9 (1983), 19 I.L.M. 671, reprinted in 15 U.S.C.A. App. at 333 (West 2004), and the UNIDROIT Principles of International Commercial Contracts 2004 are two bodies of contract law principles created with the twin aims of harmonizing the laws of trading nations and producing international rules to govern international commerce. The CISG is a treaty of the United States and is the law of all 50 of the United States by virtue of the Supremacy Clause of the federal Constitution. In contrast, the UNIDROIT principles have not been enacted or adopted by any nation state and lack the force of law unless affirmatively selected as governing by the parties, either in their contract or afterward. Despite appearing to remain largely "under the radar" in American jurisprudence, the CISG and UNIDROIT Principles are important for lawyers to understand and employ in the increasingly international field of law and business. Also, because they differ from the U.C.C. and the R2d, often in subtle ways, they are useful in the study of contract law and legal reasoning. 1. The CISG As a treaty of the United States, the CISG is the law of the land in the United States for contracts that fall within its scope, unless the parties expressly opt out of its application. This is not as easy as it might seem to be. A choice of law provision that merely selects the law of, say, New York is not sufficient to opt out of the CISG-after all, the CISG is the law of New York by way of the Supremacy Clause of the United States Constitution. Provisions that explicitly specify that the CISG does not apply and that affirmatively select other law-say, a chosen state's enactment of the U.C.C.-should be effective to accomplish the opt out. Americans confronting the CISG for the first time may assume that it represents the international version of the U.C.C. This is a mistake. Although there are many similarities, the CISG also has some significant differences from the U.C.C. For example, the two bodies of law have different scopes of applicability. The U.C.C. applies to sales of "goods": all things that are movable at the time of identification to the contract, excluding the monetary purchase price for the goods, investment securities, and causes of action, but including the unborn young of animals, growing crops, and other things attached to land that are to be severed from it. U.C.C. § 2-105. The CISG, on the other hand, applies to contracts of sale of goods between parties whose places of business are in different countries that have adopted the CISG-of which, with some reservations, the United States is one-but does not apply to sales of consumer goods, sales at auction, execution sales and other sales by operation of law, sales of xi investment securities, sales of ships and aircraft, sales of electricity, or sales where the buyer provides the bulk of the raw material for the production of the goods (as in a "turn-key" or "screw-driver" plant operation), CISG Arts. 1 and 2. Unlike the U.C.C., the CISG contains no statute of frauds, requirement of a writing, or parol evidence rule. Compare U.C.C. § 2-201(1) (requiring writing for sales of goods over $500) with CISG Art. 11 ("contract of sale need not be concluded in or evidenced by a writing and is not subject to any other requirement of form"); U.C.C. § 2-202 (parol evidence rule) with CISG Art. 11 (the contract "may be proved by any means, including witnesses"). The "battle of the forms" rules for offer and acceptance deal with similar concepts, but are stated with different initial presumptions and may lead to different results. Compare U.C.C. § 2-207 and CISG Art. 19. The U.C.C. and CISG enunciate different standards for consequential damages. See CISG Art. 74 ("ought" to have foreseen standard). A study in 2016 evaluated data from over 5,000 contracts that referenced the CISG. These contracts were filed with the SEC between 1988 and 2014, and involved the sale of securities between corporations and non-professional investors. In 99% of the contracts, the parties' reference the CISG to exclude it from governing their agreement. This study supports the theory that most U.S. companies rarely select the CISG to govern their agreements. It is possible that some U.S. attorneys who select local state laws to govern their agreement are unaware that this choice might result in the CISG governing their agreement anyway. This, in turn, suggests that most U.S. attorneys are not as familiar with the CISG as they are with their own national sales laws, explaining why these attorneys would advise their clients to exclude the CISG from their agreements. See John F. Coyle, The Role of the CISG in U.S. Contract Practice: An Empiracle Study, U. PA. J. INT'L L., 195 (2016). 2. The UNIDROIT Principles The Principles of International Commercial Contracts drafted by the International Institute for the Unification of Private Law (the "UNIDROIT Principles") make up a portion of the work of UNIDROIT or the "Rome Institute" known as the Uniform Law of International Commerce. The Principles are not law per se but, rather, are closely analogous to the R2d and tend to indicate a consensus opinion about "what the law should be" based in part upon what it is. Thus, they constitute non-binding, persuasive authority that attempts to codify general contract principles across common and civil law jurisdictions. Like the rules of the American Arbitration Association, the UNIDROIT Principles can be contracted for, i.e., the parties may agree that they should apply to the contract to the full extent permitted by the country whose law governs the contract. Unless validly contracted for, the Principles act merely as an interpretative aid for xii litigants and courts faced with matters that are not addressed by positive governing law such as the U.C.C. or CISG. Note on Civil Procedure In most American courts, when an action is instituted by complaint, petition, or other initial filing, a file is created in the court clerk's office. That file is the lawsuit. The parties then prosecute the case, "moving" the court to take actions and make rulings that go into and change the status of the file. A court will generally do little, if anything, on its own to a case (except dismiss it for lack of prosecution), although it may (acting sua sponte) should it choose to do so. The index of the motions, orders, and other documents in the file is called the "docket" in most jurisdictions and is increasingly available on-line for review. { In general, the dispositive motions that the parties can bring-those that may result in a closing of the file or portions of the file by dismissal or entry of judgment-proceed from the broad to the narrow. In other words, at the outset of a case, the first motions, like a motion to dismiss under Federal Rule of Civil Procedure 12 for instance, apply a very coarse filter to the plaintiff's claims-they ask whether, assuming everything the plaintiff claims is true, the case should be dismissed and the file closed for a purely legal reason that is beyond factual dispute. For example, under FRCP 12(b)(1), if the court lacks subject matter jurisdiction, then the case should be dismissed, no matter how correct the plaintiff may be regarding how she was wronged by the defendant. Nothing else matters; if the court lacks subject matter jurisdiction, there is no need to proceed further; no relief can be granted. The same is true for lack of personal jurisdiction or expiration of the statute of limitations. These purely legal defenses to the suit are relatively inexpensive to litigate and thus are efficient tools for use in filtering out those lawsuits that should not take up any further judicial resources. As the litigation proceeds, a series of ever finer and ever more fact- driven filters are applied-a motion for a judgment on the pleadings and a motion for summary judgment, for example. Claims that survive these filters continue (absent settlement) to trial, post-trial motions, and appeals. All of this is very expensive and increasingly resource-intensive for the parties (who supply the ever more detailed facts), for counsel (who develop the ever more detailed facts and applicable law), for judges (who must consider and rule on these ever more detailed facts, rule on the evidentiary motions made to expand or limit the facts, and determine the applicable rules of law), and for juries (who are asked to give up their time for a pittance in jury fees to watch an often disjointed and confusing trial in which these facts are presented and are then asked to make a decision). Lost xiii Lesson One: If You Can't Get a Summary Judgment, Your Client Has We tell our students that most lawsuits are settled before trial. What we often fail to tell them is that in contracts cases, even suits with no merit are settled. It is just too expensive to try a contract case, and in many jurisdictions you can't get to trial in a reasonable time. What is more, contract litigation, much more so than tort litigation, often ties up a business. Moreover, if the case goes to a jury, the outcome can be very hard to predict. So if the business litigator can't get the non-meritorious claim or defense thrown out on summary judgment, the client usually settles. Robert M. Lloyd, Making Contracts Relevant: Thirteen Lessons for the First-Year Contracts Course, 36 Arizona State Law Journal 257, 257-58 (2004) (internal footnotes and citations omitted). So, as you read the edited opinions in this book, note the procedural posture of the case. Ask yourself, what is the likelihood of success of the particular cause of action or defense that the opinion is focusing upon? Conversely, how has a plaintiff managed to develop the facts to keep a claim alive so that it can be used to leverage a settlement in the future? The judicial opinions in this book are dispositive documents granting or denying a party's attempts to get something thrown out of the lawsuit file or kept in play pending settlement or judgment. However, they are not the whole story, which, like an iceberg, is mostly out of sight. The litigation action in court swirls around merely the tip of the iceberg that is exposed above water. Note on Legal Reading Most first year law students are inundated with hundreds of pages of reading per week. This can often seem to be an overwhelming task, especially after success as an undergraduate with a much lighter page load. However, the task is not an impossible one. Legal reading skills are perhaps the most foundational aspect of a legal education and, like all skills, can be developed through practice and experience. Research indicates that the development of certain habits or tendencies can improve a person's ability to read cases more effectively and efficiently. These tendencies include placing the case in context (historically and procedurally), reading the case outside of the linear presentation (reading a case out of order), and focusing on the purpose of the reading. This is not an exhaustive list but it hopefully illustrates the idea that reading a case from start to finish is not always the most effective method-in fact, a straight through read is almost never the most effective way to digest a judicial opinion. xiv Putting a case in context allows the reader to ascertain the underlying issues behind an opinion, which may clarify the holding. Reading outside the order of an opinion-first finding the statement of the issue or issues, then finding the ruling on the issue, then finding the reasoning, then reading the facts to see if they support the reasoning-can provide valuable information (i.e. the holding) which casts light on facts or analysis revealed earlier in the opinion. law Attorneys hone these skills over years of practice. For a first year student, they may seem difficult or outlandish. But speedy and productive reading can yield favorable results for the client, and attorneys embrace this lesson. It is all part of "working smarter, not harder" as the old canard goes. As first year students, we suggest that you begin to embrace it too. An Overview of a Working Contract Before delving into the case law, let's take a brief look at a simple but real contract that will govern the parties' relationship in the purchase and sale of a business in the form of a sale of substantially all its assets. In many of the opinions in this book, the case came about because a matter was not properly provided for in the contract at issue. When reviewing the cases, in addition to thinking about the issue, the rule, the court's application of the rule to the issue and the specific facts, think in terms of how the contract could have been drafted to avoid the dispute. The following discussion of a contract sets the context of transactional work to help you in this process. A. The Deal Time Line: Big or Little, Deals Follow a Pattern A transaction generally follows a standard timeline or chain of events. First, the parties make contact and negotiate. A preliminary agreement is reached and they contact their lawyers, if they have not done so already. Although the key business issues have probably been addressed by the parties, there will often be significant issues left open, some of which will only become apparent to the client after consultation with counsel. As the parties proceed with full, formal documentation, due diligence (detailed factual and legal investigation) begins, often with one party's production of documents and information relevant to representations and warranties that are being negotiated into the documentation. The definitive transactional documents are finalized and signed, and further due diligence and other pre-closing activities take place. Then the "closing" occurs; this is the point at which the majority of the consideration changes hands. Deals are either "sign and close"-like a typical sale of goods where the contract to sell is signed, the purchase price is paid, and the goods or a document of title to the goods are delivered-or "delayed closing" deals, like typical real estate transactions where the contract is signed, various due diligence deliveries and inspections are made and then, XV later, the purchase price is paid and title to the property passes at closing of an "escrow." Payments or deliveries may be made directly, party-to- party, or through an escrow, the preferred route for all but the most basic transactions. Escrows provide the parties with the security of knowing that although they have parted with their consideration, often worth many thousands or millions of dollars, it will not be delivered to the other party until that party's deliveries are complete. In case of a dispute, the escrow agent can hold all consideration already delivered and maintain the status quo pending the dispute's resolution. There may be a post-closing adjustment period as well that will allow the parties to examine what they have purchased or received and adjust price and other compensation to account for unavoidable variations. For simple transactions, this time line is condensed, and one or more steps may be omitted. On the other hand, in major business transactions, the time line can extend over a year or more. The middle ground of 30 to 90 or 120 days represented by an average residential home purchase and sale transaction is also a typical period in which a small to medium commercial lease or asset purchase transaction might take place. Keep this timeline in mind when thinking about a contract, drafting one, or considering a contract dispute. Know where the transaction is and where it is going (or where it has stalled). The relative position on this chain of events will affect the pace and the level of detail with which parties draft and define the agreement as well as their litigation goals and available remedies. Contract negotiation and documentation is often an exercise in selling: (1) Selling the parties on executing the documents; (2) Selling the parties on voluntary performance, after execution; and (3) Selling a later court or other entity on enforcement, after voluntary performance has ceased. As some of the materials in this text will demonstrate, these three sales goals undermine each other to some extent. Consider the tension between selling the parties on execution, which tends to imply plain vanilla documentation with few, if any, "teeth," on the one hand, and selling the parties later on voluntary performance, which is furthered by fairly detailed documents that contain both "carrot" and "stick" provisions in the form of conditions tailored to the particular parties interests. Further, when providing for "teeth," especially when dealing with a contract between a large, sophisticated entity with substantial bargaining power, and a less sophisticated or powerful entity, counsel must be careful not to go too far for fear that a court will use a doctrine like unconscionability to xvi delete or disregard portions of the contract or to re-write the parties' contract. B. Contracts Memorialize a Deal Contracts are documents that speak as of one particular time (in the case of most, the date of their execution). This means that they are intended to capture the agreements of the parties, and their respective rights and obligations as of that time, and to establish a set of rules that will govern future dealings. They must provide for substantially all the details of the parties' future dealings or they fail in their job. Let's look at the various sections of a basic contract. Generally, the first page of any transactional document begins with a title in all or initial caps, centered, and underlined. The title identifies the type of contract using a generic term, such as "Lease," "Prenuptial Agreement" or "Asset Purchase Agreement." This is followed by an introductory paragraph that identifies the contract more specifically, often including the date of the agreement, and names the parties, often introducing defined terms for them that are then used throughout the balance of the contract. The preambles or recitals that follow the title and introductory paragraph set the context for the agreement and are useful in later interpretation. They also provide a place to list related transactional documents and other things that may be part of the transaction as a whole but are otherwise not referenced in the particular agreement itself. The recitals generally include the facts that will help a later reader grasp the nature, purpose, and basis for the agreement-like an introduction to a book. Examples of appropriate facts for recitals include: (i) the history, relationship, and goals of the parties, (ii) the nature of the transaction, and (iii) other transactional documents and things associated with the transaction. The recitals are an excellent place in which to cover factual matters that may be important in applying contract law doctrinal rules at a later date such as the central purpose of the contract, a party's lack of alternatives, or the potential damages faced should one party not perform. Following the recitals is the substance of the contract. If well-drafted, these provisions are clearly presented in the active voice so the party that is required or permitted to do an act or receive a performance can be easily determined. Also, if well drafted, the contract is not ambiguous; otherwise, a court may be faced with the question of whether or not to allow in various types of evidence to determine what the parties meant. Some of these interpretive rules are discussed in Chapters 15 and 18. Well drafted contracts are also free of unintended vagueness. The substantive terms include statements of the consideration supporting the contract, discussed in Chapter 5. They will also include representations, warranties, covenants, conditions, and other provisions xvii that serve as the workings of the contract, a legal machine governing the parties, their relationships, and their exchanges. These working provisions are discussed in some detail in Chapters 23 and 24. C. An Example: The Simple Asset Purchase Agreement ASSET PURCHASE AGREEMENT ASSET This PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (the "Agreement") is entered into and effective as of January 5, 2007, at Columbus, Ohio, by and between Joseph Carcello Industries, Inc., a Delaware Corporation (the "Seller"), and Galcar Acquisition Subsidiary 3, a Wyoming limited liability company ("Buyer"), on the basis of the following facts and constitutes (i) a contract of purchase and sale between the Parties, and (ii) escrow instructions to Third American Title Company ("Escrow Agent"), the consent of which appears at the end of this agreement. Buyer and Seller are collectively referred to in this document as the "Parties." RECITALS. A Seller has determined that it is in the best interests of its share- holders to enter into this Agreement, whereby Seller will sell to Buyer, for the Purchase Price and on the terms and conditions set forth below, all of the Seller's assets (other than the Excluded Assets, as defined in Section 1.2 below). B. [Recitals as appropriate. Recitals are a place to provide general background and context for the rest of the contract. They are also a good place to define, or give short names to, other documents and agreements that may be relevant to the overall transaction and the parties' agreements.] AGREEMENT For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree that the above Recitals are true and correct to the best of their knowledge and further agree as follows: ARTICLE 1 SALE AND PURCHASE 1.1 Sale and Purchase of Seller's Assets. Subject to the terms and conditions below, on the Closing Date (as defined in Section 2.2 below), Seller shall sell, convey, transfer and deliver to Buyer, and Buyer shall purchase from Seller, all of the assets of the Seller, other than those assets specifically excluded under Section 1.2 below (collectively, the "Acquired Assets"). It is expressly understood and agreed that Buyer is purchasing the Acquired Assets subject to all encumbrances thereon existing as of the Close of Escrow. xviii 1.2 Excluded Assets. Buyer will not acquire any interest in the following assets of the Seller's ("Excluded Assets"): (a) all of the Seller's cash on hand, deposits in bank accounts and cash equivalent securities or other similar items (collectively, the "Cash Assets") as of the Closing Date; and (b) tax refunds and insurance policies related to the Acquired Assets. 1.3 Purchase Price: Payment. Seller shall sell and Buyer shall purchase the Acquired Assets for a total purchase price of $40,000,000 (the "Purchase Price").1 1.3.1 Deposit. Upon execution of this Agreement, Buyer shall deliver to Seller an initial deposit (the "Deposit") of $2,000,000 in Cash or Cash Substitute to be applied towards the Purchase Price. "Cash Substitute" means (i) a certified or cashier's check, with Buyer as drawer or remitter thereof, drawn and paid through a banking institution acceptable to Seller, currently dated, payable to Seller and honored upon presentation for payment, or (ii) an amount credited by wire trarisfer from an account of Buyer into Seller's bank. The Deposit will be non-refundable to Buyer pursuant to Article 9 below (subject, however, to Sections 2.2 and 3.1 below). Seller shall hold the Deposit in a separate, segregated, interest-bearing account to be distributed or released as provided herein. Until the Close of Escrow or a default by Buyer (as described in Article 9), the Deposit is not property of the Seller. 1. 1.3.2 Refunds of Deposit. Any refund of the Deposit made under this Agreement will be made to and accepted by Buyer as a corporation. 1.3.3 Grant of Security Interest. Buyer hereby grants to Seller a security interest in the Deposit to secure Buyer's contingent obligation to pay Seller liquidated damages, pursuant to Article 9 below, in the event Buyer defaults.2 1.3.4 Additional Cash at Closing. The additional sum of $8,000,000 in cash or Cash Substitute (“Additional Cash") will be delivered by Buyer to Seller at or prior to the Close of Escrow (as more particularly provided in Section 4.1 below). 1.3.5 Note. Prior to the Close of Escrow (as more particularly provided in Section 4.1 below), Buyer shall execute and deliver into Escrow a Promissory Note in the principal amount of $30,000,000 in Consideration is discussed in Chapter 6. * Liquidated damages are discussed in Chapter 19. xix બી. પ the form of Exhibit A to this Agreement (the "Note") executed by Buyer. Escrow Agent is hereby instructed to, at the Close of Escrow, date the Note as of the Close of Escrow. ARTICLE 2 ESCROW 2.1 Opening of Escrow. Within five (5) business days of the execution of this Agreement, Buyer and Seller shall open an Escrow account with an escrow agent reasonably satisfactory to both and shall deposit with Escrow Agent fully executed counterparts of this Agreement for use as escrow instructions. The parties agree to execute Escrow Agent's usual form of supplemental escrow instructions for transactions of this type provided, however, that such escrow instructions will be for the purpose of implementing this Agreement and will not have the effect of modifying this Agreement unless they expressly so state and are initialed by Buyer and Seller. "Opening of Escrow" as used herein means the date when Escrow Agent (i) has received a counterpart or counterparts of this Agreement executed by both Buyer and Seller, (ii) has received notification from Seller that Seller has received the Deposit from Buyer, and (iii) has executed the Consent of Escrow following the signature page of this Agreement. 2.2 Close of Escrow. The closing of the sale and transfer of the Acquired Assets ("Close of Escrow") is to take place on or prior to December 1, 2007 (the "Closing Date"). If the closing has not occurred by that date, either party may terminate this Agreement by providing to the other party and to Escrow Agent five (5) days prior written notice thereof, in which case (1) Seller shall return to Buyer the Deposit, minus the amount of Seller's attorneys' fees and any other costs incurred in connection with the transaction contemplated by this agreement (provided, however, that the total amount of such fees and costs shall not exceed, in the aggregate, $300,000,000), and (ii) the Parties shall have no further obligations under this Agreement. ARTICLE 3 CONDITIONS TO THE PARTIES' OBLIGATIONS 3.1 Conditions to Buyer's Obligation to Purchase. Buyer's obligation to purchase the Acquired Assets is expressly conditioned upon each of the following:4 3.1.1 [List conditions specific to this deal.] 3 Escrows and their function are discussed in Chapter 21. 4 Conditions are critical performance ordering, triggering, and excusing provisions. They are discussed in Chapters 21 and 22. XX 3.1.2 Seller's Deliveries to Escrow Agent. Timely delivery of those documents required to be delivered to Escrow Agent by Seller pursuant to Article 5 below. 3.2 Conditions to Seller's Obligation to Sell. Seller's obligation to sell the Acquired Assets is expressly conditioned upon each of the following: 3.2.1 Performance by Buyer. Timely performance of each obligation and covenant of, and delivery required of, Buyer hereunder. 3.2.2 Buyer's Deliveries to Seller and Escrow Agent. Timely delivery of the items required to be delivered to Seller and/or Escrow Agent by Buyer pursuant to Article 4 below including, but not limited to, the Deposit, the Additional Cash, the Note, and the Letter of Credit, and the Consent. ARTICLE 4 BUYER'S DELIVERIES 4.1 Balance of Purchase Price. Buyer shall, at or prior to the Close of Escrow, deliver to Seller cash or Cash Equivalent in the amount of the Additional Cash. Buyer will, at or prior to the Close of Escrow, deliver to Escrow Agent written confirmation, countersigned by Seller, that Buyer has made the delivery required by this Section 4.1. 4.2 Note, Letter of Credit and Consent. Buyer shall, at or prior to the Close of Escrow, deliver to Escrow Agent (1) the Note, in the form attached as Exhibit A and executed by Buyer and (ii) the Letter of Credit, in the form attached as Exhibit B. 4.3 Transfer Documents. Buyer shall, at or prior to the Close of Escrow, deliver to Escrow Agent counterparts, executed by Buyer, of those Transfer Documents set forth in Article 5 below which are required to be executed by Buyer. 4.4 Cash-Prorations. Buyer shall, at or prior to the Close of Escrow, deliver to Escrow Agent cash in the amount, if any, required of Buyer under Article 7 entitled "Proration, Fees and Costs." ARTICLE 5 SELLER'S DELIVERIES TO ESCROW AGENT 5.1 Transfer Documents. Seller shall, at or prior to the Close of Escrow, deposit into Escrow the following instruments of conveyance and transfer ("Transfer Documents") in order to transfer to Buyer Seller's right, title, and interest in and to the Acquired Assets: 5.1.1 Real Property. With respect to each parcel of real property being transferred, a quitclaim deed in the form of Exhibit C to this Agreement (“Quitclaim Deed") executed and acknowledged by Seller; xxi 5.1.2 Notes. With respect to each debt owed to Seller which is evidenced by a note in favor of Seller ("Note"), an Allonge in the form of Exhibit D to this Agreement, executed by Seller; 5.1.3 Deeds of Trust. With respect to each Note which is secured by a deed of trust under which Seller is the beneficiary, either as original beneficiary or via assignment ("Deed of Trust"), an Assignment of Deed of Trust in the form of Exhibit E to this Agreement, executed and acknowledged by Seller; 5.1.4 Vehicles. With respect to each vehicle owned by Seller, a Department of Motor Vehicles "pink slip" executed by Seller and transferring all of Seller's title in such vehicle to Buyer; 5.1.5 Stock. With respect to all stock owned by a Seller, an Assignment Separate from Certificate in the form of Exhibit F to this Agreement, executed and acknowledged by Seller; and 5.1.6 Personal Property. With respect to all personal property of Seller (including, but not limited to accounts receivable), a bill of sale in the form of Exhibit G to this Agreement (the "Bill of Sale") executed in counterpart by Seller, pursuant to which Seller will transfer all of the personal property of Seller, other than the Excluded Assets, otherwise not transferred pursuant to Sections 5.1.1 through 5.1.5 above. 5.2 Availability of Original Original Documents. Seller makes no representation or warranty as to the availability of original copies of instruments normally associated with ownership of the Acquired Assets. It is hereby agreed that, except to the extent caused by Seller's gross negligence or willful misconduct, any delay in or ineffectiveness of any transfer of assets contemplated by this Agreement which is caused by the unavailability of such documents shall not constitute a default by Seller hereunder. ARTICLE 6 BUYER'S REPRESENTATIONS 6.1 Condition of Acquired Assets. BUYER IS TAKING THE ACQUIRED ASSETS IN AN "AS-IS, WHERE-IS, WITH-ALL-FAULTS- AND-ENCUMBRANCES" CONDITION EXISTING AS OF THE CLOSE OF ESCROW, BASED BASED UPON BUYER'S OWN FAMILIARITY THEREWITH AND NOT UPON ANY STATEMENTS, ADVICE, OPINIONS OR REPRESENTATIONS WHICH MAY HAVE BEEN MADE BY SELLER OR SELLER'S AGENTS. Representations and disclaimers of representations are discussed in Chapter 10. xxii ARTICLE 7 PRORATIONS, FEES AND COSTS 7.1 Prorations. All non-delinquent personal and real property taxes, water, gas, electricity and other utilities, local business or other license fees or taxes and other similar periodic charges payable with respect to the Acquired Assets will be prorated between Buyer and Seller as of the Close of Escrow. 7.2 Seller's Closing Costs. Seller shall pay (1) Seller's own attorneys' fees, (ii) one-half of Escrow Agent's escrow fee, and (iii) one-half of all documentary transfer taxes payable in connection with the recordation of Quitclaim Deeds and Escrow Agent's customary charges to buyers and sellers for document drafting, recording and miscellaneous charges. 7.3 Buyer's Closing Costs. Buyer shall pay (1) Buyer's own attorneys' fees, (ii) one-half of Escrow Agent's escrow fee, and (iii) one-half of all documentary transfer taxes payable in connection with the recordation of Quitclaim Deeds and Escrow Agent's customary charges to buyers and sellers for document drafting, recording and miscellaneous charges, (iv) all sales and use taxes payable as a result of the transactions contemplated by this Agreement, and (v) the cost and expense of any title policies desired by Buyer with respect to the Acquired Assets is not a condition to Buyer's obligations under this Agreement, nor shall Buyer's efforts to acquire such policy or policies in any way delay the Close of Escrow. ARTICLE & RECORDATION: DISTRIBUTION OF FUNDS AND DOCUMENTS 8.1 Form of Disbursements. All disbursements by Escrow Agent will be made by checks of the Escrow Agent or by wire transfer to the account of the receiving party, as such party may direct. 8.2 Recorded Documents. Escrow Agent shall cause the County Recorder of Bigfoot County (the "County Recorder”) to record the Quitclaim Deeds and any other documents which are herein expressed to be, or by general usage are, recorded ("Recorded Documents"). After recordation, Escrow Agent shall cause the County Recorder to mail Recorded Documents to the grantee, beneficiary, or person (i) acquiring rights under the Recorded Documents, or (ii) for whose benefit the Recorded Documents were acquired. 8.3 Non-Recorded Documents. Escrow Agent shall, at the Close of Escrow, deliver by United States Mail, (or hold for personal pick-up, if requested), each non-recorded document received hereunder by Escrow Agent to the payee or person (i) acquiring rights under the non-recorded xxiii document, or (ii) for whose benefit the non-recorded document was acquired. 8.4 Cash Disbursements. Escrow Agent shall, at the Close of Escrow, hold for personal pick-up, or will arrange for wire transfer, (i) to Seller, or order, any excess funds delivered to Escrow Agent by Seller, and (ii) to Buyer, or order, any excess funds theretofore to Escrow Agent by Buyer. Upon Escrow Agent's request, Buyer and Seller shall deposit with Escrow Agent all sums necessary to pay their respective shares of the costs of Closing; provided, however, Buyer and Escrow Agent acknowledge that Seller shall not be required to advance any of its own funds to pay its respective share of the costs of Closing; all such costs will be paid solely out of the Deposit. 8.5 Copies of Documents. Escrow agent shall, at the Close of Escrow, deliver to Buyer and to Seller, copies of the Recorded Documents, conformed to show the recording data. ARTICLE 9 DEFAULT 9.1 Seller's Remedies. If Buyer defaults under this Agreement and fails to complete the purchase of the Acquired Assets herein provided, then Seller will be released from any further obligations under this Agreement and will be entitled to the following: BECAUSE IT WOULD BE EXTREMELY IMPRACTICABLE AND DIFFICULT TO DETERMINE THE DAMAGE AND HARM WHICH SELLER WOULD SUFFER IN THE EVENT BUYER DEFAULTS HEREUNDER, AND BECAUSE A REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT THAT SELLER WOULD SUFFER IN THE EVENT OF BUYER'S DEFAULT AND FAILURE TO DULY COMPLETE THE ACQUISITION HEREUNDER IS THE SUM OF $2,000,000 PLUS ANY INTEREST ACCRUED THEREON, SELLER WILL BE ENTITLED TO RETAIN THE DEPOSIT OF $2,000,000 PLUS ANY INTEREST ACCRUED THEREON, AS LIQUIDATED DAMAGES. THE PAYMENT OF SUCH AMOUNT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER. Buyer's Initials Seller's Initials Any fees, costs, or attorneys' fees incurred in the enforcement and collection of liquidated damages as herein provided will not be included in the calculation of liquidated damages and shall be recoverable in addition xxiv thereto." Seller's remedies for breach are limited to those provided in this paragraph. 9.2 Buyer's Remedies. If the sale contemplated by this Agreement is not completed according to its terms by reason of any material default of Seller, Buyer will have the right to pursue any remedy at law; provided, however, that upon the occurrence of any material default by Seller, Buyer agrees that it will not (i) record a lis pendens or seek any provisional remedies including, but not limited to, the appointment of a receiver, any temporary restraining order, any preliminary injunction or any action for claim and delivery with respect to the Acquired Assets or (ii) request the specific performance of this Agreement. ARTICLE 10 GENERAL PROVISIONS 10.1 Captions. Captions in this Agreement are asserted for convenience of reference only and do not define, describe, or limit the scope or the intent of this Agreement or any of the terms of this Agreement. 10.2 Exhibits. All exhibits referred to in and attached to this Agreement are a part of this Agreement. 10.3 Entire Agreement. This Agreement contains the final, complete and entire agreement between the Parties and supersedes all prior or contemporaneous agreements, understandings, representations, and statements, oral or written, between the Parties with respect to the subject matter of this Agreement and the transactions contemplated by this Agreement. 10.4 Modification. No modification, waiver, amendment, discharge, or change of this Agreement shall be valid unless the same is in writing and signed by the party against which the enforcement of such modification, waiver, amendment, discharge, or change is or may be sought. 10.5 Attorneys' Fees. Should any party employ an attorney for the purpose of enforcing or construing this Agreement, or obtaining any judgment or court order based on this Agreement, in any legal proceeding whatsoever, including insolvency, bankruptcy, arbitration, declaratory relief, or other litigation, the Prevailing Party (herein defined) shall be entitled to receive from the other party or parties thereto, reimbursement for all attorneys' fees and all costs, including but not limited to service of process, filing fees, and the cost of any bonds, whether taxable or not. Such reimbursement shall be included in any judgment or final order issued in $ Liquidated damages clauses are discussed in Chapter 19. 7 Remedies are discussed in Chapters 16 to 20. Integration clauses such as this and the parol evidence rule are discussed in Chapter 14. XXV that proceeding. The "Prevailing Party" means the party determined to most nearly prevail and not necessarily the one in whose favor a judgment is rendered. As provided in Article 10 herein, Seller may recover its attorneys' fees in addition to liquidated damages. 10.6 Governing Law. This Agreement is governed by the laws of the State of and federal law, as applicable, without regard to the choice of law provisions of those bodies of law. 10.7 Successors and Assigns. All terms of this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the Parties and their respective legal representatives, successors, and assigns.9 10.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed an original, and all of which shall together constitute but one agreement. 10.9 Further Assurances. The Parties shall cooperate with each other and execute any documents reasonably necessary to carry out the intent and purpose of this Agreement. 10.10 Survival of Warranties and Obligations. All warranties and representations contained in this Agreement, and all covenants and duties that are to be performed at a time or times after the Close of Escrow, survive the Close of Escrow. 10.11 Construction. Each party and its counsel have reviewed and revised this Agreement. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party will not apply in the interpretation of this Agreement or any amendments or exhibits hereto. IN WITNESS WHEREOF, this Agreement has been executed as of the date set forth above. SELLER: [Name] BUYER: [Company Name] Signed: By: Typed: Name: Title: Note on the Fifth Edition The fifth edition of this text features a number of changes from the fourth edition. The principle ones are listed below. 1. For the majority of cases, we have included a note that translates currency values from the nominal value at the date of the case to 2019 dollar values using a combination of the Assignment and delegation are discussed in Chapter 29. xxvi 2. 3. 4. 6. Consumer Price Index and the Gross National Product Deflator. These conversions are approximate at best, but much appreciated by students. The "Notes and Questions" have been revised and updated throughout the book. In Chapter 4, Cook's Pest Control, Inc. v. Rebar and its accompanying material has been omitted. In Chapter 5, Frishman v. Canadian Imperial Bank of Commerce has been omitted for the sake of brevity. Its substance is covered in the notes and questions following Karl N. Llewellyn, A Lecture on Appellate Advocacy. In Chapter 15, a detailed synopsis of the Supreme Court of Tennessee's description of Textual versus Contextual approaches to contract interpretation was added. 6. In Chapter 16, General Motors Corp. v. Brewer and its accompanying material has been omitted. 7. 8. 9 In Chapter 17, Eastern Air Lines, Inc. v. McDonnell Douglas Corp. and Poppenheimer v. Bluff City Motor Homes and their accompanying materials have been omitted. In Chapter 22, Lumley v. Wagner has been edited down for the sake of brevity and Van Wagner Advertising v. S & M Enterprises and its accompanying material has been omitted. In Chapter 24, K & G Construction Co. v. Harris and a short note following Carter v. Sherburne Corp. have been omitted. 10. In Chapter 25, Hemmert Agric. Aviation, Inc. v. Mid- Continent Aircraft Corp. and Transcontinental Refrigeration Co. v. Figgins has been omitted for the sake of brevity. The substance of the latter case has been incorporated into Problem 25-7. 11. In Chapter 26, Drake v. Wickwire and its accompanying material has been omitted. 12. In Chapter 28, Don King Productions v. Douglas and Empire Gas Corp. v. American Bakeries Co. have been omitted. 13. In Chapter 29, Transportation & Transit Assocs., Inc. v. Morrison Knudsen Corp., Ilkhchooyi v. Best, Beattie v. State of Oklahoma, ex rel. Grand River Dam Authority, and BIS Computer Solutions, Inc. v. Richmond, Virginia and their accompanying materials have been omitted. 14. In Chapter 29, Dolan v. Altice USA, Inc. has been included. Dolan is a new case that deals with a variety of issues covered xxvii in this book, specifically ambiguity, third-party beneficiaries, contract drafting, contract interpretation, and the parol evidence rule. A Final Introductory Note This is a casebook designed for a first-year, law-school contract law course that includes material often found in an upper division U.C.C. Sales course, but its goals are not just to teach doctrinal contract law. In fact, if the Contracts course were meant just to teach the "black letter law" of contract, this book would be unnecessary. A commercial outline from any publisher or, better yet, the Restatement (Second) of Contracts and Article 2 of the U.C.C. would suffice. The rules are only the first step in the dance that is contract law. It is their application to facts (or the facts application to the law) that have been preserved and developed by lawyers that is the real meat of the matter. In addition to the "black letter law," students should focus on developing critical case analysis skills, as well as the use of multi-element and multi- factor standards to state or apply a legal rule. These skills lie at the heart of litigation and transactional problem solving in the law of contracts and elsewhere. After mastering the basic rules, think about how they can be used in a transactional document. Lawyers should seek to draft into or around every law that may affect the transaction. The point is to prepare a document that defines the parties' relationship and will be a useful tool in managing that relationship and in any litigation should that relationship break down. Know the law and how it operates and then deploy that knowledge every step of the way from the parties' first meeting to their last day in court after years of litigation, should it come to that. Pay attention to these bedrock principles as you work through the text and its problems and exercises. The authors welcome your comments and feedback ([email protected]) and more information about them and their school can be found through The University of Tennessee College of Law's website: http://www.law.utk. edu/. Additional materials, including sets of on-line, interactive problems regarding contract damages can be found at the publication page of the website of The xxviii We thank, in particular, David Cantrell (UT Class of 2021) for his detail-oriented assistance in producing this fifth edition. Many others contributed, but his work was integral to the finalization of this casebook.