An Introduction to Contracts
MSU School of Engineering
April 16, 2008
Prof. Lumen Mulligan, M.A., J.D.
Slide 1
Contracts and Your Career
• Products and services you (your firm)
sell to clients
• Products ultimately resold to
consumers
– Standard contract law is often altered by
state and federal consumer protection
acts
• Employment contracts
Slide 2
What gives rise to a lawsuit for breach of
contract?
Valid Contract
• Mutual Assent
• Consideration
• Legality of the
Object
• Capacity
(Material)
Breach
• Substantial
Impairment
•Measuring Expectations
•Anticipatory
Repudiation
•Liquidated Damages
•Specific Performance
•Restitution
Defenses
Slide 3
Damages
What is a Contract
• A contract represents a series of (mostly)
voluntarily assumed rights and duties (i.e.,
promises), the breach of which normally
empowers the non-breaching party to sue
for damages.
• Contrasted with torts that are mostly
involuntarily assumed duties.
• “Contract” is a legal conclusion not a piece
of paper (which is technically a
memorandum).
• So What???
Slide 4
Examples of Agreement + Law = Contract
• The writing states that if A fails to buy my 3 acres
on Oct. 5, A shall pay a $20,000 penalty. Despite
the agreement, this is void as a matter of law (i.e.,
not part of the contract).
• The writing is silent as to warranties on my sale of
microwaves to A,B and C. Despite the lack of
agreement, the contract includes a warranty
provision under UCC 2-314 (i.e., a warranty is
imposed as a matter of law).
Actual
Agreement
Slide 5
OR
Legally
imposed
Contractual
Rights/duties
Form Contracts
• An adhesion contract: “a standardform contract prepared by one party,
to be signed by the party in a weaker
position, usually a consumer, who has
little choice about the terms.” Thus
the “take-it-or-leave-it” aspect
– Being adhesive is not alone enough to render the
contract unenforceable.
– Have you ever signed a NON adhesive contract?
Slide 6
Overreaching?
Yes it’s a real
K.
Can the
Church of
Scientology
enforce
this?
Slide 7
Illegal Bargains: Violations of Public Policy
• Employment Contracts: a contract prohibiting an employee
from competing with his employer for a reasonable period
following termination is enforceable if the restriction is
necessary to protect legitimate interests (A/K/A as noncompete agreements or covenants-not-to-compete)
– Magic number appears to be 1 year and “reasonable” geographic
area.
• Earthweb v. Schlack (quits his web job case)
Slide 8
Take Home Point
• Contracts important to you will be a
function of both the terms of the
agreement and other statutory and/or
judge-made law.
• This affects contracts you make with
clients, relations with consumers, and
employment contracts.
– You may not, for example, be able to
avoid warranties to consumers or liability
for faulty designs.
Slide 9
What about writing it all down?
• As we noted, your non-compete clause
may not be enforceable. But there is
no punitive sanction under contract
law for over-reaching.
• This is the case even if it written
down.
• So do I need to write out a contract in
order to be enforceable?
Slide 10
Written Employment Contracts
• The rule: If a person’s employment
cannot be completed as a matter of
logical necessity in under a year, it
must be in writing to be enforceable.
– Employment for life
– Employment for 14 months
Slide 11
Statute of Frauds: Key notion
If you have such a
contract it must
be evidenced by a
writing that is
signed by the
person to be
charged to be
enforceable.
Slide 12
At Will Employment
• Almost all employees, especially junior
folks, are “at will” employees.
– This means, even if there is a written agreement,
the parties agree that the employee can quit or
be fired at any time with some minimal notice.
• Given this state of affairs (absent statutory
claims for discrimination) most employee
claims are not about being fired but not
receiving full compensation for the time
worked.
– In such cases, the written terms will be
invaluable.
Slide 13
So What if I Have a Side Deal
• If I have a writing, but my employer
and I made an oral “side deal.” Is that
binding?
• This is a function of the parol evidence
rule?
Slide 14
Parol Evidence Rule
• Where parties reduce
their agreement to a
written memorandum,
the writing is entitled to
special evidentiary weight
in determining the terms
of the agreement by the
parties.
• This is the essence of the
PER.
• That is, the oral side deal
is almost never enforced.
Slide 15
Take Home Point
• Generally a written employment contract
will not be a legal necessity (esp. early in
your career).
• BUT … a writing will protect you in by
ending fights at trial over this term or the
other.
• To this same end, reliance upon handshake side deals to protect import interests
is not wise.
– “Hey, do project X and we will make sure you
are involved in cool project Y.”
Slide 16
Bonuses – Can I Count on Them as a Legal
Matter?
• No.
• Contract law requires “consideration” in
order to render promises enforceable.
• Consideration, among other things, requires
a mutual exchange of benefits between the
parties at the time the promise is made to
render the promise enforceable.
• A bonus is so-called past consideration and
therefore is unenforceable.
– This is different from a mandatory incentive
structure.
Slide 17
Past Consideration
Unenforceable
Y’s Past Action
Y’s Promise made
X’s Promise made
Enforceable
Slide 18
X’s Promise made
Take Home Point
• Don’t spend your bonus before you get
it.
• Of course, if your firm doesn’t pay out
expected bonuses it will suffer
reputational and morale costs. But if
there are hard financial times,
bonuses are the first thing to go. This
is especially true of junior people.
Slide 19
Remedies in General
• Remedies= What the
nonbreaching party to a
contract is awarded in
case of breach.
• The Common Law and the
UCC establish rules for
remedies, but
– Most rules for contract
remedies may be modified
by the contract itself!
Slide 20
Remedies: The Goal
• In contract, the goal is generally speaking
COMPENSATORY.
– Does the remedy make plaintiff as well-off as she would
have been had defendant fully performed.
– Contrast this with Tort where punitive damages are
available (they are never available in contract).
• The law takes a particularly amoral approach to
breaches of contract. The breaching party, again
unlike tort, is not a “wrong-doer” per se.
– Thus, won’t see emotional damages for breaching a
contract, and (again unlike tort) a strong duty for plaintiff
to mitigate damages
Slide 21
Remedies: Lay of the Land
(1) Valid contract, (2) Breach, (3) Damages
Does the Contract
Entirely trump
Standard remedy
Rules?
No.
Does Plaintiff
Only want $$$?
If only money,
then this is a
“legal” remedy
Slide 22
If NOT only
money,
then this is an
“Equitable”
remedy
Yes.
Apply the contractual
Provisions, subject
to rules limiting
application
**Note, Misrep. damages are
Tort damages, not contract
damages
Mitigation of Damages
• Non-breaching party has
a duty to reduce
(“mitigate”) damages via
reasonable efforts
without undue risk,
burden or humiliation.
• So, even if you, or your
company, did not
breach, you cannot be
assured of full payment
from the breaching
party, if you didn’t
attempt to mitigate
damages.
Slide 23
Specific Performance
• The Court orders defendant to go
through with the contract.
– When: The subject matter of the contract
is rare or unique. E.G.
»
»
»
»
Land is always unique
Original art
A piece of intellectual property
Impractical to otherwise determine $$
– But never: Court’s will never give specific
performance of employment contracts.
13th Amd. to the Constitution.
Slide 24
Injunctions
• Court ordering
defendant not to do x.
Can be entered as a
result of a contract.
• This is how non-competes
are enforced.
Slide 25
Damages v. Net Recovery
• Damages (or remedies) are what the court will
award to a victorious party at the end of the
day.
• Net recovery is really what people care about.
– How was the lawyer paid!!!
– How long did it take to recover
– What impact did the suit have on the client
• This greatly affects whether suits will actually
be brought (despite mean letters etc.). That is,
in a non-compete there is no money to be had
from the employee. So there has to be a VERY
big incentive to enforce the clause to make it
financially worthwhile.
Slide 26
Financing Litigation: American Rule
• The American Rule:
• Each side pays their own attorney’s fees
regardless of outcome
• English Rule:
• The loser pays fees for both sides
– Why have we adopted this rule???
• The American Rule is often tempered.
Slide 27
Some Stats About Litigation
• Contract cases:
• 55% of civil filings
• 33% of all trials; most K trials are bench trials
• Plaintiff wins 66% of the time winning a median
amount of $37,000 (mid 1990s)
• Tort and Tort-like actions
• 45% of all civil filings
• 66% of all trials; most tort trials are jury trials
• Plaintiff wins 50% of the time winning a median
amount of $31,000 (mid 1990s)
• Big Wins?
• Only 15% of plaintiff wins are over $250K
• Only 5% of plaintiff wins are over $1M
• The majority of punitive damages wins are in
business to business suits
• Knowing these statistics, why do Plaintiffs
and Defendants litigate?
Slide 28
Take Home Point
• Bringing a contract suit involves a host of
costs that are not recoverable.
• This is especially true in a non-compete
context where there is no money to be had
from the former employee.
• This affects incentives to sue.
• BUT … contracts can alter remedies, absent
gross overreaching. Be mindful of such
clauses in your employment contract.
Slide 29