Summary Contracts Notes.

PS pages 1-19 Chapter 1 – Deals, Lawyers, and Basic Contract Concepts Interpreting Contacts (and Drafting Them) The Six Things that happen in a Contract  Interpreting: figuring out what another lawyer’s drafted words mean  Drafting: creating rules  First Step – decide what is happening in each sentence o Covenant: a promise to do or not do something  Creates a duty (obligation)  Affirmative – the party must do something  Negative – the party must not do something (a prohibition)  Uses words such as “shall” or “must”  Performing: keeping a covenant’s promise  Breach: breaking a covenant’s promise  Right: duty expressed backwards  A party’s entitlement to receive the other party’s performance of a duty o Ex: Duty – the landlord shall permit the tenant to live in the apartment, Right – the tenant has a right to live in the apartment  Right and duty mean the same thing  A right can’t exist without a duty o A covenant imposes a duty on one party o The other party has a right to receive performance of the covenant o Discretionary Authority: power or permission to do something  Authority: the power to act  Discretion: the freedom to decide whether to act or not  Uses words like “may”  Opposite of duty  Ex: Duty – the tenant shall pay rent by the first business day of each month, Discretionary Authority – the tenant may hang pictures on the apartment’s walls  Discretionary authority using the word “right” is not accurate  If you can identify a duty on the other party that corresponds exactly to the “right”, then the “right” is that duty expressed backwards  If the “right” appears to give a party power to do something, then the “right” is discretionary authority expressed inaccurately o Declaration: makes something true by declaring it  Declarations are housekeeping, they help the deal operate properly  Ex: Liability for the millions of dollars doesn’t grow out of the declaration itself, it’s caused by a breach of a covenant elsewhere  A declaration is different from a warranty or a representation  If the warranty is breached or the representation turns out to be a misrepresentation, the party who made it is legally liable to the other party  Made by one party for the benefit of the other party  Parties can create a declaration together and take joint responsibility for it o Condition: a fact that must be true to activate the duty, discretionary authority, or declaration  Attached to a duty, discretionary authority, or declaration  Uses the word “if”  Covenant example: If the tenant fails to pay the rent by 5:00 P.M. on the day it is due, the tenant shall pay a penalty of $25 per day until the rent is paid  Discretionary Authority example: If the tenant fails to pay the rent for two consecutive months, the landlord may terminate this lease  Declaration example: If the premises are destroyed, this lease terminates as of the date of destruction  Some conditions use the words “unless” or “except”  Covenant example: The tenant shall not replace any of the apartment’s appliances unless the landlord consents in writing o Warranties: a promise by one party to the other that a statement of fact is true  One party states a fact, promising to the other party that the fact is true (if it’s not true, the warranty has been breached)  If the promising party can’t do anything in the future to make those facts true, that party is promising a fact outside of their control (a warranty)  A warranty can promise a past fact, a present fact, or a future act o Representation: a statement of fact made by one party for the purpose of inducing the other party to agree to some or all of the contract  If the statement turns out not to be true, then it is a misrepresentation  Some statements of fact are both warranties and representations  A party can represent a past or present fact, but not a future fact  A party can warrant the future but not represent it  Misrepresentation is a TORT How Different Types of Provisions Work Together  Covenants and warranties are promises  Discretionary authority is a grant of power  Declarations and conditions are tools for making the contract work well  Representations are statements that somebody else (the other party) might rely on  A contract is a trade (“agreement” or “deal”) o Parties trade promises and powers o They agree on declarations and conditions o Each might make representations to the other to induce agreement to the deal  A rule governs behavior o Duties and discretionary authority requires or permits behavior o Declarations create facts o Conditions limit duties, discretionary authority, and declarations o Rules permeate law and are the core of every contract  Affirmative Duty: rules that require you to do some things  Negative Duty: rules that prohibit you from doing things  A contract is mostly a set of rules that the parties have agreed to be governed by for the purposes of their transaction o By agreeing to the contract, the parties have created the equivalent of their own private statute  EXAMPLE: Television Limited Warranty o The manufacturer promises that the television will be free of defects in materials or workmanship for one year after the day you purchased it (a warranty) o A defect in materials or workmanship includes product failures from normal use and doesn’t include accidents, misuse, or failure to follow instructions in the installation and owner’s manuals (a declaration) o The warranty applies only to the original consumer purchaser (a declaration) o If the warranty is breached by product failure within a year due to defective materials or workmanship (a condition), the manufacturer will replace or repair it (a covenant), and the manufacturer can choose whether to replace or repair (discretionary authority) Managing Risk  Every contract is a mixture or opportunity and risk  People enter into contracts where opportunity outweighs risk, and refuse to do so when risk outweighs opportunity  The seller’s opportunity is to make money, the consumer’s opportunity is to use or enjoy whatever the consumer is buying  Business risk includes the possibility that markets may change  Legal risk includes the legal consequences of certain events or situations  Warranties, representations, conditions, discretionary authority, covenants, and declarations can all be used to reduce risk or enlarge it o Warranty: a warranty reduces your risk of product failure; a longer warranty reduces the buyer’s risk but increases the manufacturer’s risk o Representation: reduces the risk of buying nothing; because of a misrepresentation, you can either get out of the deal or get damages o Condition: a party might negotiate conditions, tied to risks, that can limit some of the party’s duties o Discretionary Authority: if a flooring subcontractor worries that oak may become more expensive in the future, it might negotiate for discretionary authority to substitute another wood such as maple or hickory The Process of Contract Interpretation  First: categorize each relevant provision  Second: figure out why each provision is in the contract  Third: step back and look at the contract as a whole Consequences  Some consequences, such as damages, can be awarded only by a court or in arbitration after years of expensive dispute  When a condition isn’t satisfied, the consequence is immediate: the thing conditioned stays inactive  Covenant: damages are the default remedy for a breach  Discretionary Authority: nothing goes wrong; the parties share responsibility for the statement; by agreeing they make it true  Condition: o For a covenant: if the condition isn’t satisfied, the party with the covenant isn’t obligated to perform it o For a discretionary authority: if the condition isn’t satisfied, the party with discretionary authority isn’t allowed to exercise it o For a declaration: if the condition isn’t satisfied, the declaration isn’t considered ture  Warranty: damages are the default for breach of warranty (limited warranty = replace or repair)  Representation: the party victimized by the misrepresentation may avoid the contract or have a court rescind it; if the party that misrepresented did for fraudulently, the victimized party may get damages instead Form Contract  A form contract is one that can be used over and over again in similar deals, without being negotiated in detail each time Closings  Closing: a meeting at which the core transactions of a deal are accomplished  Asset Purchase Closing: the seller will deliver title of the asset to the buyer, and the buyer will pay for it  Loan Deal Closing: the lender will deliver money to the borrower, and the buyer will sign a promissory note and deliver the document giving the lender a lien on some of the borrower’s property as collateral