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

attest

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

arms-length

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.

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[i] 26 CFR Section 1.482

amendment

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.

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[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.

addendum

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.

acceptance

When you click the “Place Your Order” button at Amazon.com, tell the cab driver where you want to go, or hand a $20 bill to the cashier at the movies, you are accepting an offer to enter into a contract. All of these actions—despite the lack of fanfare—communicate an unconditional willingness to be bound by the other party’s offer. An acceptance is a necessary part of a legally binding contract: If there’s no acceptance, there’s no deal.

There is no acceptance if … Occasionally, one party disputes whether the other accepted an offer. In general, acceptance has not occurred if:

• one party’s response to an offer doesn’t communicate a readiness to be bound (“Sounds good, let me think about it”);
• the response has strings attached (“I’m willing to do it if you’ll pay me ten thousand dollars more”); or
• the offer is based on lies (“You said you had title to the car.”)

Also, if the person making the offer indicates how the other party must accept it—“Call me with your response before Saturday”—then, the other party must accept under those conditions to create a contract. In this example, accepting on Sunday will not create a contract.

Conditional acceptance and counter offers. When one party responds to an offer with additional conditions or qualifications, the response is generally considered to be a counter offer, not an acceptance. A counter offer isn’t an acceptance because it materially changes the terms of the proposed contract. Legally, a counter offer is considered a rejection of the original offer and the proposal of a new offer in its place.

EXAMPLE: A customer asks a carpenter to build a cabinet for $1,000 and the carpenter replies, “OK, if you also pay for my supplies.” The carpenter has made a counteroffer. The customer must accept the counter offer in order for an agreement to be formed.

However, under the Uniform Commercial Code—legal rules governing the sale of goods—the rules are sometimes more liberal.[i] Under these rules, a qualified acceptance might create a binding contract, despite adding new conditions, unless the modifications cause surprise or hardship. For example, “I accept your offer to sell your car, but you’ll have to arrange to deliver it to California, instead of New York.”

Acceptance by actions. Acceptance isn’t always communicated by words; sometimes actions suffice. For example, if a buyer places an order to buy goods at a certain price, and the seller responds by shipping the goods, the seller’s actions signal acceptance of the offer. However, silence by itself – that is, if one party doesn’t say or do anything—rarely constitutes acceptance. That principle is derived from a 19^th century English contract case in which a man offered to buy a horse and stated that unless he heard otherwise from the seller, “I consider the horse mine.”[ii] The British court ruled that his assumption didn’t create a contract; the other party’s acceptance had to be clearly expressed. Acceptance of goods that weren’t ordered may also create a binding contract except when a consumer receives unsolicited merchandise. For example, in California, the receipt of unsolicited merchandise is an unconditional gift, which the recipient need not return or pay for.[iii]

Open offers and options. Parties that want some time to consider an offer—for example, for a home purchase—can enter into an option agreement. In an option agreement, one party pays for the exclusive right to accept an offer during a fixed period. This gives the potential buyer an opportunity to consider the deal without having to worry that someone else will snap it up—or that the terms of the deal will change—in the meantime.

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[i] UCC 2-207

[ii] Felthouse v Bindley (1862) EWHC CP J 35

[iii] Cal. Civ. Code Sec. 1584.5