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By: Timothy Murray MURRAY, HOGUE & LANNIS
I was asked by a company to revise its standard boilerplate legal terms found on the back of its purchase order form so that its terms would prevail in a battle of the forms contest—where contracts are formed by parties exchanging documents without signing off on the same piece of paper. Proper drafting can enhance the chances that the terms will be construed as the contract in such a battle.
I IMPROVED THE FORM, AND MONTHS LATER, I FOUND myself in the office of the company’s head of procurement. I asked if he had received any feedback on the new form.
“We really appreciate what you did for us with that new form,” he gushed, to my delight. It is not often that a client is so appreciative.
But then he pointed to a large box on the floor. “As soon as we use up that box of old forms, we’re going to roll out your new ones.”
It wasn’t so funny at the time. That failure wasn’t my fault. This article is about failures that are the attorney’s fault—and how to avoid them.
Professor Arthur Corbin, who wrote the most influential legal treatise America has produced, Corbin on Contracts, preached that contract law is constantly evolving just as society constantly changes (or, depending on your perspective, spins out of control). This view hasn’t always been universally accepted. Corbin reported that by the time he and the other great contract law treatise writer, Samuel Williston, worked together on the first Restatement of Contracts, “Williston had virtually ceased to read recent cases.”1 Williston was the product of the late 19th century Harvard Law School faculty “that convinced its students that it had arrived at final principles.”2
Of course, there are no final principles, but sadly, we all know practitioners with a final principles mindset—self-identifying experts in contract law who aren’t especially interested in what the courts have said about contracts recently.
The courts tell us how to draft, and we ignore the judicial precedents at our peril. Contract law is encrusted with rules—the rules differ from place to place, and they change over time. We can’t have confidence that we’ve drafted an effective contract without a thorough understanding of the daunting complexities of contract law. Most contract cases are lost, won, or better yet, avoided altogether before the document is even signed—in the drafting stage.
To assist attorneys who draft contracts, my Corbin on Contracts co-author Jon Hogue and I have written a new volume called Corbin on Contract Drafting, to be published in the fall of 2022. It explains why contracts have to be drafted in certain ways—the why is most of the book. It’s not a book about drafting style, and it isn’t a formbook. It’s a book forged in the fires of messy, mystifying, real-world cases. This short article is a sampling—the tip of the iceberg—of just a few of the areas we cover.
There is not one, monolithic contract law. Figuring out which rules apply is its own challenge. The rules differ from state to state. For example, many states say that in determining whether a contract is integrated, extrinsic evidence is admissible, but many others disagree.3 Many states say that a time is of the essence clause in the contract is conclusive4—late performance means that the breach is material and the non-breaching party’s duties are discharged. But other courts say that a time is of the essence clause is not conclusive.5 For the dreaded battle of the forms, many states apply the knockout rule,6 but some major states—including California7 and apparently New York8—do not.
It matters if the predominant purpose of the contract is for goods or services.9 If for goods, the Uniform Commercial Code (U.C.C.) applies (the seller’s obligations are measured by the perfect tender rule); if for services, the common law applies (the seller’s obligations are measure by substantial performance). For sale of goods contracts made by parties whose principal places of business are in different countries that abide by United Nations Convention on Contracts for the International Sale of Goods (CISG),10 the CISG applies (unlike U.S. law, it has no parol evidence rule). Parties can opt out of the CISG in their choice of law provision, but most courts say that a generic choice of law clause specifying, for example, that the laws of the state of New York apply is not enough since CISG is, itself, part of the law of New York. The clause has to say that the parties opt out of CISG.11
Figuring out which law applies can be akin to a game of whack-a-mole. Try to follow the bouncing ball in the following case. Wadley Crushed Stone Company wanted to build a granite plant in Alabama that would process 500 tons of granite per hour. It signed a contract in Georgia to buy equipment from 1st Quality Equipment Company. The contract also said that 1st Quality would provide “erection, installation, and electrical” services. 1st Quality supplied the equipment, but Wadley refused to pay for some of it because it did not meet the 500 ton-per-hour requirement. Five years after the plant was completed, Wadley sued 1st Quality. The court sat in Alabama, so it applied Alabama choice of law rules. Since the contract was signed in Georgia, Georgia law governed the substantive claims. But Alabama considers the statute of limitations to be a procedural matter (as most states do), so the court applied Alabama law to determine whether the claim was time-barred. The case hinged on whether the contract was one for goods or services. If for goods, the action was untimely because the U.C.C. has a four-year-statute of limitations.12 If for services, Alabama’s six-year statute of limitations13 would allow the claim. Since the court applied Georgia law to interpret the contract—even though this issue related to the statute of limitations—Georgia law, not Alabama law, applied to decide whether the contract was for goods or services. To determine whether the four-year U.C.C. or the six-year non-sale of goods statute of limitations applied, the court applied Georgia’s predominant factor test and concluded that since over 95% of the contract was for goods, “it seems pretty clear under Georgia case law . . . that the contract is for goods and not services.” The breach of contract claim was time-barred.14
The difference in state laws is dramatically illustrated by restrictive employment covenants that are drafted too broadly. There are three principal approaches courts take with respect to this issue,15 each offering far different outcomes and suggesting different approaches in drafting:
Few attorneys think that the law of offer and acceptance is in any sense controversial, though it can be. Consider these two cases:
The offers in the two cases differ because in the second case, the Wal-Mart offer stated a firm duration—until March 31 at 3 p.m.—so the offer did not expire in a reasonable time. Up to the time that the plaintiff accepted the settlement offer, Wal-Mart manifested no intention to revoke the offer based on a favorable disposition of its summary judgment motion, which certainly was foreseeable to Wal-Mart. Regardless, it was asking too much of the court to ignore the express terms of Wal-Mart’s settlement offer—its firm duration—under the facts of the case.
There are many traps for the unwary in drafting limitations of remedies. Merely stating a substitute remedy in the contract is not enough to make it exclusive—the contract has to say that it is the exclusive remedy. There is a presumption of cumulative remedies. Advanced BodyCare Solutions’ contract with Thione said that if Advanced “fail[ed] to order and pay for at least the minimum dollar amount of Products during any applicable period of time,” Thione could, “at [its] sole and absolute discretion,” terminate or renegotiate the Agreement, or revoke its exclusivity. Advanced claimed that these remedies were the only remedies available to Thione. The U.S. Court of Appeals for the Eleventh Circuit disagreed, noting courts’ “strong reluctance to construe a contractual remedy as exclusive” when the agreement did not use “the magic words ‘exclusive’ or ‘sole’ remedy”—and this is so “even when they have thought that an exclusive remedy was intended . . . .” The agreement “does not clearly express that the listed remedies are the exclusive remedies available to Thione, regardless of what the parties’ intentions may have been . . . .”22
Drafters who seek to exclude consequential damages may not be excluding the damages they think they are. A federal court summed up the problem when it declared that a contractual provision excluding “consequential damages” is ambiguous. “The term ‘consequential damages’ is subject to multiple interpretations, and ‘no two courts or treatises define consequential damages the same way.’”23 For drafters who rely on contract language excluding consequential damages, that judicial statement ought to be chilling. What’s the difference between direct and consequential damages? Both are foreseeable, but direct damages are more foreseeable than consequential damages.24 But at what point on the foreseeability continuum does someone cross from one to the other? There are no bright lines. For instance, while lost profits are usually regarded as consequential damages, sometimes they are direct damages.25 The court in Jay Jala, LLC v. DDG Constr., Inc.26 spent more than 3,000 words groping for clarity to decide whether various categories of damages fell within the consequential damages exclusion. The effort was valiant, but the court’s task was an impossible one. Parties can often avoid the squabbles over what is consequential damages by spelling out precisely how they want various categories of damages to be treated in the event of a breach, instead of simply excluding consequential damages. To simply exclude all consequential damages can be akin to inviting a stranger of indeterminate ability—otherwise known as a judge—to become an ex post facto co-drafter of the contract.
If a contract for the sale of goods has an effective sole and exclusive remedy (e.g., repair or replacement shall be the sole and exclusive remedy), and the seller is unable or unwilling to give the remedy stated, the remedy has failed of its essential purpose, and the buyer is entitled to the entire panoply of remedies available under the U.C.C.27 But what happens if the contract also contains an exclusion of consequential damages? Most courts say that the exclusion is enforceable, but some courts say that the exclusion does not apply and that the buyer is entitled to consequential damages.28 The parties must draft around it. Example: “Regardless of the failure of the sole and exclusive remedy, SUPPLIER will not be liable for any indirect, special, incidental, or consequential damages regardless of how they are characterized. The parties intend the exclusion of indirect, special, incidental, or consequential damages as an independent agreement apart from the sole and exclusive remedy referenced herein.”
In recent years, parties on the losing end of breach of contract actions sometimes unexpectedly find themselves responsible for attorney’s fees. This is because in many courts, broadly drafted indemnity clauses are being applied to first-party claims. While indemnity traditionally has been deemed to apply to third-party claims, in recent years, more litigants have attempted to use indemnity provisions in connection with first-party claims (that is, direct breach of contract claims between the parties to the contract where no third-party is involved). This means that if the indemnity provision contains an attorney’s fee provision, the non-prevailing party must pay. For example, a broadly drafted indemnification clause covering “any and all costs and expenses” may be held to include first-party claims.29 Many drafters are now policing indemnity provisions more closely to ensure that they are applied only to third-party claims.
No area of contract law is more misunderstood than the parol evidence rule (except, of course, the battle of the forms,30 which is in its own universe in terms of misapprehension). The parol evidence rule is very often mistaken as an aid to interpreting contracts. It is nothing of the kind. When judges say that “parol evidence is not admissible unless the contract is ambiguous,” this is not a statement of the parol evidence rule, it is a statement of interpretation—in that instance, it is unfortunate that judges use the term parol evidence instead of extrinsic evidence.
The parol evidence rule deals with integration, not interpretation. The court must first decide the integration question—that is, the scope of the agreement (specifically, whether the parties intended for the writing to bar admission of evidence of prior or contemporaneous agreements).31 Only after figuring out which terms are part of the agreement may the document be interpreted.32 Ambiguity goes to interpretation, not integration.
A merger clause gives full effect to the parol evidence rule—it says that “there are no representations, promises or agreements between the parties except those found in the writing.”33 Are merger clauses conclusive on the question of integration? Some courts say they are;34 some say they are not, but that they are significant.35 The most important rule about merger clauses is to have one. In one case, the U.S. Court of Appeals for the Second Circuit held that because there was no merger clause, it was proper for the lower court to admit evidence of a prior agreement as shown by a text message thread and a photo of a white board from a meeting36—exactly the sort of evidence that merger clauses are designed to exclude.
Modern contract litigation often includes extra-contractual claims along with claims for breach of contract. A garden-variety merger clause may not preclude evidence of fraud in the inducement to invalidate the contract.37 But some courts have suggested a drafting solution that precludes fraud claims—by including non-reliance language in the merger clause. In SodexoMAGIC, LLC v. Drexel Univ.,38 the court was called upon to decide whether the following generic integration clause precluded fraud claims: “This Agreement contains all agreements of the parties with respect to matters covered herein, superseding any prior agreements, and may not be changed other than by an agreement in writing signed by the parties hereto.” The clause mentions prior agreements but not prior representations. The court found that the clause, as written, did not preclude a claim for fraudulent inducement. Something more than a garden-variety integration clause was needed—a fraud insulating clause that would make it legally impossible for a party to establish that it justifiably relied on a pre-contractual representation. The panel called this an “integration-plus contract.”
Some invisible terms—trade usage and course of dealing—become part of the contract even with a garden-variety merger clause. (Trade usage and course of dealing are terms of art with established meanings.)39 Unless they are carefully negated in the contract, the parties’ written expression is to be read as if it contained this evidence.40 This careful negation requires words in addition to the usual merger clause.41 Another invisible term—course of performance—refers to the conduct of the parties in carrying out the terms of their writing.42 Since such evidence occurs after the writing, it cannot be precluded by the parol evidence rule—regardless of whether the writing has a merger clause.43
Traps for the unwary are everywhere in contract law. A few more short examples:
On and on it goes. No one is able to fully keep up with contract law—the cases come too fast, dozens every day. All due apologies to Professor Williston: Professor Corbin was right. There are no final principles. As attorneys, it is our job to be sentries—always watching the skies for change in the law. Failure to heed the signs of change can be disastrous for our clients.
Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, is the lead author of the Corbin family of contract law texts. He writes the biannual supplements to Corbin on Contracts, is author of Corbin on Contracts, volumes 1 and 15 and volume 8 (pending publication); Corbin on Pennsylvania Contracts; Corbin on Ohio Contracts; Corbin on Massachusetts Contracts; Corbin on New York Contracts (publication pending); Corbin on Contracts: Force Majeure and Impossibility of Performance Resulting from COVID-19 (2021), and is co-author of Corbin on Contracts Desk Edition (2021) and Corbin on Contract Drafting (pending publication).
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1. William Twining, “Looking Back Will Still Keep Us Looking Forward”: A Letter from Arthur Corbin to Soia Mentschikoff upon the Death of Karl Llewellyn, 27 Yale J.L. & Human. 201, 203, n.9 (2015) (citing Arthur L. Corbin, Answers to Questions 7 (Oct. 1965) (unpublished typescript) (on file with author of the article). 2. Id. 3. Gregory Klass, Parol Evidence Rules and the Mechanics of Choice, 20 Theoretical Inq. L. 457, 470-471 (2019). 4. E.g., Greenland Super Mkt., Inc. v. KL Vegas, LLC, 2019 Nev. Unpub. LEXIS 1271, 452 P.3d 411 (Nov. 21, 2019). 5. E.g., Kodak Graphic Communs. Can. Co. v. E.I. du Pont de Nemours and Company, 2015 U.S. Dist. LEXIS 834 (W.D.N.Y. Jan. 6, 2015), aff’d, Kodak Graphic Communs. Can. Co. v. E. I. du Pont de Nemours & Co., 640 Fed. Appx 36 (2d Cir. 2016). 6. See General Steel Corp. v. Collins, 196 S.W.3d 18 (Ky. Ct. App. 2006); Power Paragon, Inc. v. Precision Tech. USA, Inc., 2009 U.S. Dist. LEXIS 21363 (W.D. Va. Mar. 17, 2009); Flender Corp. v. Tippins Int’l, Inc., 2003 PA Super. 300, 830 A.2d 1279 (2003). 7. Steiner v. Mobil Oil Corp., 20 Cal. 3d 90, 569 P.2d 751, 141 Cal. Rptr. 157 (1977). 8. E.g., Movado Group, Inc. v. Mozaffarian, 92 A.D.3d 431, 938 N.Y.S.2d 27, 2012 NY Slip Op 732 (App. Div. 2012); Italfabrics, Ltd. v. Jay Jacobs, Inc., 1990 U.S. Dist. LEXIS 3643 (S.D.N.Y. April 5, 1990); Kevin C. Stemp, A Comparative Analysis of the “Battle of the Forms”, 15 Transnat’l L. & Contemp. Probs. 243 (2005). 9. Boardman Steel Fabricators, Ltd. v. Andritz, Inc., 2015 U.S. Dist. LEXIS 119562, *9-10 (E.D. Ky. Sept. 9, 2015). See Kraft v. Health, 2020 U.S. Dist. LEXIS 255115, *19 (D. N.D. Dec. 3, 2020) (“To decide whether goods or services predominate in a mixed contract, courts often consider the contract language, the business of the supplier, and the ‘intrinsic worth’ of the goods involved . . . . Courts also commonly compare the relative cost between the goods and services in the contract.”) 10. See, e.g., Am’s Collectibles Network, Inc. v. Timlly (HK), 746 F. Supp. 2d 914 (E.D. Tenn. 2010). 11. Thyssenkrupp Metallurgical Prods. GmbH v Energy Coal, S.p.A., 2015 NY Slip Op 31922(U) (Sup. Ct .2015). 12. Ala. Code § 7-2-725(1). 13. Ala. Code § 6-2-34(9). 14.Wadley Crushed Stone Co., LLC v. Positive Step, Inc., 2022 U.S. App. LEXIS 14014 (11th Cir. May 24, 2022). 15. E.g., Hassler v. Circle C Res., 2022 WY 28, 505 P.3d 169 (2022). 16. Charles A. Sullivan, The Puzzling Persistence of Unenforceable Contract Terms, 70 Ohio St. L.J. 1127, 1159 (2009). 17. Restatement of Employment Law § 8.08, Reporters Notes (2015). Heraeus Med., LLC v. Zimmer, Inc., 135 N.E.3d 150 (Ind. 2019) offered a spirited but unsatisfying defense of the strict blue-pencil approach. 18. Restatement of Employment Law § 8.08. 19. Hassler, 2022 WY 28 (excellent opinion). 20. Sherrod v. Kidd, 138 Wn. App. 73, 155 P.3d 976 (2007). See also Moore v. Donegal Mut. Ins. Co., 247 Md. App. 682, 693, 239 A.3d 764, 770 (2020) (“[W]here the offer was accepted prior to final judgment, within approximately two hours after the offer was stated to be still on the table, the issue whether the offer was accepted within a reasonable amount of time is an issue of fact.”) 21. Wal-Mart Stores Tex. LLC v. Shirey, 2020 Tex. App. LEXIS 945 (Feb. 4, 2020). 22. Advanced BodyCare Solutions, LLC v. Thione Int’l, Inc., 615 F.3d 1352, 1362 (11th Cir. 2010). See Consolidation Coal Co. v. Marion Docks, Inc., 2010 U.S. Dist. LEXIS 32524, *9 (W.D. Pa. Feb. 22, 2010), adopted, 2010 U.S. Dist. LEXIS 31365 (W.D. Pa. March 31, 2010). 23. Team Contrs., L.L.C. v. Waypoint NOLA, L.L.C., 2017 U.S. Dist. LEXIS 160763, at *10 (E.D. La. Sept. 29, 2017). See DaimlerChrysler Motors Co., LLC v. Manuel, 362 S.W.3d 160 (Tex. App. 2012) (distinction between direct and consequential damages remains elusive). 24. Iron Branch Assocs., LP v. Hartford Fire Ins. Co., 2021 U.S. Dist. LEXIS 171601 (D. Del. Sept. 9, 2021). See Peter A. Alces, On Discovering Doctrine: “Justice” in Contract Agreement, 83 Wash. U. L. Q. 471, 484, n. 40 (2005). 25. OMS3, LLC v. Carestream Dental, LLC, 2020 U.S. Dist. LEXIS 202566 (E.D. Pa. Oct. 30, 2020). 26. Jay Jala, LLC v. DDG Constr., Inc., 2016 U.S. Dist. LEXIS 150969 (E.D. Pa. Nov. 1, 2016). 27. U.C.C. § 2-719(2). 28. See, e.g., Sanchelima Int’l, Inc. v. Walker Stainless Equip. Co., LLC, 920 F.3d 1141 (7th Cir. 2019); Eastern Fisheries, Inc. v. Airgas United States, LLC, 2016 U.S. Dist. LEXIS 195021 (D. Mass. Jan. 28, 2016). 29. E.g., Hensel Phelps Constr. Co. v. Cooper Carry Inc., 861 F.3d 267 (D.C. Cir. 2017). 30. U.C.C. § 2-207. 31. Wachovia Bank, N.A. v. Dresdner (In re Brookland Park Plaza, LLC), 2009 Bankr. LEXIS 3241, *18 n. 5 (Bankr. E.D. Va. Oct. 13, 2009) (the parol evidence rule “is not a rule of interpretation, but rather it defines the subject matter of interpretation.”) 32. Restatement (Second) of Contracts § 213, cmt. a. 33. Restatement (Second) of Contracts § 216 cmt. e (1981). 1-5 Murray on Contracts § 85 (a merger clause states “that the writing constitutes the sole and exclusive repository of the parties’ agreement and somewhat redundantly [adds that the parties] do not intend to be bound by any other agreement, understanding or negotiation of whatsoever kind or nature.”); Shehadeh v. Horizon Pharma USA, Inc., 2021 U.S. Dist. LEXIS 174508, *12 (S.D.N.Y. Sept. 14, 2021). 34. E.g., Zwiker v. Lake Superior State Univ., 2022 Mich. App. LEXIS 859, *30 (Feb. 10, 2022). 35. E.g., Bonfire, LLC v. Zacharia, 251 F. Supp. 3d 47 (D.D.C. 2017) (merger clause may be a significant but not conclusive factor). 36. Dhaliwal v. Hypr Corp., 2022 U.S. App. LEXIS 781 (2d Cir. Jan. 11, 2022). 37. Vigortone Ag Prods. v. AG Prods., 316 F.3d 641, 644 (7th Cir. 2002) (“the majority rule is that an integration clause does not bar a fraud claim.”). But see e.g., Pass v. Palmiero Auto. of Butler, Inc., 229 A.3d 1, 7 (Pa. Super. 2020) (“When the parties intend for a writing to be their entire contract, parol evidence is inadmissible to demonstrate fraud in the inducement of the contract, i.e., ‘an opposing party made false representations that induced the complaining party to agree to the contract.’” Toy v. Metro. Life Ins. Co., 593 Pa. 20, 928 A.2d 186, 205 (Pa. 2007)). 38. SodexoMAGIC, LLC v. Drexel Univ., 24 F.4th 183 (3d Cir. 2022). 39. E.g., U.C.C. § 1-303; Restatement (Second) of Contracts §§ 222-223. 40. U.C.C. § 2-202, cmt. 2. 41. Precision Fitness Equip., Inc. v. Nautilus, Inc., 2011 U.S. Dist. LEXIS 13576 (D. Colo. Feb. 2, 2011). 42. U.C.C. § 1-303(a); Restatement (Second) of Contracts § 202(4). 43. See U.C.C. § 2-202, cmt. 2 (does not include course of performance among the matters that can be carefully negated). See also Keith A. Rowley, Contract Construction and Interpretation: From the “Four Corners” to Parol Evidence (and Everything in between), 69 Miss. L.J. 73, 331 (1999) (course of performance cannot be “carefully negated”). 44. Michael M. Greenfield, Consumer Protection and the Uniform Commercial Code: The Role of Assent in Article 2 and Article 9, 75 Wash. U. L. Q. 289 (1997). 45. George S. Geis, Gift Promises and the Edge of Contract Law, 2014 U. Ill. L. Rev. 663, 677, n. 70 (2014). 46. Staff4jobs v. List Logistics, 2022 U.S. Dist. LEXIS 33328, *19 (D. N.J. Feb. 25, 2022). See G.L.M. Sec. & Sound, Inc. v. LoJack Corp., 667 Fed. Appx. 339 (2d Cir. 2016) (despite an NOM clause, a modification may be implied by the parties’ conduct) (Massachusetts law). 47. Restatement (Second) of Contracts § 322(2)(b); Brdl v. Rd Legal Funding, 2021 N.J. Super. Unpub. LEXIS 643 (April 16, 2021) (Delaware law). But see Travertine Corp. v. Lexington-Silverwood, 683 N.W.2d 267, 272, 274 (Minn. 2004), which construes anti-assignment clauses as depriving the putative assignor of the power to assign. 48. Pravin Banker Assocs., Ltd. v. Banco Popular Del Peru, 109 F.3d 850, 856 (2d Cir. 1997); Brdl, 2021 N.J. Super. Unpub. LEXIS 643. 49. Furnituredealer.Net, Inc. v. Amazon.com, Inc., 2022 U.S. Dist. LEXIS 54509, *93-94 (D. Minn. March 25, 2022) (citing Corbin on Contracts). 50. Restatement (Second) of Contracts § 241. 51. Bear, Stearns Funding, Inc. v. Interface Group -- Nev., Inc., 361 F. Supp. 2d 283, 296 (S.D.N.Y. 2005) (citing Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 243, 129 N.E. 889, 891 (1921) (Cardozo, J.)). 52. Kodak Graphic, 2015 U.S. Dist. LEXIS 834, aff’d, Kodak Graphic, 640 Fed. Appx 36. 53. E.g., John J. Kassner & Co. v. New York, 46 N.Y.2d 544, 389 N.E.2d 99, 415 N.Y.S.2d 785 (1979). 54. Hoctor v Polchinski Mems., Inc., 50 Misc. 3d 65 (N.Y. App. Term 2015).