An Introduction to Contracts MSU School of Engineering April 16, 2008 Prof. Lumen Mulligan, M.A., J.D.Contracts and Your CareerWhat gives rise to a lawsuit for breach of contract?What is a ContractExamples of Agreement + Law = ContractForm ContractsOverreaching?Illegal Bargains: Violations of Public PolicyTake Home PointWhat about writing it all down?Written Employment ContractsStatute of Frauds: Key notionAt Will EmploymentSo What if I Have a Side DealParol Evidence RuleSlide 16Bonuses – Can I Count on Them as a Legal Matter?Past ConsiderationSlide 19Remedies in GeneralRemedies: The GoalRemedies: Lay of the LandMitigation of DamagesSpecific PerformanceInjunctionsDamages v. Net RecoveryFinancing Litigation: American RuleSome Stats About LitigationSlide 29Slide 1An Introduction to ContractsMSU School of EngineeringApril 16, 2008Prof. Lumen Mulligan, M.A., J.D.Slide 2Contracts 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 contractsSlide 3What gives rise to a lawsuit for breach of contract?•Mutual Assent•Consideration•Legality of the Object•CapacityValid Contract(Material)BreachDamages• Substantial Impairment•Anticipatory Repudiation•Measuring Expectations•Specific Performance•Liquidated Damages•RestitutionDefensesSlide 4What 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 5Examples 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).ActualAgreementLegallyimposedContractualRights/dutiesORSlide 6Form Contracts• An adhesion contract: “a standard-form 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 7Overreaching?Yes it’s a real K.Can the Church of Scientology enforce this?Slide 8Illegal 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 non-compete 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 9Take 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 10What 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 11Written 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 monthsSlide 12Statute of Frauds: Key notionIf 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 13At 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 14So 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 15Parol 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 16Take 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 hand-shake 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 17Bonuses – 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 18Past ConsiderationY’s Past ActionX’s Promise made X’s Promise made Y’s Promise made UnenforceableEnforceableSlide 19Take 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