Wednesday, April 28, 2010

avoidance (and frustration)

Avoidance and frustration may sound like common tax-preparation strategies, but these terms have specific meanings in contract law. When a contract includes a mutual mistake, one party unfairly pressured the other (“duress”), or one party lied (“fraud”), then the goal of the contract has been “frustrated.” In this situation, the injured party can void the contract (“avoidance”). In that case, all parties are released from their obligations. In cases of intentional fraud—for example, when someone deliberately lied to induce a deal, the injured party can elect avoidance or can instead seek additional damages for the fraud, under tort law.

See: mistake, duress, fraud, misrepresentation, voidable contracts, restitution

authority to bind

No, this is not borrowed from an S&M Encyclopedia. Someone with “authority to bind” has the power to sign agreements on behalf of another person or entity. Under state laws, an officer of a corporation, a managing member of a limited liability company, or a general partner in a partnership all have the authority to bind their respective entities. The individual owner of a sole proprietorship can always bind that business although in community property states, the signature of a spouse is sometimes also advised, just to make sure all parties are on board.

Status of authority. The status of the signing parties should be reflected in the signature block of the document, which should indicate whether that person is an officer, a general partner, etc. In addition, many legal documents contain a statement such as “Each party has signed this Agreement through its authorized representative,” or similar language.

Avoiding fraud. As a preventative measure—to avoid being improperly bound to contracts—businesses often take the following actions:

  • Notice. Companies often provide written notice to customers, vendors, and others as to who in the company has authority.
  • Contract notice. Companies often include a notice on all contracts indicating the names of those persons who can bind the business.
  • Establish limitations. Companies establish limitations on authority to bind in their agency and contractor agreements.

See: agent, signatures

attorney in fact

An attorney-in-fact does not have to be an attorney; it can be any person named in a power-of-attorney document to act on behalf of someone else (the “principal”). The attorney-in-fact doesn’t have unlimited powers, however. All of the powers and responsibilities are set forth in the power-of-attorney document. They often include the authority to sign contracts on behalf of the principal.

See: agent

attorney fees

You may have heard the joke about the new client who asked the lawyer, “How much do you charge?” “I charge $200 to answer three questions,” replied the lawyer. The client asked, “Isn’t that a bit steep?” “Yes,” said the lawyer, “What’s your third question?” As the joke indicates, it’s important to get a clear understanding about how fees will be paid when you hire a lawyer.

Under the “American Rule,” (applied in U.S. Courts), each party to a lawsuit must pay its own attorney fees, unless a statute provides otherwise. (For example, laws the prohibit discrimination allow employees who win in court to collect their attorney fees from the other party.) However, parties can change this default rule by signing a contract that requires the losing side in a legal dispute to pay the winning (or “prevailing”) side's attorneys' fees and costs. Below is a typical attorney fees provision.

EXAMPLE: Attorney Fees. The prevailing party shall have the right to collect from the other party its reasonable costs and necessary disbursements and attorneys’ fees incurred in enforcing this Agreement.

What are reasonable costs? Costs refer to filing fees, fees for serving the summons, complaint, and other court papers, fees to pay a court reporter to transcribe depositions (pretrial interviews of witnesses) and in-court testimony, and, if a jury is involved, to pay the daily stipend of jurors. Often costs to photocopy court papers and exhibits are also included. Typically, court costs are paid by the parties to the dispute. But with the inclusion of an attorney fees clause, the losing party is held responsible for both parties' costs

Watch out for one-way attorneys’ fees provisions. Under a mutual provision, such as the example above, the party that wins the lawsuit is awarded attorneys’ fees. This is fair and encourages the quick resolution of lawsuits. A “one-way provision” allows only one of the parties to receive attorneys’ fees, usually the party with the better bargaining position. One-way provisions, no matter which side they favor, create an uneven playing field for resolving disputes. Some states, such as California, have recognized this unfairness and automatically convert a one-way attorneys’ fees contract provision into a mutual provision.

Judicial enforcement. This type of clause is not always enforced. Courts are allowed to judge contracts for fairness and to change their terms if they decide that doing so is the more fair solution. If a judge decides that it would be unfair to enforce a requirement that one side pay the other's attorneys' fees or finds that one of the parties was forced into signing the agreement, the judge could cancel the requirement or change the amount of fees to be paid. But if a judge decides that an attorney fee provision is reasonable and that it was negotiated by two parties with equal bargaining power, then the judge will likely enforce it.


An archaic term sometimes used to indicate that a party affirms or certifies something to be true or correct.


See: addendum


The party assigning the contract (or legal rights) is the assignor; the party receiving them is the assignee.

See: Assignment

assignment (of contract)

Did you ever start a magazine subscription with one company (say, “The National Scholar”) and midways into the subscription begin receiving another magazine (“The National Enquirer”)? That’s usually because the first company has gone out of business and assigned all its subscription contracts to another company. An assignment of contract occurs when one party to an existing contract (the “assignor”) hands off the contract’s obligations and benefits to another party (the “assignee”). Ideally, the assignor wants the assignee to step into his shoes and assume all of his contractual obligations and rights. In order to do that, the other party to the contract must be properly notified.

EXAMPLE: Tom contracts with a dairy to deliver a bottle of half and half every day. The dairy assigns Tom’s contract to another dairy, and—provided Tom is notified of the change and continues to get his daily half & half—his contract is now with the new dairy.

An assignment doesn’t always relieve the assignor of liability; that depends on many factors, especially the language of the contract. Some contracts may contain a clause prohibiting assignment, others may require the other party to consent to the assignment, and others may include a guaranty that regardless of an assignment, the original parties (or one of them) guarantees performance.

EXAMPLE: Jonas and Murphy owned property in San Francisco that they leased to Schiller. Schiller assigned his lease to a battery manufacturing company, which became the new tenant under the lease. Jonas assigned his rights as a property owner to Kahn. When the battery manufacturer failed to pay rent, Kahn (the new owner) sued Schiller (the original tenant). The lease agreement included a guaranty clause, stating that if Schiller or “his assigns” failed to pay rent, than Schiller would be on the hook for it. Schiller’s lawyers, looking for a creative way out of the payment, argued that the lease required Schiller to pay Jonas and Murphy, not Kahn (because Kahn was not mentioned in the original lease). The court disagreed, finding that Jonas was free to assign his rights to Kahn. The court said that if the lease was supposed to prevent Jonas from assigning rights, there should have been a prohibition written into it. In other words, if the parties want to prevent assignment of the contract, they must include an anti-assignment clause. (By the way, the issue wouldn’t have arisen if the lease had said that Schiller had to pay Jonas “and his assigns and successors.”) [i]

When assignments will not be enforced. An assignment of a contract will not be enforced if:

  • The contract prohibits assignment. Contract language, typically referred to as an anti-assignment clause, can prohibit (and “void”) any assignments. We provide a sample, below.
  • The assignment materially alters what’s expected under the contract. If the assignment affects the performance due under the contract, decreases the value or return anticipated, or increases the risks for the other party to the contract (the party who is not assigning contractual rights), courts are unlikely to enforce the arrangement.
  • The assignment violates the law or public policy—Some laws limit or prohibit assignments. For example, many states prohibit the assignment of future wages by an employee, and the federal government prohibits the assignment of certain claims against the government.[ii] Other assignments, though not prohibited by a statute, may violate public policy. For example, personal injury claims cannot be assigned because doing so may encourage litigation.

Delegation or Assignment? In some cases, a party may not wish to assign the whole contract but only to get somebody else to fulfill its duties.

EXAMPLE: Phyllis enters into a written agreement with Robert’s Bakery to provide cupcakes for her child’s birthday party. Phyllis pays $200 in advance. Robert’s Bakery has an emergency and can’t deliver the cupcakes, so Robert pays $150 to Sylvia’s Cupcakes to take over the delivery. Robert hasn’t assigned the contract; he’s delegated his duties to Sylvia. If Sylvia doesn’t deliver, Phyllis’ dispute would be with Robert. If Robert had properly assigned the contract, Phyllis’ dispute would be with Sylvia. (Of course, to be effective as a delegation, the person to whom the task is delegated—in this case, Sylvia—has to accept or assume the duty or responsibility.)

Obviously, not all duties can be delegated—for example, some personal services are usually not delegated because they are so specific in nature. If you hired Ted Nugent to perform at your event, for example, he could not arbitrarily delegate his performing duties to Lady Gaga.

To prohibit delegation, the parties should include specific language to that effect in the agreement. For example, an anti-assignment clause might state. “Neither party shall assign or delegate its rights …”

How is a contract assigned? There are three steps to follow if you want to assign of a contract.

  1. Examine the contract for any limitations or prohibitions. Check for anti-assignment clauses. Sometimes the prohibition is not a separate clause but is included in another provision. Look for language that states, “This agreement may not be assigned …” If you find such language, you may not be able to assign the agreement unless the other party consents.
  2. Execute an assignment. If you are not prohibited from assigning, prepare and enter into an assignment of contract, an agreement transferring rights and obligations.
  3. Provide notice to the obligor. After you have assigned your contract rights to the assignee, you should provide notice to the other original contracting party (referred to as the obligor). Unless otherwise prohibited by the contract or by law, this notice will effectively relieve you of any liability under the contract.

Assignment Checklist. As you draft a contract clause about assignment or a later assignment agreement, consider these questions:

  • Do you want the freedom to delegate tasks in the agreement? If so, be sure that the contract does not prohibit delegation. Usually that prohibition is included in an anti-assignment clause. You can also include affirmative language if you wish, such as “Either party may delegate its obligations under this agreement.”
  • Do you want the ability to assign the revenue you receive from a contract? If you want to be able to assign revenue from a contract but not the performance obligations—for example, you want your nephew to receive the royalties from a licensing deal, but otherwise you are to be on the hook for all other obligations—then make sure you have made this freedom explicit if the contract has an anti-assignment clause. For example, you could include language such as, “Neither party may assign its rights or obligations except that Licensor may assign its right to receive revenue under this agreement.”
  • Do you want the ability to assign all rights under the agreement to a company that acquires your business? If so, review the anti-assignment exceptions, below.
  • Do you want to make sure that the other party to the agreement will always be responsible to you, even if the agreement is assigned? If so, you should include a guaranty similar to that mentioned in the example above, in which the assigning party guarantees performance after assignment.
  • Do you want to prevent the other side from assigning the contract or delegating their obligations? Include a general anti-assignment/anti-delegation clause and be sure that it includes language such as “Any assignment or delegation made in violation of this clause is void.”

Anti-assignment clauses. Below are three variations of anti-assignment clauses that can be used in a contract. EXAMPLE 1 is a standard anti-assignment clause barring any assignment or delegation. EXAMPLE 2 is used when the parties want to prohibit assignments except if they transfer the agreement to new owners or affiliate companies (and don’t want to ask for permission). EXAMPLE 3 is similar to EXAMPLE 2 except it requires permission for such an assignment. The good news is that permission can’t be withheld on a whim. Consent to the assignment to a new owner can only be made for a valid business reason. What’s a valid reason? If the assignee is in terrible financial shape or is a direct competitor, that would qualify.

EXAMPLE 1: No Assignment or Delegation Permitted

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. Any assignment or delegation in violation of this section shall be void.

EXAMPLE 2: Consent Not Needed for Affiliates or New Owners.

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. However, no consent is required for an assignment that occurs (a) to an entity in which the transferring party owns more than 50% of the assets, or (b) as part of a transfer of all or substantially all of the assets of the transferring party to any party. Any assignment or delegation in violation of this section shall be void.

EXAMPLE 3: Consent Not Unreasonably Withheld.

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of other. Such consent shall not be unreasonably withheld. Any assignment or delegation in violation of this section shall be void

Anti-assignment clauses can be modified to prohibit only one of the parties from assigning rights. Also, when preparing an anti-assignment clause, keep in mind that you can only prevent “voluntary” assignments; you cannot prevent assignments that are ordered by a court or that are mandatory under law—for example in a bankruptcy proceeding.

[i] Murphy v. Luthy Battery Co. 74 Cal.App. 68, 239 P. 341 (Cal.App. 1 Dist. 1925).

[ii] 41 U.S.C. Sec. 15

asset-based loan

A type of loan agreement where the borrower pledges certain business assets—for example equipment or inventory—as collateral for a loan.

as of

Why does a contract state, “This Agreement is dated as of November 27, 2010,” instead of “This Agreement is dated November 27, 2010”? It’s because the magic words, “as of,” refers to the date that an agreement is effective. The “effective date” (or the “as of” date) can be different than the date of signature, so it’s common practice to use “as of” in the preamble to indicate when an agreement was reached and to include a separate date for signatures. Another simple workaround is to state, “This Agreement is effective as of November 27, 2010 (the “Effective Date.”))

See: preamble

as is

You’re about to buy a car and the owner tells you he’s selling it “as is.” You suddenly feel uptight. What is he hiding? A missing gear shift, faulty brakes, a dead body in the trunk? A century ago, all purchases were “as is” and the buyer had an obligation to seriously inspect every purchase before making it. The age-old legal rule was caveat emptor: Let the buyer beware. But during the 20th century, laws were enacted to protect consumers, including laws requiring that goods and services be merchantable and useful for their intended purposes. This implied warranty of merchantability does not apply when property is sold “as is.” As long as the buyer had a reasonable opportunity to inspect the property beforehand, the “as is” buyer takes the goods in their current condition and cannot complain about problems later.

See: warranties


The world would be a better place, at least hygienically, if we could keep everyone at a distance equal to the length of an arm—the literal meaning of this tem. In contract law, an agreement is considered to be “arms-length” if the parties acted independently and the resulting agreement reflects what would be negotiated on the open market. Whether an agreement is “arms-length” is sometimes an issue of great interest to the government.

EXAMPLE. A grandfather wants to give his granddaughter $100,000 but he is concerned about gift taxes. Instead, he prepares a “loan” agreement, lending her $100,000 interest free and with no schedule for repayment. The IRS would not consider that to be an arms-length agreement and would instead insist that the amount be treated as a gift for tax purposes.

Contracts made with the U.S. government should be arms-length and federal law determines what is and isn’t arms-length by using a “standard of comparability,” in which the arrangement is measured against similar transactions on the open market.[i] When courts measure an arms-length decision, they commonly use three factors: market price, relationship of the parties, and comparable agreements.

[i] 26 CFR Section 1.482


No matter how it sounds, this isn’t Scottish slang for derriere. Instead, it refers to being “behind” in payments. For example, an account that’s past due is “in arrears”. The term appears in contracts referencing a failure to pay on a sales, loan, or mortgage agreement.


Though often considered a 20th century phenomenon, arbitration—an out-of-court proceeding in which one or more neutral third parties hears evidence and then makes a binding decision—has a long and checkered past, starting with King Solomon’s famous approach to child custody. It was used in England back in the 13th century (and before the existence of the so-called common law—rules based upon court rulings), and George Washington even included an arbitration provision in his will.[i] Today, arbitration is the most commonly used method of alternative dispute resolution (ADR).

Binding or nonbinding. Arbitration can be binding (which means the participants must follow the arbitrator’s decision and courts will enforce it) or nonbinding (in which either party is free to reject the arbitrator’s decision and take the dispute to court, as if the arbitration had never taken place). Binding arbitration is more common.

Who can arbitrate disputes? Arbitration can be voluntary (the parties agree to do it) or mandatory (required by law). Most contract arbitrations occur because the parties included a clause requiring them to arbitrate any disputes “arising under or related to” the contract. If a provision like this isn’t included, the parties can still arbitrate if they both agree to it (although it’s tough to reach an agreement like this once a dispute has arisen).

Advantages and disadvantages. For simple contract disputes in which the matter can be heard in one day, arbitration is usually a good choice. However, if in doubt, consider the advantages and disadvantages, below:

  • Advantages. Arbitration is usually faster, simpler, more efficient, and more flexible for scheduling, than litigation. Also, it avoids some of the hostility of courtroom disputes, perhaps because it’s a private proceeding versus the public drama of the courtroom. If the subject of the dispute is technical—for example, about a patent—the parties can select an arbitrator who has technical knowledge in that field.
  • Disadvantages. Unlike a court ruling, a binding arbitration ruling can’t be appealed. It can be set aside only if a party can prove that the arbitrator was biased or that the ruling violated public policy. Unlike a court battle, there is no automatic right to discovery (the process by which the parties must disclose information about their cases). However, you can include a requirement for discovery in your arbitration provision or agree to it under arbitration rules. The costs of arbitration can be significant; in some cases, they may even exceed the costs of litigation (see below).

What does it cost? According to a survey by Public Citizen, a consumer watchdog group, the cost of initiating an arbitration is significantly higher than the cost of filing a lawsuit. On average, it costs about $9,000 to initiate a claim to arbitrate a contract claim worth $80,000 (versus about $250 to file that action in state court). Keep in mind that the people in the dispute pay the arbitrators, and arbitration fees can run to $10,000 or more. Add in administrative costs and your own attorney fees (if you hire one) and the process might even cost more than litigation.

Arbitration Checklist. A simple arbitration provision, such as the one shown in Example 1, may be suitable for basic contract disputes. But more complex contracts or those involving large sums of money may require the parties to consider some of the questions below. (Note: when you agree to arbitrate with an organization such as the American Arbitration Association, their rules permit the parties to work out some of these details later. Still, it’s generally easier to agree on these things before there’s a dispute.)

  • Do you want an arbitrator knowledgeable in a specific field of law or business? If so, include that in your arbitration provision—for example, “Arbitration shall be conducted by an arbitrator experienced in the toy and licensing industry.”
  • Do you want to understand why the arbitrator ruled a certain way? In this case, you should include a request for a written record of the decision.
  • Do you want to prevent some issues from being arbitrated? If so, then you need to make exceptions—for example, “All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration, except for disputes relating to the validity of patents … “
  • Are you worried that the potential award may be astronomical? If so, the parties may agree to limit the amount of the award—for example, by stating that the arbitrator cannot award more than $10,000 to any party.
  • Do you want the arbitrator follow specific arbitration rules? If so, include the name of the organization, for example, the California Lawyers for the Arts or the American Arbitration Association.
  • Should the winning party have its attorney fees paid by the loser? If so, include language regarding attorney fees—for example, “the prevailing party shall be entitled to its reasonable attorney fees and costs.” What are costs? The filing fees, charges for serving papers, court reporter charges for depositions (which can be very expensive), transcripts, costs of copying, and exhibits.
  • Does it matter where you arbitrate or what state’s law applies to arbitration? If so, indicate those preferences in arbitration provision. Keep in mind that the location of the arbitration may seem unimportant now, but will prove a major issue if a dispute occurs and you have to book a flight to Anchorage for the arbitration hearing.

Sample arbitration clauses. Example 1 shows a simple no frills arbitration clause; Example 2 offers more conditions and obligations.

EXAMPLE 1: Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. An award of arbitration may be confirmed in a court of competent jurisdiction

EXAMPLE 2: Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. The arbitration shall be conducted on a confidential basis pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Any decision or award as a result of any such arbitration proceeding shall be in writing and shall provide an explanation for all conclusions of law and fact and shall include the assessment of costs, expenses, and reasonable attorneys’ fees. Any such arbitration shall be conducted by an arbitrator experienced in [insert industry or legal experience required for arbitrator] and shall include a written record of the arbitration hearing. The parties reserve the right to object to any individual who shall be employed by or affiliated with a competing organization or entity. An award of arbitration may be confirmed in a court of competent jurisdiction.

Do you need to hire a lawyer for arbitration? If you have a significant amount of money or property in dispute, you should consider hiring a lawyer. The arbitrator’s decision will be binding, which means this is your only chance to win.

Arbitration variations. Arbitration is typically a straightforward matter. The parties submit evidence and arguments, and the arbitrator makes a binding decision. Over the years, however, a few variations have developed, including:

  • Mediation/Arbitration (sometimes known as “Med/Arb”). In this arrangement, the parties first attempt to mediate their dispute and if they can’t resolve it with a mediator, they submit the matter to arbitration.
  • Bracketed (High-Low) Arbitration. The parties agree in advance to high and low limits on the arbitrator’s authority. This method is best used when the only dispute is over how much money is owed.
  • Pendulum Arbitration (also known as “Baseball Arbitration”): Each party gives the arbitrator a figure for which he or she would be willing to settle the case. The arbitrator must then choose one party’s figure or the other—no other award can be made.
  • Night Baseball Arbitration: As in baseball arbitration, above, each side chooses a value for the case and exchanges it with the other side—but not with the arbitrator (“night baseball” refers to the fact that the arbitrator is ”kept in the dark.”) The arbitrator makes a decision about the value of the case, and then the parties must accept whichever of their own figures is closer to the arbitrator’s award.



Americans owe a staggering $900 billion to credit card companies. That’s why most card-carrying members of the credit-card class aren’t surprised when the credit card company adds some sticker shock each month (for failing to pay their credit card off in full). These additional monthly interest payments are calculated using an annual percentage rate (APR) established by the federal government The APR is divided by twelve to arrive at a periodic interest rate, then multiplied against your monthly balance to come up with your monthly interest payment. References to APRs are often found in loan agreements and mortgages, or may be used in a contract as the standard for determining interest on late payments.


Real-estate contracts often reference things that “run with the land.” These are called “appurtenances,” and they come in two forms:

  • a right associated with land—for example, the right to access land using a horse-trail, or
  • property that’s attached to land—for example, a barn or a shed.

anti-dilution clause

In 1995, a U.S. company, Alantec, was sold for $770 million. The founders, who thought they owned 90% of the stock, received a measly $600,000. Why? Venture capitalists who owned a small share of the company had been issuing the company’s common stock to many investors, which diluted the founder’s ownership to .007 percent. To prevent this type of dilution, stock sale and stock transfer contracts typically contain a provision that prevents the value of the stock from decreasing as a result of additional shares being issued (a process known as “dilution”).


‘Any’ and ‘Each’ are often (and incorrectly) used interchangeably in contracts. Here’s the scoop.

Any’ refers to one member of a group without specifying which member—for example, ‘any general partner’ refers to one (unspecified) general partner from a partnership. If ‘any’ is used with a plural noun—for example, ‘any general partners’—then it refers to two or more partners from the partnership without specifying which partners.

Each’ refers to every member of a group considered individually—for example ‘each officer’ refers to every officer in the company from vice-president to CEO. Because ‘any’ and ‘each’ are adjectives that sometimes cause contract ambiguity, contracts expert Tina L. Stark recommends using ‘any’ when creating discretionary authority—for example, when someone may do something (“Any officer may sign checks without the consent of the board”), and to use ‘each’ when creating affirmative obligations—for example, when somebody must do something. (“Each officer shall furnish proof of citizenship prior to commencing employment.”)

anticipatory breach (anticipatory repudiation)

In April 1852, Mr. De La Tour hired Mr. Hochester as a courier. Hochester was supposed to start work on June 1, but on May 11, De La Tour told him he wouldn’t need his services. On May 22, Hochester sued for breach and De La Tour responded that no breach could occur until the services were due to begin, on June 1 (which had been the rule until that time). The English court, in a landmark case, ruled that a contract is breached once one party unconditionally refuses to perform as promised, regardless of when performance is supposed to take place. This unconditional refusal is known as a “repudiation.”

Once one party to a contract indicates—either through words or actions—that it’s not going to perform its contract obligations, the other party can immediately claim a breach and seek remedies such as payment.

When does repudiation occur? Courts usually recognize three types of repudiation:

  • A positive and unconditional refusal is made to the other party (“express repudiation”). The other party must tell you, in essence, “I’m not going through with the deal.” It’s not enough to make a qualified or ambiguous refusal (“Unless this drought breaks, I won’t be able to deliver the apples.”). The repudiation must be clear, straightforward, and directed at the other party (“I will not be delivering the apples as promised.”).
  • A voluntary act makes it impossible for the other party to perform. When it comes to repudiation, actions speak as loudly as words. For example, a couple was supposed to repay two loans from the profits of their business. Instead, the couple voluntarily ran the business into the ground, incurring lots of other debts and making it impossible to pay back their original loans. Their reckless actions counted as a repudiation of the original loan agreements.[i]
  • The property that is the subject of the deal is transferred to someone else. If the contract is for the sale of property, repudiation occurs when one party transfers (or makes a deal to transfer) the property to a third party. For example, if you’ve contracted to buy a house and you learn that the other party has subsequently sold it to his brother, your sales contract has been repudiated (even if you never heard a word about it from the other party).

UCC rules for sale of goods. The Uniform Commercial Code (UCC)—legal rules governing the sale of goods—prescribes a procedure for dealing with anticipatory breach. If you have reason to believe that the other party is not going to fulfill its obligations, you have a right to demand “adequate assurance of performance,”[ii] and you can suspend your own performance until the assurance is provided. If, after 30 days, the other party fails to comply with your request for assurances, the contract is officially over (“repudiated”).

EXAMPLE: In April, Steve orders 100 computers from Compco. He is supposed to pay $50,000 on May 1 and receive the computers on July 1. On April 29, Compco’s CEO tells a television reporter, “Unless chip production increases, Compco may have trouble filling its summer orders.” Steve demands an assurance from Compco and withholds payment of the $50,000 due on May 1. When Compco hasn’t responded to Steve’s request for assurance by the end of the month, Steve terminates the contract.

As you can see, under UCC rules, a qualified repudiation (“Compco may have trouble filling its summer orders”) is enough to stop the clock on the contract, at least until the other side provides the requested assurances. Many commentators have argued that all contracts—not just those governed by the UCC—should follow these rules for requesting and providing assurance.

Retracting repudiation. It’s possible for a party to repudiate the contract and then later retract the repudiation, as long as the other party hasn’t made a “material change” in position because of the repudiation.

EXAMPLE: Tom is supposed to deliver 100 cases of cauliflowers to Bob. Tom’s tractor breaks down, and he tells Bob he can’t fill the order. Bob immediately makes a new cauliflower deal with Sam. Two days later, Tom buys a new tractor and tells Tom he can fulfill the order. But it’s too late to retract the repudiation because Bob relied on it in making his new deal with Sam (a “material change”).

When only a payment remains. In what may seem like an odd quirk, the rules described in this section don’t apply if the only contract obligation remaining is for one party to pay money to the other. In these cases, the party seeking the payment must wait until the due date for the payment has passed. (No claim of anticipatory breach can be made.).

EXAMPLE 1: Greta agrees to steam clean Sam’s houseboat on May 1; Sam will pay Greta $2,000 on June 1. Greta completes the steam cleaning on time and on May 15, Sam tells Greta he can’t pay her. Because the only contract obligation remaining is payment, Greta must wait until June 1 to sue for breach.

EXAMPLE 2: Same facts as above: Greta agrees to steam clean Sam’s houseboat on May 1; Sam will pay Greta $2,000 on June 1. This time, Greta starts the work but within the hour Sam announces he can’t pay her. In this case, Greta does not have to wait until June 1 to sue for breach because Greta hadn’t completed her steam cleaning (her obligation). She can claim an anticipatory breach.

Duty to mitigate. There’s one last twist to anticipatory breach: if one party repudiates the contract, most courts require the other party to act swiftly to avoid incurring unnecessary costs or expenses. This is referred to as “mitigating damages,” and generally means that you can’t sit around and let the situation get worse. This also explains why some parties repudiate a contract: It gives the other party more time to cut its losses, which reduces the damages available for the breach. For instance, in our houseboat example, if Sam repudiates two weeks before Greta starts work, she may be able to find another client to fill that slot—and limit or even wipe out any damages she could have collected from Sam as a result of the breach. If she can make up the money with another job, it’s essentially a situation of “no harm, no foul.”

See: breach of contract, UCC, mitigating damages

[i] Zogarts v. Smith, 86 Cal.App.2d 165 (1948).

[ii] U.C.C. Sec. 2-609

antecedent, rule of the last

In 1891, attorney Jabez Sutherland wrote a book on interpreting contracts and statutes. He created a simple rule for deriving the meaning of contract clauses that contained multiple obligations or conditions. Sutherland said that when a qualifying word or phrase is used with a group of obligations or conditions, the qualifying terms are presumed to modify only the condition or obligation that immediately precedes it (the “last antecedent”).[i]

EXAMPLE 1: A contract clause states: “Subject to the termination provisions of this Agreement, this Agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years, and thereafter for successive five (5) year terms, unless and until either party terminates it by providing one year prior notice in writing to the other party.” The qualifying phrase: “unless and until either party terminates it by providing one year prior notice in writing.” The last antecedent: “successive five year terms.” Applying the rule to this clause, either party could terminate the agreement under the notice provision only during “successive five (5) year periods,” not during the initial five-year period.

EXAMPLE 2” The U.S. Constitution states: "No person except a natural born Citizen, or a Citizen of the United States, at the time of the Adoption of this Constitution, shall be eligible to the Office of President...” The qualifying phrase: “at the time of the Adoption of this Constitution.” The last antecedent: “a Citizen of the United States.” If the rule were not applied and the phrase was intended for both of the conditions, then the U.S. would have run out of presidential possibilities—natural born Citizens at the time of Adoption of this Constitution—sometime in the 19th Century.

Unfortunately for those seeking contractual clarity, Jabez Sutherland muddied the waters by added a qualifier to his rule: “̀Evidence that a qualifying phrase is supposed to apply to all antecedents instead of only to the immediately preceding one may be found in the fact that it is separated from the antecedents by a comma.” Although still used by some American courts[ii], this exception could lead to unintended results, because it conflicts with common grammatical usage of commas. Like all rules of construction, courts generally apply this one with a dose of common sense in order to avoid potentially absurd results.

[i] Service Employees International Union Local 503 v. State of Oregon (Ct. App. 2002).

[ii] Ibid.


During the 1930s, homeowners purchased homes with much shorter mortgages (three to five years) than today’s 20-30 year loans. Down payments for these short mortgages ranged from 50% to 80% of the purchase price and ended with a large balloon payment. That may explain why more than half of the population rented and most of the rest were in danger of losing their homes during the Great Depression. In 1934, the Federal Housing Authority stepped in with a new system of government-backed mortgages, which required a much lower down payment, and spread repayment of the loan amount (the principle) and the cost of the loan (the interest) over a longer period, using a system called amortization. Using an amortized payment plan, the borrower—for example, in a mortgage or car loan—gradually pays less interest (and more principal) as the payment plan progresses.

EXAMPLE: Jake borrows $100,000 to purchase a condo at 8% interest and plans to pay it back over ten years. Although each of his120 monthly payments will be for the same amount ($1213), less than half of his first payment will go toward paying off the principal; the rest will pay the interest on the loan. As the principal is paid off, the interest owed decreases and the amount of each payment that goes toward the principal increases over the life of the loan, until only $8 of his final payment goes toward interest.

[i] Service Employees International Union Local 503 v. State of Oregon (Ct. App. 2002).

[ii] Ibid.


Didn’t get your contract exactly right? Amend it.

Amendments are ideal if you and the other party want to modify some of the elements of a contract—for example, one party wants to make an addition, deletion, correction or similar change. An amendment doesn’t replace the whole original contract, just the part that’s changed by the amendment (for example, the delivery date or price for goods). If a contract requires extensive changes, it’s generally wiser to create an entirely new agreement, or alternatively, to create an “amendment and restatement,” an agreement in which the prior contract is reproduced with the changes included.

Can you prohibit oral amendments? Some contracts contain clauses such as the one below, which requires that any amendments be made in writing and signed by both parties.

EXAMPLE: Entire Agreement. This is the entire agreement between the parties. It replaces and supersedes any and all oral agreements between the parties, as well as any prior writings. Modifications and amendments to this agreement, including any exhibit or appendix, shall be enforceable only if they are in writing and are signed by authorized representatives of both parties.

Surprisingly, the prohibition against oral modification provided in this clause is not always enforced. The reasoning, as expressed by one court, is this: Parties to a contract cannot, even by a written provision in the contract, deprive themselves of the power to alter or terminate that contract by a later agreement; so a written contract may be modified by the parties in any manner they choose.[i] In other words, a contract clause requiring written amendments will not always be enforced. The chances of it being enforced go down if one or both parties relied on the oral modification.

EXAMPLE: An insurance company had an employment contract with an agent that required any modifications to be in writing. The agreement also stated that the agent’s employment had to be terminated in writing. The agent was offered $500 to resign. When he refused to resign, his boss said, “You are fired.” The agent left the job, accepted his everance pay and accrued vacation pay, and stopped coming to work. However, he argued that he was still entitled to collect commissions because his employment was never terminated in writing, as required by the contract. A federal court of appeal did not agree. Despite the contract language requiring modifications in writing, the court determined that the agent and the insurance company had accepted, through their statements and actions, an oral amendment to the contract regarding notice of termination.[ii] Most importantly, the insurance company had reason to rely on the agent’s behavior after he was told he’d been fired.

This is not to say that you should disregard clauses prohibiting oral amendments or avoid using such clauses in agreements. Written amendments—like written agreements in general—have many advantages over oral agreements, and a party seeking to enforce an oral modification despite a clause prohibiting them will face an uphill battle in court. In addition, the law requires that some amendments must be in writing —for example, amendments for transfers of real or intangible property and certain financial contracts must be in writing.

Amendments, consents, and waivers. There are times when the parties want to deviate from the agreement but don’t need to modify it. For example, one party to a nondisclosure contract might give the other party permission to disclose certain facts to certain people, even though that might technically violate the language of the contract. These deviations—in which a party waives a provision or permits something that is otherwise prohibited—are sometimes considered amendments although they are more properly defined as “waivers” or “consents.” Unlike an amendment, a consent or waiver doesn’t modify the agreement itself; instead, it excuses or permits activities that are otherwise prohibited by the contract Consents and waivers should be in writing.Consent

Creating amendments. The goal when creating a contract amendment is to be as specific and concise as possible. As James Brown might have stated, “You should hit it and quit it.” The document can appear informal—for example, like a letter agreement—or it can resemble the original contract in font and layout. Generally, amendments come in a few different styles, as shown below.

Redlines and strikeouts. Additions and deletions are shown visually, with additions underlined and deleted text crossed out. (Most word processing programs allow you to choose “strikeout” as a font choice.) A statement describing the process commonly precedes it:

EXAMPLE: “The parties agree to amend the Agreement by the following additions (indicated by underlining) and deletions (indicated by strikethroughs):

Section 7 is amended to read as follows:

7. Term. The Term of this Agreement shall be from July 31, 2009 to July 31, 2010 2011. The Agreement may be renewed on an annual basis for additional two-year terms following the initial term, upon written agreement of the parties. The parties must mutually inform each other of their intention to renew the Agreement no later than January 31 June 1 of each year in which the Agreement is set to terminate.

“Replaced in its entirety.” In this manner, you simply state that a whole clause has been replaced and provide the new clause.

EXAMPLE: “Section 7 is replaced in its entirety by the following:

7. Term. The Term of this Agreement shall be from July 31, 2009 to July 31, 2011. The Agreement may be renewed for additional two-year terms following the initial term, upon written agreement of the parties. The parties must mutually inform each other of their intention to renew the Agreement no later than June 1 of each year in which the Agreement is set to terminate.

Describing without restating the amendment. Using this approach, the changes are described. This is often shorter but requires the parties to check against the existing text of the contract.

EXAMPLE: “The first sentence of Section 7 is amended by modifying “2010” to “2011.” The second sentence is amended by striking “on an annual basis,” and replacing it with “for additional two-year terms.” The date in the last sentence is modified from “January 31” to “June 1.

You can choose whichever method suits you or combine them if you wish. The important thing, as with all contract drafting, is that your intentions are clear to all parties as well as to third parties reading the amendment. In addition, be sure to change any cross-references, if necessary.

Note: Modifications before the contract is signed. If a contract is modified before it is signed, such changes are not ‘amendments.’ If you wish to handwrite a change into an agreement that been printed out for signature—for example, because you noticed a typo at the last minute—you can use a pen to do so and have both parties initial it. Although not technically an amendment, these modifications are sometimes labeled as such.

Note: Amending certain assigned U.C.C. agreements. If your contract is a secured transaction—a loan or a credit transaction in which the lender acquires a security interest in collateral owned by the borrower—then there may be complications involving amendments to assigned agreements under Section 9-405 of the Uniform Commercial Code (UCC). You should consult with an attorney before amending an assigned contract for a secured transaction.

EXAMPLE: Amendment

1. This amendment (the “Amendment”) is made by _________________ and _________________, parties to the agreement _________________ dated (the “Agreement”).

2. The Agreement is amended as follows:


3. Except as set forth in this Amendment, the Agreement is unaffected and shall continue in full force and effect in accordance with its terms. If there is conflict between this amendment and the Agreement or any earlier amendment, the terms of this amendment will prevail.


By: __________________________

Printed Name: _________________

Title: ________________________

Dated: _________________


By: __________________________

Printed Name: _________________

Title: ________________________

Dated: _________________

Completing the Amendment. Here’s how to complete the sample Amendment.

1. Introductory paragraph. Type your name or the name of your company and the other side’s name (an individual or a company).

2. Describe the amendment(s). Type in the amendments to the existing contract using any one of the three methods described above.

3. The concluding paragraph. This paragraph should be included to guarantee that other than the amendment, the contract remains as it is written.

4. Proofread and sign your amendment. Under the printed party names, each of you should sign and write in the date. Below, each should print his or her name and title, such as “Chief Operating Officer,” or “General Partner.” You’ll want to make sure the person signing the agreement has the authority to do so, and equally important, that you have fulfilled any signing or notice requirements included in the original agreement. Generally, agreements require the contracting parties to sign all amendments. However, in some cases—for example corporate amendments or amendments to financial agreements—other signatures or notices may be required.

5. Managing Amendments. Contracts may undergo multiple amendments, so it’s usually a good idea to number each amendment—for example “Amendment No. 1” or “First Amendment.” In addition, amendments should be filed and maintained with the original agreement so that anyone viewing the file will know that the agreement has been amended.

[i] Prime Financial Group, Inc. v. Masters, 141 N.H. 33, 676 A.2d 528, N.H.,1996.

[ii] Canada v. Allstate Ins. Co., 411 F.2d 517. C.A.Fla. 1969.


If an artist-model agreement states, “The artist shall paint the model nude,” is it the artist or the model who should appear sans clothing? This is an example of ambiguity: when contract language can be reasonably interpreted in more than one way. Some ambiguities are semantic—a word has multiple meanings—but most are the result of misuse or improper placement of words, making the language confusing or inconsistent, or in some cases, producing an absurd result. For example, one employment contract we’ve seen states that the employee “must wear the uniform in the employee locker.” (Claustrophobic applicants need not apply.)

Consider a contract between a lawyer and a client that provides for payment of the attorney’s out-of-pocket expenses. The clause states that:

“These [out-of-pocket] expenses include court reporting services, expert witness fees, reasonable travel expenses, if any, fees paid to trial witnesses and the cost to create demonstrative trial exhibits.”

In this case[i], the client argued that the word “include” was a term of limitation that should be interpreted as “include only. Therefore, he shouldn’t have to pay for anything that wasn’t on the list, such as photocopies and online research. The lawyer argued that “include” was a term of expansion, used to preface a few common examples. In other words, the client had to pay for all reasonable out-of-pocket expenses, whether or not they were on the list.

The court agreed that both interpretations were reasonable but concluded that as a matter of public policy—and perhaps, poetic justice—ambiguities in attorney fee agreements should be construed against the attorney, who after all wrote the agreement. The client didn’t have to pay the extra fees.

How do courts interpret ambiguity? Some ambiguities may not be obvious to the ordinary observer but may arise because the contract language has an unusual meaning under the circumstances. For example, in one historic case, a contract for horsemeat provided a discount if the meat was less than 50% protein. This seems clear enough on its face, but the supplier successfully claimed that trade custom in the horsemeat business was that 49.5% protein meets a 50% standard.[ii] In other words, the term “50%” was ambiguous in this context, in that it could actually mean “49.5%.”

What evidence is considered? Courts differ as to what types of evidence they will consider when resolving ambiguities in a contract. For many years, courts looked only to the “four corners” of the document and to the “plain meaning” of its words. In a 1968 case, however, the California Supreme Court broke with the past and considered evidence outside of the contract in interpreting its meaning.

EXAMPLE: A contractor agreed to indemnify a public utility for any harm caused during the replacement of a turbine cover. (“Indemnify” means that the contractor would compensate the utility for damages.) When the contractor caused $25,000 in damage, the public utility sued to get the money back under the indemnity clause. The contractor argued that the indemnity clause was meant to insure only against harm to third parties, not to the utility itself. The words “third-party” didn’t appear in the contract, but other evidence of trade practices by the parties proved that the contractor’s interpretation was correct. The California Supreme ruled in favor of the contractor stating that evidence outside a contract (extrinsic evidence) should be admitted as long as it is offered to prove a meaning to which the language of the writing is “reasonably susceptible.”[iii]

In summary, although courts sometimes differ, external evidence—for example, previous contracts between the parties or previous courses of action between the parties—can generally be used to clarify or explain an ambiguity, as long as that evidence does not vary or contradict the terms of the contract.

Two other things to consider about ambiguity.

  • Vague language is not necessarily ambiguous. Common contract terms – for example, ‘reasonable,’ ‘satisfactory,’ and ‘immediately’ -- are vague but not necessarily ambiguous within the context of an agreement.
  • Plain language can avoid many ambiguities. Lawyers have a fondness for unusual word order (“as in this deed provided”) as well as obscure language (“therein referenced”). In addition there is a paranoia among lawyers that leads to over drafting—for example, saying “shall not now, or in the future” instead of just saying, “shall not.” The solution is unambiguous: Use plain language whenever possible.

Ambiguities clause. Sometimes—as in the fee agreement mentioned above—ambiguities are interpreted against the drafter of the contract. In other words, if terms could be reasonably interpreted in different ways, the could will likely rule in the way most beneficial to the person who didn’t write the contract. After all, the drafter was responsible for writing the ambiguous language in the first place, and shouldn’t get to benefit from his or her lack of clarity. Parties who don’t want this default rule to apply can include the following clause (sometimes referred to as an “ambiguities clause”) in their contract:

EXAMPLE: Ambiguities. Both parties and their attorneys have participated in the drafting of this Agreement and neither party shall be considered the “drafter” for the purpose of any statute, case, or rule of construction that might cause any provision to be construed against the drafter of the Agreement.

[i] Guerrant v. Roth, 334 Ill.App.3d 259, 777 N.E.2d 499, (Ill.App. 1 Dist.,2002).

[ii] Hurst v. W.J. Lake & Co., 16 P.2d 627 (1932)

[iii] Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co. 69 Cal.2d 33, 69 Cal.Rptr. 561 (Cal.1968)

Tuesday, April 27, 2010

alternative dispute resolution (ADR)

In 1992, Herb Kelleher, president of Southwest Airlines, offered to arm-wrestle a rival airline company’s president for the right to use the slogan, “Plane Smart.” Kelleher lost but he demonstrated the outer boundaries of alternative dispute resolution (ADR): ways to settle an argument short of full-blown litigation. Few executives have followed Kelleher’s lead; most prefer more common ADR procedures, such as:

  • Mediation. A neutral third person helps the parties talk through their dispute and come up with a mutually acceptable solution. Some mediators suggest possible outcomes, but a mediator generally can’t impose a resolution on the parties.
  • Arbitration. Much like a judge, an arbitrator hears from both parties, sometimes in a trial-like proceeding. The arbitrator then decides how the dispute should be resolved.
  • Negotiation. The parties resolve the dispute themselves, with or without the aid of a third party.
  • Collaborative law. Lawyers, trained in special, less adversarial procedures, represent each party and work together to reach a mutually acceptable resolution. Collaborative law is used most commonly in divorce proceedings.

Although ADR is considered an "anything but court" approach, ADR-type programs have been incorporated by many courts. For example, the federal courts use Early Neutral Evaluation (ENE), a variation on mediation—in order to alleviate their increasing caseloads. With the exception of court-ordered ADR procedures, all ADR is voluntary.

Contracting parties who want to resolve potential disputes by ADR rather than litigation should include a clause in their contract to that affect. Although the parties could decide to use ADR after a dispute arises, it’s better to put an ADR clause in the contract ahead of time. Once the parties are engaged in a contract dispute, it will be much harder for them to reach an agreement on dispute resolution procedures.

See: arbitration; mediation; negotiation

agreement in principle

An agreement in principle (like a “letter of intent”) is an “agreement to agree”— the parties want to make a deal but they haven’t agreed on the details. Because it doesn’t contain all of the essential elements for a contract, an agreement in principle cannot bind the parties to particular terms. However, most courts agree that once an agreement in principle is made, the parties have a duty to act in good faith as they proceed to finalize the agreement. If one party fails to negotiate in good faith, the other may sue for damages. On the other hand, if the parties reach an agreement in principle, and then take action on it—that is, they act as if a contract is in place—courts will presume that a contract exists and will do their best to determine and enforce its terms.

See: Letter of intent


Remember Tom Cruise as a sports agent in Jerry Maguire, or Jeremy Pivens as the Hollywood agent Ari Gold, in Entourage. We know they’re important, but what exactly do these people do? Basically, an agent is authorized to act on behalf of someone else (the “principal”). In return for their deal making, agents usually receive a cut of the money the principal makes on the deal. Because an agent usually has authority to negotiate contracts that are binding on the principal, the agent has a legal duty to be scrupulously loyal and honest to the principal, fully disclosing all of the information the principal needs to make a fully informed decision. (This higher standard is known as a “fiduciary relationship.”) For example, it would be a breach of your agent’s duty if she failed to disclose that she also represented your competitor.

An agent is not the principal’s employee because the principal does not control how the agent performs (a standard requirement for employees). Also, most agents typically represent a number of clients. To ensure that a court does not misinterpret the relationship, agency contracts often contain a clause like the one below. Note, this clause references other relationships besides agent-principal including joint ventures (any joint economic activity between two or more people) and partnerships:

EXAMPLE: No Joint Venturer: Nothing contained in this Agreement shall be deemed to constitute either agent or company as a partner, joint venturer, or employee of the other party for any purpose.

When an agent can bind the principal (“actual authority”). The agent’s power to enter into contracts and make promises that the principal must keep usually happens in one of two ways:

  • By contract. The agent and principal sign an agency contract, establishing the agency’s power to bind the principal.
  • By law. Either a statute or case law establish the relationship. For example, in a general partnership, any partner can bind the other partners.

When an agent’s power to commit the principal is explicitly spelled out by law or contract, the agent is said to have “actual authority.” This means that the agent and principal both know, and agree to, the agent’s role in acting for the principal.

Apparent authority. In some cases, an agent lacks actual authority but leads someone to reasonably believe that he or she has the power to enter into contracts. This is called “apparent authority.” In order to protect the party that was misled, a court will uphold the agreement if that party reasonably believed that the principal endorsed the deal, because of statements, actions, or even inaction.

EXAMPLE: A former insurance agent, recently fired by SLYCO, arrives at Max’s home. The ex-agent was supposed to turn in his company car (emblazoned with the SLYCO logo) but kept it for an extra week. The ex-agent convinces Max to pay several thousand dollars for a newer policy. The agent pockets Max’s money and disappears, never informing SLYCO. Later, after a car accident, Max asks for repayment under his policy. Max reasonably relied on the fact that the ex-agent had a company car in assuming that he still worked for SLYCO. Because Max’s assumption was reasonable, SLYCO would probably be obliged to provide the coverage purchased by Max. Courts refer to situations like this, in which someone who once had actual authority no longer does, as “lingering apparent authority.”

How to avoid apparent authority problems. To avoid being bound to contracts by someone with apparent authority, the principal should:

  • Provide notice. Alert third parties thief an agent no longer has authority. For example, if you’ve switched agents, notify your customers.
  • List actual agents. Periodically distribute a statement to customers and clients on company letterhead indicating the agents who have actual authority, and update the last quickly when necessary.
  • Keep the agent informed. Let the agent know, in writing, whether or not you have conferred actual authority, and as to which issues.

additional insured

Being named as an “additional insured” allows someone to be protected from liability under another person’s or company’s insurance company. When an entertainer like Britney Spears appears at the Hard Rock CafĂ©, she (probably through her lawyer) requests, as a condition of her contract, that she be named as an additional insured under the Hard Rock’s liability insurance policy. That way, if anyone is injured during her show, the insurance policy will protect her—along with the club—from liability. Similarly, a toy designer will want to be named as an additional insured under a toy company’s product liability insurance.
How is it done? A contract clause—commonly entitled “Insurance”—establishes the type of insurance required, the amount of coverage, how proof will be provided that the party has been named, and other details. These clauses can be quite lengthy. Below is an example of an abbreviated version.
EXAMPLE. Insurance. Company shall obtain and maintain during the term of the agreement, at Company’s sole cost and expense, standard product liability insurance coverage naming Customer as an additional insured.


If you’re a busy manager who uses the same contract repeatedly with multiple clients, then addendums are your BFFs. An addendum is simply any document attached to—and made part of—a contract. Using an addendum makes it easy to change schedules, prices, standards, product lists, or any other information that may vary regularly over time or from customer to customer. In some cases, the addendum is also known as a rider, an exhibit, or a schedule (although technically, the latter two terms are specific types of addendum).
How can you be sure the addendum is binding? Because an addendum is attached after the signature page, parties often initial each page of the addendum to guarantee that it will be considered part of the agreement. Another (or complementary) approach is to include the words “incorporated by reference” the first time an addendum is mentioned in a contract (for example, “The parties shall abide by the delivery specifications in the attached Addendum, incorporated by reference”). You can also use a special clause within the main body of the contract to make this point, as shown below.
EXAMPLE: Addendum. Any attached Addendums and any other attachments or exhibits to this Agreement are incorporated in this Agreement by reference.

act of God

Even atheists can avoid liability for breaching an agreement by claiming that performance was delayed by an act of God—an unforeseen natural event such as a flood, tornado, earthquake, or lightning. However, whether a court accepts this argument often depends on the contract language in a “Force Majeure” clause. Humanists please note: although the reference to ‘God’ implies a supernatural cause for such events, it is accepted that some of these events are (at least partially) human-induced—for example, flooding caused by the use of reclaimed land or earthquakes caused by human activity, such as drilling or excavation.

See: force majeure

acquisition agreement (federal government, FAR)

The federal government needs to buy a lot of stuff, from jet engines and highway signs to paper clips and those nifty baseball caps with the presidential seal. It purchases these things via contracts known as acquisition agreements. All federal acquisition agreements must meet two criteria:

  • Their purchasing power must come from a specific legislative source of funding. In other words, Congress—which holds the “power of the purse”—must have approved the expense or department budget.
  • The agreement must follow the federal acquisition rules, most of which are derived in some way from the Federal Acquisition Reform Act (FARA) or the Federal Acquisition Regulations (FAR, found in Title 48 of the United States Code of Federal Regulations). These laws set guidelines, safeguards, fees, whistleblower protections, administrative rules for contracts and many other regulations.

In addition, federal contracts must be executed or authorized by a contracting officer (usually the head of the appropriate agency) who has the authority to bind the federal government. Both goods and services can be the subject of federal acquisition contracts, although special performance-based rules apply to service agreements. The acquisition regulations and process are provided in detail at Acquisition Central (

acquisition agreement (sale of business)

It’s a rule of the corporate food chain that the bigger companies devour the smaller—for example, Google purchased YouTube, Coca-Cola bought Odwalla, and General Motors acquired Hummer (R.I.P.). All such deals, whether big or small, are made possible by acquisition agreements. These agreements occur in two ways:

  • Entity purchase agreements (also known as “stock purchase agreements”). In this arrangement, the buyer purchases the business entity by buying a majority (or more) of its stock. The new owner generally steps into the shoes of the previous owners, assuming all debts and obligations.
  • Asset purchase agreements. In this arrangement, the buyer purchases all of the business’s assets, both its tangible property (inventory, real estate, office equipment, etc.) and intangible property (copyrights, patents, trademarks and trade secrets). The company’s shell—its corporate or LLC ownership—remains in place with the same owners, even though there is no business to run anymore, as a practical matter. This is the deal of choice for the purchase of a sole proprietorship or a partnership because the business has no ”shell” to speak of: Once the assets are gone, there’s no structure left to worry about.

Which is better? There are two issues to consider when choosing an acquisition model: taxes and liabilities for debts and obligations. Tax-wise, an asset sale is usually better for the buyer because the buyer can begin depreciating the assets sooner. The seller usually prefers an entity purchase because the seller pays taxes only at the low long-term capital gain rate. Sellers are especially wary about using an asset sale for a C corporation, because that will leave them at risk for double taxation, once for the corporate entity and then again for the shareholders.

As for debts and liabilities, an asset sale is usually preferable for a buyer, because the buyer won’t be responsible for existing debts of the business unless the buyer agrees to take them on. That’s the not the case with an entity sale, in which it’s assumed that all liabilities are included in the sale. (To make the deal happen, however, the selling shareholders or LLC members may have to accept responsibility for some specified liabilities, such as a recent bank loan.) The choice of acquisition arrangement also affects how ownership is transferred and whether a lease for the business can be transferred or assigned to the new owners.


When something gradually increases in size—for example, your spouse’s waistline or your boss’s ego—the process is known as accretion. Accretion also appears in contracts, such as:

  • Financial contracts. Accretion refers to the process by which payments or value increase over time. For example, accretion occurs when a bond purchased at a discounted price ($175) matures to its face (or “par”) value ($250).
  • Real estate contracts. Accretion refers to the increase in land size due to the forces of nature. For example, accretion occurs if a river changes course and sediment deposits increase the size of the property.
  • Labor union contracts. An accretion clause dictates what happens to employees in one company if they are transferred to another company whose employees are already represented by a union.

An accretion clause spells out how the extra money, property, or people will be treated (for example, who will own the land created by sedimentation).