05

Contracts:contractformation

ng 1: I on onThis text givesanoverviewof someof the mostimportant conceptsandterminologyrelated to what constitutes a legal contract and when it is enforceable.

1 Read through the text quickly. Then match these questions (a-e) with theparagraphs that answer them (1-5).

a What form can an enforceable contract take?

b When do third parties possess enforceable rights in a contract?

c Upon which grounds related to the formation of a contract may its validity beattacked?

d What are the elements of an enforceable contract?e What are the essential terms of a contract?

lit should be noted that, in the United States, contracts for the sale of goods are governed by the UniformCommercial Code (UCC)and in the United Kingdom by the Sale of Goods Act, and therefore the abovecommon law contractual principles may have been supplemented or replaced by these statutory provisions.

~

.

. n on2 Match these defences (1-4) with their definitions (a-d).

1 illegality of the subject matter2 fraud in the inducement

3 duress

4 lack of legal capacity

a when one party does not have the ability to enter into a legal contract,i.e. is not of legal age, is insane or is a convict or enemy alien

b when one party induces another into entering into a contract by use or threatof force, violence, economic pressure or other similar means

c when either the subject matter (e.g. the sale of illegal drugs) or theconsideration of a contract is illegal

d when one party is intentionally misled about the terms, quality or other aspectof the contractual relationship that leads the party to enter into the transaction

.. n n9Lawyers are usually involved at the formation stage of a contract, which includes

advising, drafting and negotiating. Drafting is commonly carried out with the help ofcontract templates or forms. Nevertheless, legal counsel must advise on the inclusion or

omission of clauses and their wording. To do this, familiarity with common clause typesand the language typically used in them is necessary.

3 Match these types of contract clauses (1-10) with their definitions (a-j).

1 Acceleration

2 Assignment

3 Confidentiality

4 Consideration

5 Force Majeure

6 Liquidated Damages

7 Entire Agreement2

8 Severability

9 Termination

10 Payment of Costs

a clause stating that the written terms of an agreement may not bevaried by prior or oral agreements because all such agreements havebeen consolidated into the written document

b clause designed to protect against failures to perform contractual

obligations caused by unavoidable events beyond the party's control,such as natural disasters or wars

c clause outlining when and under which circumstances the contractmay be terminated

d clause concerning the treating of information as private and not for

distribution beyond specifically identified individuals or organisations,nor used other than for specifically identified purposes

e clause in a contract requiring the obligor to pay all or a part of a payableamount sooner than as agreed upon the occurrence of some event or

circumstance stated in the contract, usually failure to make paymentf clause setting out which party is responsible for payment of costs

related to preparation of the agreement and ancillary documentsg clause expressing the cause, motive, price or impelling motive which

induces one party to enter into an agreement

h clause referring to an amount predetermined by the parties as thetotal amount of compensation a non-breaching party should receive ifthe other party breaches a part of the contract

i clause prohibiting or permitting assignment under certain conditions

j clause providing that, in the event that one or more provisions of the

agreement are declared unenforceable, the balance of the agreementremains in force

2 (US) a/so Merger (The term Parol Evidence is used in both the UK and the USA.)

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4 Add the name of each clause type (or its nearest equivalent) in your languageto the list in Exercise 3.

5 Identify the type of clause listed in Exercise 3 exemplified by each of theseclauses.

1 The seller's liability for damages shall in no case exceed the purchase price of

the particular quantity delivered with respect of which damages are claimed.2 Whenever, within the sale judgment of Seller, the credit standing of Buyer

shall become impaired, Seller shall have the right to demand that theremaining portion of the contract be fully performed within ten (10) days.

3 Neither party shall be liable in damages or have the right to terminate this

Agreement for any delay or default in performing hereunder if such delay ordefault is caused by conditions beyond its control including, but not limitedto, acts of God, government restrictions (including the denial or cancellation

of any export or other necessary licence), wars, insurrections and/or anyother cause beyond the reasonable control of the party whose performanceis affected.

4 This Agreement may not be assigned without the prior written consent of the

other party, except that Buyer may assign the Agreement to a subsidiary orrelated corporation so long as the owners of at least seventy-five per cent(75%) of the stock of such corporation are either Buyer or the shareholdersof Buyer.

S In the event Operator defaults in the performance of any covenant oragreement made hereunder, as to payments of amounts due hereunder or

otherwise, and such defaults are not remedied to the Supplier's satisfactionwithin ten (10) days after notice of such defaults, the Supplier may

thereupon terminate this agreement and all rights hereunder of the Operatorbut such termination shall not affect the obligations of the Operator to takeaction or abstain from taking action after termination hereof, in accordancewith this agreement.

6 This Agreement, including the Schedules and Exhibitsattached hereto,

constitutes and contains the entire agreement of the parties with respect ofthe subject matter hereof and collectively supersedes any and all prior

negotiations, correspondence, understandings and agreements between theparties respecting the subject matter hereof. No party is relying on or shall

be deemed to have made any representations or promises not expressly set

forth or referred to in this Agreement.

6 In your own words, explain the following words and expressions in italics fromthe clauses in Exercise 5.

1 liability for damages (clause 1)2 within the sale judgment of Seller (clause 2)

3 delay or default (clause 3)

4 prior written consent (clause 4)

S In the event Operator defaults in the performance... (clause 5)6 abstain from taking action (clause 5)7 Schedules and Exhibits (clause 6)8 deemed (clause 6)

3

2:The text on this page and the next is an example of the previously mentioned type ofdocument known as a contract form, which is often used by lawyers at the formationstage of a contract.

7 Briefly scan the agreement and answer these questions.

1 What kind of agreement is it?2 Why does the text have gaps in it?

8 Read the text more carefully. What types of clauses are 2b, 3, 5 and 6?

NON-COMPETITION AGREEMENT OF SHAREHOLDEROF SELLERINCONNECTION WITH SALE OF ASSETS

COVENANT NOT TO COMPETE

ThisCOVENANTNOTTOCOMPETE(thisIiCovenant"),datedasofenteredintobyandbetween ("Shareholder")and-corporation("Purchaser"),with referenceto thefollowingfacts:A , corporation("Seller"),andPurchaserarepartiesto thatcertainAsset

PurchaseAgreement,datedasof , 2°- (asamended,supplementedor otherwisemodifiedfromtimeto time,the IiPurchaseAgreementli),pursuantto whichPurchaseragreedtopurchasefrom Seller,andSelleragreedto sellto Purchaser,certainassetsof thebusinessownedandoperatedby Sellerlocatedat ("theBusinessli).Unlessotherwisenoted,capitalizedtermsusedhereinshallhavethe meaningsascribedto themin the PurchaseAgreement.

B Shareholderownsallof the issuedandoutstandingcapitalstockof Seller.C Shareholder,duringthe courseof ownershipandoperationof the Business,hasacquirednumerous

businesscontactsamongthe public,financialinstitutionsand industryemployees.D Purchasershollexpenda considerableamountof time,money,andcreditwith respectto the

purchaseandoperationof the Business.E Purchaserdoesnotdesireto expendsuchtime,money,andcreditandthensubsequentlycompete

with Shareholderin the businessof

F It is a conditionprecedentto the closingof the transactionscontemplatedbythe PurchaseAgreement("theClosingli),thatShareholderexecuteanddeliverthisCovenantandthatPurchaserpayShareholdercertainamountsat Closing,allasmorefullydescribedbelow.

THEREFORE,in considerationof the foregoingandfor othergoodandvaluableconsideration,the receiptandsufficiencyof whichareherebyacknowledged,the partiesheretoagreeasfollows:1 Fora periodof yearsfromthe datehereof,Shareholdershallnot haveanycontrolling

ownershipinterest(of recordor beneficial)in,or haveanyinterestasa director,principalexecutiveofficer,keyemployee,agentor consultantin,anyfirm,corporation,partnership,proprietorship,orotherbusinessthatengagesinanyof the followingactivitieswithina mileradiusof theBusiness'scurrentlocation[describe].

2 Additionally,Shareholdershall:a not referprospectivepurchasersor lesseesof

Business;andb subjectto anyobligationto complywithanylaw,rule,or regulationof anygovernmentalauthority

Orotherlegalprocessto makeinformationavailableto the personentitledthereto,keepconfidentialandshallnot useor permithisattorneys,accountants,or representativesto use,inanymanilerotherthanfor the purposeof evaluatingthetransactionscontemplatedby the PurchaseAgreement,anyconfidentialinformationof PurchaserwhichShareholderacquiredin the courseof

fhe negotiationof the transactionscontemplatedbythe PurchaseAgreement. contJ

, 2°_, is madeand,a

In , other than the

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3 Asconsiderationfor the agreementsof Shareholdersetforth in Sections1and2 above,Purchasershall,at the Closing,deliverto Shareholder$ bywiretransferof immediatelyavailablefundsin suchamountto a bankaccountdesignatedby Shareholder.

4 Thetermof thisAgreementshallbe months,commencingon the datehereof.5 In the eventthatanyprovisionor anypartof anyprovisionof thisAgreementshallbevoidor

unenforceableforanyreasonwhatsoever,thensuchprovisionshoffbestrickenandof no forceandeffect.However,unlesssuchstrickenprovisiongoesto the essenceof the considerationbargainedforby a party,the remainingprovisionsof thisagreementshallcontinuein full forceandeffect,andto theextentrequired,shallbemodifiedto preservetheirvalidity.

6 Inthe eventof anylitigationor legalproceedingsbetweenthe partieshereto,the non-prevailingpartyshallpaythe expenses,includingreasonableattorneys'feesandcourtcosts,of the prevailingpartyinconnectiontherewith.

Agreedto asof this- dayof ,2°_.

Shareholder"PURCHASER"

ByIts

9 Find the verbs, italicised in the text, which match these definitions (1-7).

1 to follow2 will be taken out

3 given to4 beginning5 has bought6 envisaged in7 will spend

1: h c

Toparaphrase meanstophrases may help yoPto

This clause deals withAccording to this clause, tfJeThis clause regulatesThis is about whathappehs Wher]Here it says..., whichmeEinsif)This part basically just says t!j6it

case, ...

10 Workingwith a partner, take turns paraphrasing the contents of each of theclauses(1-6) in the agreement on pages 67-68. Explain the contents of theclauses as if you were speaking to a client with little knowledge of the law.

3

nin9 1: 9Thecontractformation processtypically involvesnegotiatingthe terms and conditionsofthe agreement.Negotiatingcanbe carriedout face to faceand/or in writing, with the useof both contracttemplates,asseenin Reading2,and term sheets.

While a great deal of the negotiating processtakesplacetodayvia email, face-to-facenegotiating continuesto playan important role. Undoubtedly,the ability to negotiatewell in Englishdependsto a largeextent on experience.However,negotiatingskills canbe improvedby learningabout hownegotiationsaregenerallyconductedand whichtechniquesareemployedby goodnegotiators.

11 .. ~Listento the first part of an excerptfroma seminarheld at a law firm forsome of the firm's recently hired young lawyers and tick the topics that thespeaker will cover.

1 preparing for a negotiation

2 phrases and expressions for negotiators3 using agreement templates and term sheets4 classic 'tricks' used by negotiators5 general negotiating techniques6 dealing with objections from the other side

7 different types of agreements usually encountered8 recognising a good deal

9 role-plays

DDDDDDDDD

12 .. ~ Listen to the second part of the seminar and answer these questions.

1 What do you think the speaker means by horse-trading?2 What does the speaker say about the purpose of a merger clause?

9 e 1: n9 e p

it's

This

a

listening text contains several otherexamples of phrases that can be used to give emphasis to aspeaking as

13 Look at the first two paragraphs of the transcript of the presentation (Part II)

on page 267 and underline the phrases used for giving emphasis to a point.Which of them can be made stronger by adding the adverbs mentioned above?

Unit 5 Contracts: contract formation

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ng: eA memois a formal text type used,for example,to outline or clarify a point of law or toprovidea brief opinionon a case.Memoscanbe external [e.g. to a client] or internal[e.g. to anotherlawyerin the samefirm]. In either case,a memoservesto circulateinformationthat requiresthe attention of its readers.

14 Match the halves of these sentences explaining the elements of a memo.

1 A heading a refers to any sentences providing background information aboutthe project in question (such as a reference to an event or to aprevious request for information).

b individual points should be organised in descending order ofimportance, i.e. most important ones first, subordinate or

supporting points later.c is a clear call to action - an explanation of what should be

done in what way, by whom and by what date.d includes the components Date, To, From and Subject.e states the main idea of the memo in less than ten words.

2 The subject line

3 The context

4 In the main message,S The action close

15 Identify the elements from Exercise 14 in this internal memo.

Memorandum

To: All members of the legal staff of the Mergers &Acquisitions department

John Thornton

10 February 2006

In-company seminar on contract negotiations

From:

Date:

Subject:

As part of our in-company training programme focusing on professionalcommunication skills, we have arranged for the well-known communication trainerand practising lawyer, Mr Tom Boland, to hold a half-day workshop on the topic ofSuccessful Contract Negotiations.

We would like to invite all members of the legal staff in the department to attendthis workshop, which will take place on 27 February, 9-11.30 a.m., ConferenceRoom 12.

The workshop consists of a theoretical part, followed by practical role-plays offeringan opportunity for negotiating skills training and personal feedback from the trainer.Thus it is imperative that you arrange your schedules so that you can be present forthe entire workshop.

Please let me know by 9 a.m. on Monday, 13 February by [email protected]) whether you can attend.

J. Thornton

3

16 Havingattended the in-company seminar on effective contract negotiations(Listening 1), you have been asked by your superior to draft a memo for some

of the junior colleagues who were not present at the talk. Your superior isparticularly interested in the points made in connection with the careful use of

contract templates and term sheets. He would like you to write a memo

summarising the three most important points raised by the speaker. Youshould include:

0 a subject line;

0 an introductory statement of the reason for writing;0 a brief discussion of the context or relevant background information;0 a short explanation of each of the three points;0 a concluding remark pointing to the future;0 and an offer to provide further information or assistance as needed.

Include some of the phrases for giving emphasis to points as discussed in

Language use 1. Read the transcript on pages 266-267 again before youprepare the memo.

ning 2: n onLawyers are commonly requested to conduct contract negotiations on behalf of clients,

particularly in matters in which strong negotiating skills are required. In Listening 2, youwill hear Arthur Johansson, a junior lawyer who attended the in-company seminar onnegotiating techniques, negotiating the terms of an agreement for a client with the otherparty's lawyer, Ms Orvatz.

17 ..::: Listen to the negotiation. What kind of agreement are they talking about?Which clauses do they mention?

18 ..::: Listen again and decide whether these statements are true or false.

1 The clause they are discussing would not allow the franchisee to operate anykind of restaurant within the prescribed area for a stipulated period of time.

2 The lawyer representing the franchisor argues that the purpose of the clauseis to guard her client's legitimate business interests.

3 The franchisee's lawyer believes that his client is in a strong position in thenegotiation.

4 The franchisee's lawyer offers to strike the arbitration clause in exchange fora reduction in the number of years set forth in the non-competition clause.

19 What do you think of the way Arthur Johansson negotiated the agreement?Did he use any of the techniques presented at the negotiation seminar?

9 e 2: 0In addition to learningabout techniquesemployedby experiencednegotiators,improvingyour negotiatingability in Englishcanbeachievedby becomingfamiliar with and usingcommonphrases.

In one of the initial phasesof a negotiation,the biddingphase,the two sidesput forthproposalsor suggestions.Thephrasesin Exercise20 serve to introduce a proposalorsuggestion,or to respondto sucha proposalin a face-to-face negotiatingsession.(Notethat these phraseswould alsobe suitable for use in informal written communication,suchas an email, betweenpartieswith an establishedand friendly working relationship.]

Unit5 Contracts:contract formation

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20 04;: Listen to the negotiation in Listening 2 again and tick the expressions youhear the lawyers use.

1 I'm afraid we can't go along with ... D2 I'm afraid that's out of the question. D3 Our proposal is to ... D4 That's certainly a step in the right direction. D5 We suggest ... D6 That would be difficult for us. D

21 Decide whether the phrases in Exercise 20 are used to a) make a proposal,b) respond favourably, or c) reject a proposal. Which phrase is the most forcefulfor rejecting a proposal?

7 We'd like ... D8 What we're looking for is ... D9 I think we could live with that. D

10 We're not entirely happy with that. D11 We'd be happy with that. D

n92: n9 e22 Role-play this situation with a partner. Use as many of the phrases for

negotiating from Exercise 20 as you can.

Student A: Turn to page 305.Student B: Turn to page 306.

n93:The text on pages 73-74 appears on the website of an American company whose statedmission is 'to make legal information more accessible'. The text deals with electroniccontracts, or 'e-contracts'.

23 What do you know about e-contracts? Are they used often in your jurisdiction?What other words do you know that begin with e- (meaning electronic)?

24 Read through the text quickly and complete the spaces (1-5) using thesesentences (a-e).

a Consumer advocates are concerned because the federal electronic signature

law does not define an electronic signature or stipulate what technologiescan or should be used to create an electronic signature.

b An electronic contract is an agreement created and "signed" in electronicform.

e The law also benefits business-to-business websites who need enforceable

agreements for ordering supplies and services. For all of these companies,the new law is essential legislation because it helps them conduct businessentirely on the Internet.

d Security experts currently favour the cryptographic signature method knownas Public Key Infrastructure (PKI) as the most secure and reliable method ofsigning contracts online.

e The notice must also indicate whether your consent applies only to the

particular transaction at hand, or whether the ousiness has to get consentto use e-documentsjsignatures for each transaction.

J

New law makes e-signatures validContracts created online are now as legal as those on paperWhile contract basics generally apply to any contract, regardless of form, there are some newand emerging rules that apply specifically to contracts created online. Thanks to federallegislation recently signed into law, electronic contracts and electronic signatures are just aslegal and enforceable as traditional paper contracts signed in ink. The law, known as theElectronic Signatures in Global and International CommerceAct, removes the uncertainty thatpreviously accompanied e-contracts. However, consmp.ergroups worry that the law doesn'tadequately protect against online fraud and may create disadvantages and penalties forconsumers who prefer printed agreements.

What are electronic contracts and electronic signatures?1) An e-contract can also be a "Clickto Agree" contract, commonly used withdownloaded software; the user clicks an "I Agree" button on a page containing the terms ofthe software license before the transaction can be completed.One of the more difficultelectronic contract issues has been whether agreements made in apurely online environment were "signed" and therefore legally binding. Since a traditionalink signature isn't possible on an electronic contract, people have used several differentways to indicate their electronic signatures, including typing the signer's name into thesignature area, pasting in a scanned version of the signer's signature, clicking an "I Accept"button, or using cryptographic "scrambling" technology. While the term "digital signature" isused for any of these methods, it is becoming standard to reserve the term for cryptographicsignature methods, and to use "electronic signature" for other paperless signature methods.

Are e-signatures secure?

2) PKIuses an algorithm to encrypt online documents so that they will beaccessible only to authorized parties. The parties have "keys" to read and sign the document,thus ensuring that no one else will be able to sign fraudulently. Though its standards are stillevolving, it is expected that PKItechnology will become widely accepted.

No paper neededThe most significant legal effect of the new e-signature law is to make electronic contractsand signatures as legally valid as paper contracts. The fact that electronic contracts havebeen given solid legal support is great news for companies that conduct business online.Under the law, consumers can now buy almost any goods or services-from cars to homemortgages-without placing pen to paper. 3) ........................

Federal law versus state law

The federal electronic signature law won't override any state laws on electronic transactionsprovided the state law is "substantially similar" to the federal law or the state has adoptedthe UniformElectronic Transactions Act (UETA).This ensures that electronic contracts andelectronic signatures will be valid in all states, regardless of where the parties live or wherethe contract is executed.

Do you want paper or electronic?If you prefer paper, the law provides a means for you to opt out of using electronic contracts.An online company must provide a notice indicating whether paper contracts are available

Unit 5 Contracts: contract formation

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and informingyou that if you give your consent to use electronic documents, you can laterchange your mind. Ifyou withdraw consent to use electronic contracts, the notice mustexplain what fees or penalties might apply if the company must use paper agreements forthe transaction. 4) .....

Prior to obtaining your consent, the business must also provide a statement outlining thehardware and software requirements to read and save the business's electronic documents. Ifthe hardware or software requirements change while you have a contractual relationshipwith the business, the business must notify you of the change and give you the option torevoke your consent to using electronic documents.

Although the e-signature law doesn't force consumers to accept electronic documents frombusinesses, it poses a potential disadvantage for low-tech citizens by allowing businesses tocollect additional fees from those who opt for paper.

Consumer concerns

5) The law establishes only that electronic signatures in all their forms qualify assignatures in the legal sense, and leaves it up to software companies and the free market toestablish which electronic signature methods will be used.

Since electronic-signature technology is still evolving, many kinds of e-signatures offer little,if any, security. If a consumer uses an insecure signature method, identity thieves couldintercept it online and use it for fraudulent purposes. It is expected that secure methods ofelectronic signatures will be adopted and become as commonplace as credit cards. However,stolen electronic signatures have the potential to become as widespread a problem for e-commerce as credit-card scams and stolen passwords. Consumer-protection groups suggestcaution before signing anything online.

25 Read the text again and answer these questions.

1 What is the difference between a digital signature and an electronicsignature?

2 What is the most important result of the new law?3 Why do business-to-business websites welcome the new law?4 What does the new law stipulate concerning the use of paper contracts?5 According to the law, which kinds of electronic signatures are to be regarded

as legal signatures?

26 Read through the text once more, noting the advantages of the new law andany (possible) disadvantages that could arise as a result of the new legislation.

, Discuss these advantages and disadvantages with a partner. Do you think thedisadvantages outweigh the advantages?

27 Answer these questions.

1 Why do you think the drafters of the law left 'electronic signature'

undefined? Is this an advantage or disadvantage?2 What is the status of electronic contracts in your own jurisdiction?

e 3:

used to

28 The text on pages 73-74 has several examples of adverb + verb (and a fewadverb + adjective) combinations. Write them in the table below (the adverbsare indicated in the text in italics).

29 Which noun in the sixth section of the text (Do you want paper or electronic?)collocates with the following verbs?

to obtain, to withdraw, to rescind, to get, to give

30 Match these words from the text (1-6) with their synonyms (a-f).

1 revoke

2 prefer3 enforceable

4 penalties5 obtain

6 notify

a additional feesb inform

c getd opt fore validf withdraw

Unit 5

To improve your web-based research skills, visit www.cambridge.orgjeltjlegalenglish.click onResearch Tasks and choose Task 5.

Unit5 Contracts: contract formation

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Vocabulary: distinguishing meaning Which word each

out? You may need to consult a dictionary to distinguish themeaning.

covenantwhereas

Collocations Complete thewith the noun contract.

amond cancel

supplement

execute

To form or make a contract valid To make a contract partly To change or add to a contractor wholly invalid

breach enter into modify renew sign terminate

Verb forms Completethe box.

as

contract exists.3 The

by4 'Evergreen

unless the5

6 The

contract

Word formation Complete this the correct abstract noun form.Underline the stressed syllable more than one syllable.

to

1 enforceable /2 /34

the

...contract

Verb Abstract noun

renew r-enewoJ,

draft

include

omit

terminate

encrypt I

adopt

negotiate

propose

transact