December 2012

People often come to the blog looking for a sample liquidated damages clause. Although I have a nice little piece explaining liquidated damages provisions and cautioning people to avoid including penalty provisions in their contracts, I haven’t provided sample language.

Liquidated damages clauses should be tailored to the specific situation — this is particularly important because courts won’t enforce penalty provisions. Thus, it’s important that (1) your clause not in fact be a penalty provision and (2) the liquidated damages clause clearly reflect an attempt to compensate the non-breaching party.

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You’re a franchisor and the term of your franchise agreement is five years, but you can terminate it early for cause. The term and termination provision also auto-renews. Do you have the right to elect not to renew the agreement at the end of the initial term or a renewal term? Or are you on the hook for ever if the franchisee doesn’t give you an out by materially breaching the agreement?

To help you analyze the issue, here’s the first part of the term and termination provision: “The initial term of this Agreement shall begin on the date hereof and, unless sooner terminated by [the franchisor for cause] as provided in paragraph 6, shall end five years after such date, and shall automatically renew itself for successive five-year terms thereafter (the ‘renewal terms’).”

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Rivermont Village, Inc. v. Preferred Land Title, Inc.

Preferred Land Title agreed to act as an escrow agent under a real estate purchase agreement, although there was no written escrow agreement. The buyer delivered an earnest money deposit check to the title company, and the title company informed the seller that it had received the check and would deposit it that business day. The buyer then instructed the title company not to deposit the check until the buyer had completed due diligence. The title company didn’t deposit the check and failed to inform the seller.

The transaction didn’t close and the seller eventually sold the property to a different buyer for considerably less money. The seller sued the title company for breach of fiduciary duty and negligence, seeking liquidated damages in the amount of the deposit, punitive damages, and attorneys’ fees. After a bench trial, the trial court entered judgment in favor of the seller in the amount of the deposit plus interest.

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It’s that time of year … time for bloggers to put together a list of their top posts as the new year approaches. Well, I’m happy to get ahead of the curve and serve as the antipasto — the hors d’oeuvre, the aperitif, the opening act — for the more substantial bloggers among us who’ll soon be serving up their best dishes of the year gone by.

It’s been a fantastic year as I (finally) reached my 100th post, met new interwebs friends, and had great conversations with contracts aficionados and law business enthusiasts on this blog and others. I’m looking forward to blogging in 2013.

1. Battle of the Forms Explained (Using a Few Short Words)

In this primer on UCC 2-207’s battle of the forms, I discuss the common-law approach to mis-matched offers and acceptances that result from the use of pre-printed contract forms, as well as the solution offered by article 2 of the Uniform Commercial Code. The post comes complete with a handy flowchart to help solve battle-of-the-forms problems (but see the comments on use of the chart). Like cheese, this post gets better with time as Google serves it up more often as time goes by. In the new year I plan to do some pieces on specific battle of the forms issues and include exercises and real-life examples.

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Graham v. State Farm Mutual Automobile Insurance Co.

In a case involving two uninsured motorist policies, the Missouri Court of Appeals, Eastern District held that a State Farm policy provided coverage only to the extent that its policy limits exceeded the primary underinsured motorist coverage.

Two provisions in the policy were at issue. One read,

The most we pay will be the lesser of: a. the difference between the amount of the insured’s damages for bodily injury, and the amount paid to the insured by or for any person or organization who is or may be held legally liable for the bodily injury; or b. the limits of liability of this coverage.

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If your friend invites you to a dinner party, but no one’s home when you arrive, can you sue for breach of contract? Of course being so litigious could harm your social life, but could you prevail? Probably not.

Dinner invitations involve the basic elements of contract formation — there’s an offer, acceptance, and arguably consideration — but something critical is missing: the intent to be bound by the agreement. According to Calamari and Perillo (The Law of Contracts § 2.4), “if, from the statements or conduct of the parties or the surrounding circumstances, it appears that the parties do not intend to be bound or do not intend legal consequences, then, under the great majority of the cases, there is no contract.”

While someone extending a dinner invitation has a social obligation to be around when their guests arrive, social conventions are such that neither snubbed dinner guests nor the absent host would expect legal consequences to follow.

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I’ve often had clients ask me to keep their contracts short and simple. That’s a great goal, especially since two of the purposes of a written contract involve informing the parties about their business relationship. The less accessible a contract is to the people who need to read it, the less helpful it’ll be.

Another purpose of a written contract, though, involves ensuring that your rights are as secure as possible if you have to fight for them. That means being clear about what your rights are, providing for effective remedies if you find yourself in a legal battle, and making sure that you’re made whole after the dust settles. It also means that dotting every i and crossing every t will be especially important.

The purpose or purposes that predominate in a particular business deal will affect how complex the written contract that memorializes the deal should be. Let me suggest a framework for thinking about how to ensure the appropriate level of legal protection.

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Most areas of contract law change very little over time. When a new way of doing business comes along, the law might take a while to figure out how to deal with it, but eventually a consensus approach (or two) is adopted by the courts, and things hum along once again.

Recent developments in contract law

An example during my lifetime are boxtop or shrinkwrap agreements that reflect a “terms to come later” approach to contracting. In these situations, merchants sell their computers or software and enclose additional terms in the product package. Thus, the buyer doesn’t have an opportunity to read all of the terms when they purchase the product. This poses a challenge to traditional contract law, which generally doesn’t give effect to silent terms.

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