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THE WHAT, WHY AND HOW OF CONTRACTS
D. Scott Berry

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Definition of a Contract

³An agreement between two or more persons which creates an obligation to do or not to do a particular thing.´ Black¶s Law Dictionary, Sixth Dictionary, Edition (1991)

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Are all contracts required to be in writing to be legally binding?

NO!
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Contracts that usually have to be in writing to be enforceable
a) A promise to answer for the debt of another person; b) A contract to sell goods of $500.00 or more, unless the buyer actually receives and accepts the goods or gives something in part payment for them; c) An agreement which cannot be performed within one year; and d) A contract for an interest in real estate.

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Elements of a Contract:
1. Offer 2. Acceptance 3. Consideration 4. Capacity to contract 5. Intent of parties to contract 6. Object of a contract

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Object of a contract:
‡ The contract must be for a legal purpose

‡

A contract is not enforceable if it is illegal or against public policy

‡

Contracts placing a restraint on trade, price-fixing and pricemonopolies are illegal

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Buckley v. Humason, 52 N.W. 385 (1892)
Facts: ‡ Humason was the owner of property in the city of Chicago. City of Chicago had passed as ordinance that it was unlawful for any person within the City of Chicago to sell real estate without a license. ‡ Humason asked Buckley to find a purchaser for his property promising to pay Humason a commission based upon a percentage of the sale price of the property despite the fact that Buckley had no license. ‡ The property was sold and Buckley demanded his commission. Humason refused to pay. ‡ Buckley brought a lawsuit against Humason based upon the agreement between Humason.

Decision: ³Business transactions, in violation of law, cannot be made the foundation of a valid contract; and the general rule is that where a statute makes a particular business unlawful generally, or for unlicensed persons, any contract made in such business by one not authorized is void.´ The result is that Buckley was not compensated for his services.

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Capacity of the Parties to Contract
‡ Minor?

‡ Incompetent?

‡ Drunk or under the influence of some other mind altering substance?
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The Parties. . .

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Who is the contract between?
Individuals

Corporation

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IF YOU ARE SIGNING THE CONTRACT ON BEHALF OF A CORPORATION
When identifying the parties to the contract: ‡ Clearly and correctly state the name of the corporation
³Widget Manufacturing, Inc.´

‡

Provide the state in which the corporation was filed as well as the entity type of the company
³Widget Manufacturing, Inc., a Minnesota corporation´ OR ³Widget Manufacturing, LLC, a Minnesota limited liability company´

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IF YOU ARE SIGNING THE CONTRACT ON BEHALF OF A CORPORATION
When signing the contract: ‡ Clearly and correctly state the name of the corporation
³Widget Manufacturing, Inc.´

‡

Include a signature line for a representative or officer of the company to sign

Widget Manufacturing, Inc.

/s/ John Doe By John Doe Its President

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IF YOU ARE SIGNING THE CONTRACT ON BEHALF OF A CORPORATION
Verify your position with the company: ‡ ‡ ‡ ‡ ‡ ‡ ‡ Chief Executive Officer President Vice President Chief Manager Manager Chief Financial Officer Secretary

What is your position? REVIEW YOUR CORPORATE DOCUMENTS!

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IF YOU ARE SIGNING THE CONTRACT ON BEHALF OF A CORPORATION

AVOID SIGNING
THE CONTRACT AS AN INDIVIDUAL!

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Offer & Acceptance
The Offer:
‡ Most offers can be oral or written (some offers must be in writing by law) ‡ An offer must be a definite expression of the proposed terms and conditions of the proposed contract and how it is to be accepted ‡ An offer must include the identity and nature of the object being offered, the conditions it is being offered as well as under what terms it is being offered ‡ Essentially an offer is a promise in exchange to the other person¶s promise to act

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Offer & Acceptance
Acceptance of the offer:
‡ Acceptance of an offer is a manifestation of assent to the terms of the offer made by the offeree in the manner invited or required in the offer. Restatement (Second) of Contracts §50(1). ‡ According to Black¶s Law Dictionary, ³Compliance by the offeree with the terms and condition of the offer constitute as µacceptance¶.´ ‡ Acceptance of an offer can be expressed or implied

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Offer & Acceptance
Carlill v. Carbolic Smoke Ball Company
‡ The Carbolic Smoke Ball Company made a device called a "smoke ball³ that it claimed to be a cure for influenza ‡ The smoke ball was a rubber ball with an attached tube. After filling the smoke ball with carbolic acid, the tube was to be inserted into the user¶s nose. The user then squeezed the bottom of the smoke ball to release the vapors into the nose of the user.

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Offer & Acceptance
Carlill v. Carbolic Smoke Ball Company
‡ The Carbolic Smoke Ball Company published advertisements claiming that it would pay £100 to anyone who got sick with influenza after using the company¶s device in accordance with the instructions set out in the advertisement. ‡ The instructions provided that the person was to use the smoke ball three times per day for two weeks ‡ The advertisement further stated that £1000 was deposited at the Alliance Bank to cover any claims

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Offer & Acceptance
Carlill v. Carbolic Smoke Ball Company

Was it an offer?

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Offer & Acceptance
Carlill v. Carbolic Smoke Ball Company

It was an offer!
The court determined: 1) that the advertisement was a unilateral offer because it specifically provided how the offer could be accepted; and that the company's claim that £1000 was deposited at the Alliance Bank showed the serious intention to be legally bound. 2)

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Offer & Acceptance
Carlill v. Carbolic Smoke Ball Company
‡ Louisa Elizabeth Carlill saw the advertisement, purchased a smoke ball and (according to her) used it in accordance with the advertised instructions. ‡ Mrs. Carlill got sick with the on January 17, 1892 and wrote a letter to Carbolic Smoke Ball Company to claim the £100. ‡ The company denied her claim, stating that in order to qualify for the £100 payment that Mrs. Carlill needed to go to the Carbolic Smoke Ball Company's office on a daily basis to be sure she was using it properly. ‡ Mrs. Carlill refused and brought a lawsuit...

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Offer & Acceptance
Carlill v. Carbolic Smoke Ball Company

Was the offer accepted by Mrs. Carlill¶s actions?

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Offer & Acceptance
Carlill v. Carbolic Smoke Ball Company

Yes, she accepted the offer
The court determined that satisfying conditions provided in the advertisement for using the smokeball constituted acceptance of the offer.

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Offer & Acceptance
Felthouse v. Bindley
1) This case involved the sale of a horse from a nephew to his uncle 2) During negotiations between the parties a misunderstanding about the price occurred 3) As a result of the misunderstanding, the uncle wrote his nephew that the uncle would assume that he could purchase the horse for £30.15 if the uncle did not receive a response from his nephew 4) The nephew did not respond, but the horse was sold to a third-party at an auction 5) Uncle brought suit against the nephew or damages based upon conversion
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Offer & Acceptance
Felthouse v. Bindley

Was there a contract?
No, the court determined that an acceptance of an offer will not give rise to a binding agreement unless it is expressly communicated to the offeree.

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Offer & Acceptance
Beard Implement Co v. Krusa
1) This case is between an implement dealer and a farmer for the sale of a combine from the implement dealer to the farmer After speaking with the implement dealer¶s sales representatives about purchasing the combine, the famer signed a purchase order and gave a check to the implement dealer

2)

Was there a contract?

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Offer & Acceptance
Beard Implement Co v. Krusa
1) This case is between an implement dealer and a farmer for the sale of a combine from the implement dealer to the farmer After speaking with the implement dealer¶s sales representatives about purchasing the combine, the famer signed a purchase order and gave a check to the implement dealer The purchase order contained language that ³This order subject to acceptance by dealer´ and contained a signature line for the implement dealer to sign which went unsigned by the implement dealer

2)

3)

Was there a contract?
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Offer & Acceptance
Beard Implement Co v. Krusa
1) This case is between an implement dealer and a farmer for the sale of a combine from the implement dealer to the farmer After speaking with the implement dealer¶s sales representatives about purchasing the combine, the famer signed a purchase order and gave a check to the implement dealer The purchase order contained language that ³This order subject to acceptance by dealer´ and contained a signature line for the implement dealer to sign which went unsigned by the implement dealer According to the implement dealer at the time the purchase order was signed and the check delivered the farmer told the implement dealer ³I¶ll take the deal.´

2)

3)

4)

Was there a contract?
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Offer & Acceptance
Beard Implement Co v. Krusa
1) This case is between an implement dealer and a farmer for the sale of a combine from the implement dealer to the farmer After speaking with the implement dealer¶s sales representatives about purchasing the combine, the famer signed a purchase order and gave a check to the implement dealer The purchase order contained language that ³This order subject to acceptance by dealer´ and contained a signature line for the implement dealer to sign which went unsigned by the implement dealer According to the implement dealer at the time the purchase order was signed and the check delivered the farmer told the implement dealer ³I¶ll take the deal.´ The farmer decided not to purchase the combine because he thought it was too expensive. Implement dealer brought a lawsuit against farmer based upon a of breach of contract

2)

3)

4)

5)

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Offer & Acceptance
Beard Implement Co v. Krusa
‡ The trial court found that there was a contract between the farmer and implement dealer However, the Appellate Court of Illinois reversed the trial court and found that ³the offeror is the master of his offer. An offeror may prescribe as many conditions or terms of the method of acceptance as he may wish, including, but not limited to, the time, place and manner´

‡

Who was the offeror in this case?

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Offer & Acceptance
Beard Implement Co v. Krusa
‡ The trial court found that there was a contract between the farmer and implement dealer However, the Appellate Court of Illinois reversed the trial court and found that ³the offeror is the master of his offer. An offeror may prescribe as many conditions or terms of the method of acceptance as he may wish, including, but not limited to, the time, place and manner´ The court concluded that the purchase order ³unambiguously´ required the signature of the implement dealer in order to be a proper acceptance of the farmer¶s offer. Because the purchase order was not signed, no contract ever existed Generally contract are construed against the party who drafted the contract

‡

‡

‡

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Contract Consideration
What is consideration and is it necessary?
(1) To constitute consideration, a performance or return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. (3) The performance may consist of a) b) c) An act other than a promise, or A forbearance, or The creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person. Restatement (Second) of Contracts §71 ³Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered, or undertaken by the other´ Black¶s Law Dictionary (Sixth Edition)
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Contract Consideration

Carlill v. Carbolic Smoke Ball Company

Was there consideration?
Yes, the court determined that purchasing or using the smokeball constituted consideration. There was no benefit to the company for the customer relying on the procedures provided in the advertisement.

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Contract Consideration
Really what is consideration?
Harris v. Time, Inc. 
Time distributed a mass mailing in an envelope that purported to give the attorney¶s son a new calculator watch if he opened the envelope  He opened the envelope  The offer actually required that he place a subscription order to get the new watch  Attorney demanded a watch, Time refused and, of course, attorney brought a class action for $15,000,000

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Contract Consideration
Was there adequate consideration for opening the envelope? 
Court concluded that ³any bargained for act or forbearance will constitute adequate consideration for an unilateral contract´

What was the result of the lawsuit? 
Court dismissed the case stating ³the present case is µde minimus¶ in the extreme´

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Contract Consideration
Consideration when contracts are amended (Case study)
‡ ‡ Son-in-law owned a house that he wanted to sell but was unable to find a buyer As a result, Son-in-law and Father-in-law enter into a standard form residential lease agreement for the property Relevant written lease terms contained in the standard form residential lease agreement that was signed in December:  Monthly lease payment of $1,000.00  Father-in-law receive five year option to purchase  Son-in-law was to be current on all obligations pertaining to the property  Four corners clause stating no verbal agreements or additional agreements relating to the lease of the property other than contained in the lease itself  Clause requiring all amendments to the lease agreement be in writing

‡

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Contract Consideration
Consideration when contracts are amended (Case study)
‡ Relevant verbal and other agreements made after the written lease terms were agreed to:  Son-in-law was in default of his mortgage at the time the lease was signed between the parties  Verbal agreement that monthly lease payment was to be reduced if Father-in-law was unable to obtain a tenant for the full monthly mortgage payment amount (commencing January Son-in-law commenced paying Father-in-law $200.00 based on deficiency)  Father-in-law performed repairs and improvements to the property  No formal written amendment was ever signed between the parties evidencing the additional terms

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Contract Consideration
Consideration when contracts are amended (Case study)
‡ Termination of the relationship:  In September Son-in-law advised Father-in-law that Father-in-law was responsible for the full rental payment amount pursuant to the standard form residential lease agreement  Father-in-law refused to pay the additional amount  Son-in-law advised Father-in-law to terminate Father-in-law¶s lease with the tenant as Son-in-law was to sell the property as a result of Father-in-law¶s breach  Father-in-law ceased making payments on the property in September  Property was sold in February  Son-in-law brought action against Father-in-law for unpaid rent. Father-in-law counterclaimed for improvements and repairs.

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Contract Consideration
What¶s the result? Why?
Relevant written lease terms contained in the standard form residential lease agreement that was signed in December:     Monthly lease payment of $1,000.00 Father-in-law receive five year option to purchase  Son-in-law was to be current on all obligations pertaining to the property Four corners clause stating no verbal agreements or additional agreements relating to the lease of the property other than contained in the lease itself   Clause requiring all amendments to the lease agreement be in writing  Relevant verbal and other agreements made after the written lease terms were agreed to:  Son-in-law was in default of his mortgage at the time the lease was signed between the parties Verbal agreement that monthly lease payment was to be reduced if Father-inlaw was unable to obtain a tenant for the full monthly mortgage payment amount (commencing January Son-inlaw commenced paying Father-in-law $200.00 based on deficiency) Father-in-law performed repairs and improvements to the property No formal written amendment was ever signed between the parties evidencing the additional terms   Termination of the relationship:  In September Son-in-law advised Father-in-law that Father-in-law was responsible for the full rental payment amount pursuant to the standard form residential lease agreement Father-in-law refused to pay the additional amount Son-in-law advised Father-in-law to terminate Father-in-law¶s lease with the tenant as Son-in-law was to sell the property as a result of Father-in-law¶s breach Father-in-law ceased making payments on the property in September Property was sold in February Son-in-law brought action against Father-in-law for unpaid rent. Fatherin-law counterclaimed for improvements and repairs. www.berrylawoffices.com  



Contract Consideration
1. What are the final terms of the agreement between the parties?
Relevant written lease terms contained in the standard form residential lease agreement that was signed in December:     Monthly lease payment of $1,000.00 Father-in-law receive five year option to purchase  Son-in-law was to be current on all obligations pertaining to the property Four corners clause stating no verbal agreements or additional agreements relating to the lease of the property other than contained in the lease itself   Clause requiring all amendments to the lease agreement be in writing  Relevant verbal and other agreements made after the written lease terms were agreed to:  Son-in-law was in default of his mortgage at the time the lease was signed between the parties Verbal agreement that monthly lease payment was to be reduced if Father-inlaw was unable to obtain a tenant for the full monthly mortgage payment amount (commencing January Son-inlaw commenced paying Father-in-law $200.00 based on deficiency) Father-in-law performed repairs and improvements to the property No formal written amendment was ever signed between the parties evidencing the additional terms   Termination of the relationship:  In September Son-in-law advised Father-in-law that Father-in-law was responsible for the full rental payment amount pursuant to the standard form residential lease agreement Father-in-law refused to pay the additional amount Son-in-law advised Father-in-law to terminate Father-in-law¶s lease with the tenant as Son-in-law was to sell the property as a result of Father-in-law¶s breach Father-in-law ceased making payments on the property in September Property was sold in February Son-in-law brought action against Father-in-law for unpaid rent. Fatherin-law counterclaimed for improvements and repairs. www.berrylawoffices.com  



Contract Consideration
2. Was there consideration for the changes to the lease agreement?
Relevant written lease terms contained in the standard form residential lease agreement that was signed in December:     Monthly lease payment of $1,000.00 Father-in-law receive five year option to purchase  Son-in-law was to be current on all obligations pertaining to the property Four corners clause stating no verbal agreements or additional agreements relating to the lease of the property other than contained in the lease itself   Clause requiring all amendments to the lease agreement be in writing  Relevant verbal and other agreements made after the written lease terms were agreed to:  Son-in-law was in default of his mortgage at the time the lease was signed between the parties Verbal agreement that monthly lease payment was to be reduced if Father-inlaw was unable to obtain a tenant for the full monthly mortgage payment amount (commencing January Son-inlaw commenced paying Father-in-law $200.00 based on deficiency) Father-in-law performed repairs and improvements to the property No formal written amendment was ever signed between the parties evidencing the additional terms   Termination of the relationship:  In September Son-in-law advised Father-in-law that Father-in-law was responsible for the full rental payment amount pursuant to the standard form residential lease agreement Father-in-law refused to pay the additional amount Son-in-law advised Father-in-law to terminate Father-in-law¶s lease with the tenant as Son-in-law was to sell the property as a result of Father-in-law¶s breach Father-in-law ceased making payments on the property in September Property was sold in February Son-in-law brought action against Father-in-law for unpaid rent. Fatherin-law counterclaimed for improvements and repairs. www.berrylawoffices.com  



Contract Consideration
3. What about the four corners clause contained in the agreement?
Relevant written lease terms contained in the standard form residential lease agreement that was signed in December:     Monthly lease payment of $1,000.00 Father-in-law receive five year option to purchase  Son-in-law was to be current on all obligations pertaining to the property Four corners clause stating no verbal agreements or additional agreements relating to the lease of the property other than contained in the lease itself   Clause requiring all amendments to the lease agreement be in writing  Relevant verbal and other agreements made after the written lease terms were agreed to:  Son-in-law was in default of his mortgage at the time the lease was signed between the parties Verbal agreement that monthly lease payment was to be reduced if Father-inlaw was unable to obtain a tenant for the full monthly mortgage payment amount (commencing January Son-inlaw commenced paying Father-in-law $200.00 based on deficiency) Father-in-law performed repairs and improvements to the property No formal written amendment was ever signed between the parties evidencing the additional terms   Termination of the relationship:  In September Son-in-law advised Father-in-law that Father-in-law was responsible for the full rental payment amount pursuant to the standard form residential lease agreement Father-in-law refused to pay the additional amount Son-in-law advised Father-in-law to terminate Father-in-law¶s lease with the tenant as Son-in-law was to sell the property as a result of Father-in-law¶s breach Father-in-law ceased making payments on the property in September Property was sold in February Son-in-law brought action against Father-in-law for unpaid rent. Fatherin-law counterclaimed for improvements and repairs. www.berrylawoffices.com  



Contract Consideration
4. What about the provision requiring amendments to be in writing?
Relevant written lease terms contained in the standard form residential lease agreement that was signed in December:     Monthly lease payment of $1,000.00 Father-in-law receive five year option to purchase  Son-in-law was to be current on all obligations pertaining to the property Four corners clause stating no verbal agreements or additional agreements relating to the lease of the property other than contained in the lease itself   Clause requiring all amendments to the lease agreement be in writing  Relevant verbal and other agreements made after the written lease terms were agreed to:  Son-in-law was in default of his mortgage at the time the lease was signed between the parties Verbal agreement that monthly lease payment was to be reduced if Father-inlaw was unable to obtain a tenant for the full monthly mortgage payment amount (commencing January Son-inlaw commenced paying Father-in-law $200.00 based on deficiency) Father-in-law performed repairs and improvements to the property No formal written amendment was ever signed between the parties evidencing the additional terms   Termination of the relationship:  In September Son-in-law advised Father-in-law that Father-in-law was responsible for the full rental payment amount pursuant to the standard form residential lease agreement Father-in-law refused to pay the additional amount Son-in-law advised Father-in-law to terminate Father-in-law¶s lease with the tenant as Son-in-law was to sell the property as a result of Father-in-law¶s breach Father-in-law ceased making payments on the property in September Property was sold in February Son-in-law brought action against Father-in-law for unpaid rent. Fatherin-law counterclaimed for improvements and repairs. www.berrylawoffices.com  



Contract Consideration
5. What did the court decide?
Relevant written lease terms contained in the standard form residential lease agreement that was signed in December:     Monthly lease payment of $1,000.00 Father-in-law receive five year option to purchase  Son-in-law was to be current on all obligations pertaining to the property Four corners clause stating no verbal agreements or additional agreements relating to the lease of the property other than contained in the lease itself   Clause requiring all amendments to the lease agreement be in writing  Relevant verbal and other agreements made after the written lease terms were agreed to:  Son-in-law was in default of his mortgage at the time the lease was signed between the parties Verbal agreement that monthly lease payment was to be reduced if Father-inlaw was unable to obtain a tenant for the full monthly mortgage payment amount (commencing January Son-inlaw commenced paying Father-in-law $200.00 based on deficiency) Father-in-law performed repairs and improvements to the property No formal written amendment was ever signed between the parties evidencing the additional terms   Termination of the relationship:  In September Son-in-law advised Father-in-law that Father-in-law was responsible for the full rental payment amount pursuant to the standard form residential lease agreement Father-in-law refused to pay the additional amount Son-in-law advised Father-in-law to terminate Father-in-law¶s lease with the tenant as Son-in-law was to sell the property as a result of Father-in-law¶s breach Father-in-law ceased making payments on the property in September Property was sold in February Son-in-law brought action against Father-in-law for unpaid rent. Fatherin-law counterclaimed for improvements and repairs. www.berrylawoffices.com  



The importance of well written agreements

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Why should an agreement be in writing?

If it is not, the contract my not be enforced!

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Why should a contract be in writing?
1. Without a written contract, any dispute as to the terms of the agreement results in ³He said ± She Said´ 2. Without a written contract, you are typically unable get your attorneys fees reimbursed if there is a dispute 3. Without a written contract, you may end up being personally liable 4. Without a written contract, you may end up in a jurisdiction or court for you which never anticipated 5. Without a written contract, there is a greater likelihood you will end up in front of . . .

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What should be in a written contract?
A clear description of all obligations between the parties.
- Include a full and complete description of all the obligations of each party, including:  specific description of the products and/or services to be provided  all deadlines for delivery of the products and/or services

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What should be in a written contract?
A description of the Payment Terms. Terms. 
What triggers a payment obligation?  When are payments due? - What happens if a payment is late?  How are payments made? a) Cash? b) Check? c) Wire? d) Certified funds?  Who are payments to be made to?  Where are payments to be sent?
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What should be in a written contract?
A Description of a Duration of the Contract. Contract. 
How long is the contract? - Is the contract complete upon delivery of the products and/or services? - Is the contract a 30 day, 6 month or one year contract?  Is the contract renewable? If so, how? - Does the contract have to be renewed in writing? - How much notice is required to renew the contact? - Or does the contract automatically renew?

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What should be in a written contract?
Termination of the Contract. Contract. 
Can the contract be terminate for any reason or just upon good cause?  How much notice is required to terminate a contract?  If it is terminated for good cause, can a default be cured after notice of termination was received?  How is notice of termination required to be provided?  Does your contract include a deadlock provision?

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What should be in a written contract?
Insurance Provisions. Provisions. 
Is insurance necessary and/or required? - What risks are associated with the performance of the contract? - Are the risks equal for all parties? - Who is responsible for obtaining and paying for the insurance?

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What should be in a written contract?
Governing Law Provisions. Provisions. 
What jurisdiction¶s law controls? Minnesota or another state¶s?  Where is lawsuit brought? - What state and county is a dispute required to be brought?  How is lawsuit brought? - District court, arbitration or mediation?

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Arbitration or Litigation?
Advantages to Arbitration: Arbitration:
1. Usually more expedient resolution. 2. Depending upon the amount of dispute, arbitration can be less costly. 3. Depending on the rules of arbitration, any evidence may be allowed. 4. Not a public hearing and there is no public record of the proceedings. 5. The arbitration process can be less adversarial than litigation which may help to maintain business relationships between the parties. 6. Arbitration is more informal than litigation.

HOWEVER, 

There is usually no or a very limited ability to appeal a decision of an arbitrator.  Choices of arbitrators are usually limited and can be a gamble.  No or limited ability to conduct discovery.

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What should be in a written contract?
Warranty and Guaranty Provisions. Provisions. 
Are the products and/or services guaranteed to be delivered within a specific period of time?  What happens with the products and/or services are not delivered as provided in the agreement? - Price reduction? - Full refund? - Other described damages?  Strongly-worded warranty provisions will motivate better performance Stronglyand protect the purchasing party if performance is substandard.

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What should be in a written contract?
Other Provisions. Provisions. 
Confidentiality Provisions.  Noncompete Provisions.  Intellectual Property Provisions.  Independent Contractor Provisions.  Personal guaranty provisions.  Attach any other documents referred to in your contract.  A provision describing how the agreement can be signed (by fax, email multiple copies).

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