Working with Business Contracts

Course Project

Instructions:

In this course project, you will support your legal team by ensuring contracts reflect the intentions of the parties and minimize the risk that a court interprets a contract in a manner inconsistent with the business objectives it was designed to achieve. You will analyze a hypothetical contract dispute case and demonstrate an understanding of how to prepare for a potential dispute, recognize and explain rules of construction that courts use when interpreting contracts, and identify ambiguous language then redraft to promote clarity. In effect, you’ll ensure a contract says what it means to avoid situations that could undermine your business objectives.

In Part One, you will demonstrate an understanding of how disagreements between contract parties arise and how best to prepare, together with your legal team, for a potential dispute.

In Part Two, you will recognize and explain rules of construction that courts apply when interpreting contracts.

In Part Three, you will identify the ambiguities in contract language and then redraft to eliminate the ambiguity and promote clarity.

Except as indicated, use this document to record all your project work and responses to any questions. At a minimum, you will need to turn in a digital copy of this document to your facilitator as part of your project completion. You may also have additional supporting documents that you will need to submit. Your facilitator will provide feedback to help you work through your findings.

Note: Though your work will only be seen by those grading the course and will not be used or shared outside the course, you should take care to obscure any information you feel might be of a sensitive or confidential nature.

Complete each project part as you progress through the course. Wait to submit the project until all parts are complete. Begin your course project by completing Part One below. A Submit Assignment button can be found on the final course project assignment page online. Information about the grading rubric is available on any of the course project assignment pages online. Do not hesitate to contact your facilitator if you have any questions about the project.

Part One

Recognizing How Contract Disputes Arise and Get Resolved

In this part of the course project, you will consider a potential hypothetical contract dispute involving the termination provision in a supply contract between your company and its supplier. Your boss asks you to take charge of your company’s preparation for the dispute. Consider how you would respond to your boss’ requests by answering the questions that follow the scenario.

Directions:

  • Read the following hypothetical contract dispute scenario.
  • Answer the questions that follow as you prepare, together with your legal team, for a potential dispute.

Scenario:

On January 1, 2020, Able Inc. (“Able”) entered into a supply agreement with Baker Corp. (“Baker”) pursuant to which Able agreed to purchase from Baker 100,000 widgets in each year of the contract’s five-year term. The contract contained the following termination and dispute provisions:

Section 10. Term. 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-year terms, unless and until terminated by one year’s prior notice in writing by either party.

Section 11. Dispute Resolution. In the event that a dispute arises under this Agreement, either party may elect, by prompt written notice to the other party, to submit the dispute to an arbitration panel.”

On June 30, 2020, a vice president at Able sends an email to her counterpart at Baker: “This is to advise you that we are exercising our right to terminate the supply contract pursuant to Section 10 of the contract, effective June 30, 2021.” This email comes as a complete shock to Baker’s management, which had counted on the supply contract continuing until at least 2025.

Immediately after receiving the email, Baker’s vice president phones his counterpart at Able and says, “What’s this all about? Under our contract, the earliest you can terminate the agreement is January 1, 2025, and you do that by sending us a notice one year before, on January 1, 2024. You have no right to terminate the contract any earlier.”

Able’s vice president responds, “Well, we obviously disagree. The termination provision gives us the right to end the contract anytime by giving you one year’s notice. That’s what the provision says and that’s what we did — and what we talked about during negotiations. I guess we’ll see you in court if you stick to your guns on this.”

You are a manager at Able Inc. and work for the vice president who had had these communications with Baker. The vice president calls you into her office and fills you in on the situation. “We’re obviously headed for war with Baker, and since you were involved in the negotiations of the supply contract, I want you to take charge of this brewing dispute so that we’re prepared. I want you to do three things: First, send me and Simon Jones, the Executive Vice President, a memo describing in detail your recollection of the negotiations and your interpretation of the contract provisions at issue — and cc our general counsel so that it’s privileged. Second, make sure our

 files are purged of any damaging emails or other material that could hurt us in litigation. Third, since either party has the right to have the dispute arbitrated instead of litigated, give me your list of the top three or four pros and cons of arbitration versus litigation.”

Based on this hypothetical scenario, answer the following questions:

1.

Briefly describe the basis for the contract dispute between Able and Baker; i.e., on what exactly are the parties in disagreement?

2.

Your boss has asked you to draft a memo of your recollections and interpretation, as well as to purge the files of damaging information. Do you think this is a good idea? Why or why not?

3.

She has also asked you to list your top three or four pros and cons of arbitration versus litigation. In bullet-point form, set forth below what items would be on your list.

4.

Your boss has asked you to be the point person on behalf of Able in connection with the potential dispute with Baker involving the supply agreement. What initial steps would you take to prepare your company for a possible litigation or arbitration? For purposes of this question, assume that Able’s policies and procedures relating to contract administration and legal matters are the same as those of your organization.

Part Two

Recognizing General Rules of Construction Courts Apply When Interpreting Contracts

In this part of the course project, you will recognize and explain some rules of construction that courts apply when interpreting contracts. These include the parol evidence rule, rules of interpretation, implied terms, and the “forthright negotiator rule,” to name a few. With your analysis of how a court might approach these matters, you’ll be better able to avoid situations that could undermine your business objectives.

Instructions

Consider the following hypothetical contract scenario and answer the questions that follow.

Hypothetical contract scenario:

Buyer Corp. (“Buyer”) and Seller Inc.(“Seller”) are negotiating a contract for the sale of widgets. Buyer has purchased widgets from Seller many times over the past two years and mentions that this time the widgets will be used as a component in a new piece of industrial equipment to be manufactured by Buyer. Consequently, Buyer says that the widgets need to be manufactured exactly in accordance with Seller’s published specifications. Just as they’re signing the purchase contract, Seller says to Buyer, “Not to worry. If there are any problems, just let us know and we’ll give you a full refund or fix the problem.”

Here’s their contract:

“Seller agrees to sell, and Buyer agrees to purchase, 2,000 widgets for delivery on Friday, March 7. The price is $20 per widget, payable two days after delivery. The price for each widget will be adjusted to reflect the percentage increase in the price per ton of iron on the New York metals market between now and the delivery date.”

After Seller delivers the widgets on March 7, Buyer discovers that they are a slightly different size than the specification and won’t work in the Buyer’s new equipment. Buyer is also unpleasantly surprised when she sees the invoice and learns that the price has increased by 20% to $24.00 per widget but the price of iron quoted on the New York metals market had not changed since the date they signed the contract. When she calls to complain, Seller says “I’m sorry, but a contract is a contract — it doesn’t have a word about any sort of guarantee that they’ll fit your machine. And as to price, well, you must be looking at the quotes from the New York State metals market; the contract says ‘New York,’ which everyone knows is the New York City metals market.”

Buyer refuses to pay the invoice and tenders the widgets to Seller for return. Both Seller and Buyer call their lawyers.

1.

Buyer tells her lawyer about the Seller’s “not to worry” statement, saying, “That’s a guarantee — any court will rule in my favor when they hear about it,” and is surprised to hear the lawyer’s response that “I’m not sure a court will allow that statement as evidence.”

On which principle of contract construction is the lawyer relying in expressing this view?

2.

Buyer’s lawyer hesitates and says, “Wait a second, though; widgets are ‘goods,’ so even if a court doesn’t allow Seller’s statement as evidence, a court might find that the contract actually contains a warranty, and that may mean you can get your money back.”

What’s the legal basis for the lawyer’s optimism?

3.

Seller goes to his lawyer and says, “I probably shouldn’t have said that ‘not to worry’ stuff, but after all, the contract we signed didn’t say anything about it, so that’s that.” Seller’s lawyer says, “Well, possibly, but if you had called me before you signed, I would have put a clause or two in the contract that made sure you had nothing to worry about.”

To what kind of clauses is he referring?

4.

Seller tells his lawyer, “I was pretty masterful during this negotiation. I knew Buyer had in mind the New York State exchange — that’s the market in our other deals — and was relieved that when Buyer reviewed the contract (I drafted it!), she didn’t raise the issue.” Seller’s lawyer tells him he’s not so smart — and will probably lose that point in court.

There are three rules of construction on which the lawyer might be relying. What are they?

Part Three

Drafting With Clarity

In the third part of the course project, you will recognize the ambiguity in contract provisions and then redraft contractual language to eliminate the ambiguity and promote clarity.

Instructions:

Review the contract provisions set forth below in light of the objectives of the business deals that precede them.

In the spaces provided below:

  1. Briefly explain the way(s) in which the provision is ambiguous.
  2. Redraft the provision more clearly to eliminate the ambiguity so as to achieve the stated business objective.

Example Business Deal:

The tenant of an animal care facility for cats and dogs wants to be restricted as little as possible by the terms of the lease but has agreed to the landlord’s demand that only small dogs be accepted for boarding.

Contract Provision:

“The Tenant agrees that the animal care facility will accept only cats and dogs under 12 pounds.”

Ambiguity:

It is unclear if the 12-pound weight limitation applies to both cats and dogs or just to dogs; i.e., would the admission of a 14-pound cat violate the lease?

Revised Language:

“The Tenant agrees that the animal care facility will accept only (a) dogs under 12 pounds; and (b) cats.”

1.

Business Deal: The founder of a new company has agreed to pay one-third of the legal fees in connection with the company’s formation, with the balance to be shared equally by the two recently hired executives.

Contract Provision: “Legal fees relating to the formation of the Company shall be paid by the Founder and the Executives in equal shares.”

a. Ambiguity:

b. Revised Language:

2.

Business Deal: As part of a loan agreement, the bank wants to make sure it knows about all existing lawsuits currently on file against the borrower, as well as any threatened lawsuits of which the borrower is aware.

Contract Provision: “No litigation against the Borrower is pending or has been threatened to the Borrower’s knowledge.”

c. Ambiguity:

d. Revised Language:

3.

Business Deal: The closing of the sale of a building is scheduled for March 3, but the buyer wants to make sure it’s clean on March 1, when he plans to show it to a prospective tenant. The seller of the building has agreed to pay for a professional cleaning service.

Contract Provision: “The Seller shall pay for a professional cleaning of the Premises by a reputable cleaning service not later than two days before the Closing Date.”

e. Ambiguity:

f. Revised Language:

4.

Business Deal: The buyer of a company, which is owned by Ms. Jones and Ms. Smith, has agreed to pay $1 million for the business.

Contract provision: “At Closing, Buyer shall pay Ms. Jones and Ms. Smith $1 million in exchange for their shares.”

g. Ambiguity:

h. Revised Language:

5.

Business Deal: A manufacturer has agreed to deliver the goods pursuant to a supply agreement so that they are ready for shipment from the customer’s warehouse by 5:00 a.m. on May 5.

Contract Provision: “The Product shall be delivered by 12 midnight on May 5, 2020.”

i. Ambiguity:

j. Revised Language:

6.

Business Deal: In a supply agreement, the customer is entitled to be paid a late fee for specified products, some of which are listed on Schedule A and others on Schedule B.

Contract Provision: “The late fee will apply to those products listed on Schedules A and B.”

k. Ambiguity:

l. Revised Language:

7.

Business Deal: The donor establishing a trust says he wants the funds to be used only by either charitable organizations such as the Salvation Army and the Red Cross or by schools, colleges, and universities.

Contract Provision: “The Trust may donate funds only to charitable and educational institutions.”

m. Ambiguity:

n. Revised Language:

8.

Business Deal: In a real estate brokerage agreement, the property owner agreed to pay the full commission to the broker if the owner decided to withdraw the property from the market.

Contract Provision: “Owner agrees to pay Broker a commission of Six (6%) percent of the sale amount. This commission shall be earned and paid for services rendered if, during the Term: (a) All or any portion of the Property is sold (by Broker, Owner, or anyone else)….(c) Owner removes the property from the market. Such commission shall become due and payable in full at the time of closing.”

o. Ambiguity:

p. Revised Language:

9.

Business Deal: The seller of a property wants to make sure that the buyer is obligated to provide notice of the sale and it’s delivered to the state tax authority on a timely basis. If the closing were to occur on March 30, the tax notice would be due on March 1.

Contract Provision: “The Buyer shall notify the New York State Department of Revenue of the sale within 30 days of the Closing.”

q. Ambiguity:

f. Revised Language:

To submit this assignment, please refer to the instructions in the course.

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