Delegation, and Commonly Used Contracts Clauses

Summary of the book “Business and the Legal and Ethical Environment” – pages 193 to 197.

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6.3 Assignment, Delegation, and Commonly Used Contracts Clauses
LEARNING OBJECTIVES

1. Learn about assignment and delegation.
2. Examine novation.
3. Explore restrictions on assignment, exculpatory clauses, noncompete
clauses, mandatory arbitration clauses, acceleration clauses, and
liquidated damages clauses.
4. Explore the parol evidence rule.
What if you formed a contract with a rock ’n’ roll band
for its services? Specifically, you wanted the band to
play at your nightclub, because you thought that your
customers would enjoy the band enough to pay to see it
perform. You hired this specific band because you heard
that it drew large crowds of paying customers. Imagine
your surprise when, as you anticipate the band’s
performance, you discover that another band—one you
have never heard of—has come to play instead of the
original contracting band. On inquiry, you learn that the
original band transferred its duties to perform to a
lesser known band. Can it do that?
Contract elements—the terms of the contract—are
important. They may, among other things, foreclose
your ability to bring a complaint in court, they may
render you unable to be hired in your profession (at least within certain
boundaries), or they may limit liability to a party that had a role in causing injury to
you. If you are not aware of these elements, then you may face an unpleasant
surprise if you act in a way contrary to the restrictions imposed by those terms.
Likewise, contracts possess certain qualities that prohibit parties from acting in
certain ways, unless those qualities are expressly waived. This section identifies
common properties of contracts, as well as commonly used elements of contracts. If
you are negotiating a contract and you do not like a term, then you should not
agree to it. In law, there is a presumption that you have read, understood, and
agreed to each and every term of any contract to which you are a party. Arguing
that you did not understand or that you did not approve of a particular term in the
contract will not be a valid excuse to performance. You should know what you can
expect when you enter into a contract. Are you getting the band that you wanted to
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hire to play in your nightclub, or are you really getting any band that the original
band happens to transfer its duties to?
As a preliminary matter, it is important to realize that contracts are, by law,
assignable and delegable. This means that the rights conveyed by the contract may
be transferred to another party by assignment51, unless an express restriction on
assignment exists within the contract, or unless an assignment would violate public
policy. Likewise, the duties imposed on a party may be transferred to another party
by delegation52, unless the contract expressly restricts delegation, or there is a
substantial interest in personal performance by the original party to the contract,
or if delegation would violate public policy. In the case of a band hired to perform at
a nightclub, an argument could be made that the original band cannot delegate its
duties under the contract because there was a substantial interest in personal
performance by the original band. This would render the contract nondelegable. To
be on the safe side, your contract with that band should have had a clause expressly
prohibiting delegation.
Many students have seen restrictions on assignment in the form of no-sublease
clauses in leases with landlords. Do you have a no-sublease clause in your lease? If
so, that is a restriction on assignment53. This clause is necessary to prevent you
from assigning your rights under the lease—your rights to inhabit the premises—to
another party. It is necessary for the landlord to include that provision expressly if
she wishes to prevent you from subleasing the unit, because there is a presumption
in law that assignment is permitted unless it is expressly prohibited by the contract
or unless the assignment would violate public policy. Since it is unlikely that letting
someone else live in your housing unit in your absence would violate public policy,
then the landlord must expressly prohibit the assignment within the original
contract if she wishes to prevent tenants from subleasing. A landlord may have a
very good reason to wish to prevent subleasing; she may wish to ensure that each
tenant is creditworthy prior to allowing the tenant to live in the property.
Note that in delegation and in assignment, the original contracting party is not “off
the hook” if it transfers its duties or rights to another party. For instance, if
subleasing was not prohibited, and the new tenant assumed the rights and duties
imposed by the original contract, the original party to the contract is still liable for
the payment of rent. If the subleasing tenant does not pay the rent, the original
party to the lease is still liable. The way to excuse oneself from this liability is to
form a three-way novation54 with the original party and the new party, thereby
excusing the exiting party from future liability arising under the contract. A
novation is essentially a new contract that transfers all rights and duties to the new
party to the contract and releases the previous party from any further obligation
arising from the original contract.
51. The ability to transfer rights
conveyed by a contract to
another party.
52. The ability to transfer duties
imposed on a party by a
contract to another party.
53. A clause that prohibits parties
from transferring the rights
conveyed by a contract to
another party.
54. An agreement that transfers all
rights and duties to a new
party to the contract and
releases the previous party
from any further obligation
arising from the original
contract.

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Restrictions on assignment or delegation are not the only common elements that
can be found in contracts. For example, you have probably encountered
exculpatory clauses. An exculpatory clause55 is an express limitation on potential
or actual liability arising under the subject matter of the contract. In short,
exculpatory clauses are often employed when risk of injury exists. They seek to
limit one party’s liability to another. You most certainly have signed exculpatory
agreements or contracts containing exculpatory clauses if you have participated in
any potentially dangerous activity at a club or with an organized group that could
incur liability from injuries suffered by its patrons or members. For example, if you
join a kayaking club, you will most likely be asked to sign such an agreement to
“hold harmless” the club in the event of any accident or injury. However, despite
the existence of an exculpatory clause, liability will not be limited (that is, the
liability limitations will be unenforceable) when the party who would benefit from
the limitation on liability acted with gross negligence, committed an intentional
tort, or possessed greatly unequal bargaining power, or if the limitation on liability
violates public policy. Imagine that you signed an agreement to engage in kayaking
activities with a kayaking group, but the leader of the group battered you with her
oar because she was angry with you for mishandling your kayak. Since battery is an
intentional tort, the exculpatory clause will not protect the kayaking organization
from liability it incurred through the actions of its employee.
Another common contract element that you may have encountered is a
noncompete clause. A noncompete clause56 attempts to restrict competition for a
specified period of time, within a certain geographic region, and for specified
activities. Noncomplete clauses are generally valid against the party who signed it if
the time, place, and scope are reasonable. These are very common clauses in
employment contracts, particularly where the duties involved in employment are
likely to involve trade secrets or other proprietary information that the company
wishes to protect.
A mandatory arbitration clause57 is very common in consumer contracts and
employment contracts. You have certainly subjected yourself to the restrictions
imposed by these clauses if you have signed a contract for a credit card. Mandatory
arbitration clauses require parties to a contract that contains such a clause to
submit to mandatory arbitration in the event of a dispute arising under the
contract. Mandatory arbitration clauses frequently foreclose any possibility of
appealing arbitration awards in court.
An acceleration clause58 commonly exists in contracts where periodic payments
are contemplated by the agreement. For example, if you signed a lease for your
housing unit, then you most likely pay rent on a month-to-month basis. If you
breached your lease, you would still owe rent for each subsequent month
contemplated by the lease agreement. This means that your landlord would have
55. An express limitation on
potential or actual liability
arising under the subject
matter of the contract.
56. A contract clause that restricts
competition for a specified
period of time, within a certain
geographic region, and for
specified activities.
57. A contractual clause that
requires the parties to a
contract that contains such a
clause to submit to mandatory
arbitration in the event of a
dispute arising under the
contract. Mandatory
arbitration clauses frequently
foreclose any possibility of
appealing arbitration awards in
court.
58. A type of clause that
accelerates all payments due
under the contract on breach.

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new injury every month that you did not pay. An acceleration clause accelerates all
payments due under the contract on breach. This allows the injured party—in this
case, the landlord—to sue for all damages due for unpaid rent under that contract at
once, rather than having to bring a new suit each month to seek monthly unpaid
rent.
A liquidated damages clause59 allows parties to set the amount of damages in the
event of breach. Agreeing to a damage amount before any breach occurs can save
money and time spent litigating. Providing that the liquidated damages clause does
not look like a penalty, the clause will be valid and enforced by a court that hears a
dispute arising under the contract. For example, imagine that you entered into a
contract for the sale of your car. If the liquidated damages clause provided for two
thousand dollars of damages in the event of breach, that will probably be a valid
liquidated damages clause, providing that your car is an “average” car. However, if
the liquidated damages clause provided for one million dollars of damages payable
by the breaching party, then that would not be enforceable by the court because it
looks like a penalty. The proposed liquidated damages far exceed the value of the
car that is the subject of the agreement.
Of course, there are additional common elements to contracts. This is not an
exhaustive study of possible provisions, though it is a list of commonly encountered
elements. For example, time of performance is often included as a separate
provision. However, time for performance is an essential element in common-law
contract formation, and without it, the contract may fail due to lack of definite and
certain terms in formation.
A major assumption made about a written contract is that it is integrated60, which
means that it contains the entire expression of the parties’ agreement. That means
that any statements made before the parties signed the contract are not part of the
contract, unless those statements are memorialized in the contract itself. In fact,
any statements or actions that are not captured within the four corners of the
contract are considered parol evidence61, and they will not be used to interpret the
meaning of the contract.
59. A type of clause that sets the
amount of damages in the
event of breach.
60. The legal assumption made
about contracts that they
contain the entire expression
of the parties’ agreement.
61. Statements or actions that are
not captured within the four
corners of the contract.

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KEY TAKEAWAYS
Parties to contracts must not only take care to form the agreement so that it
is legally enforceable, but they must also be aware of the properties of
contracts in general, as well as specific provisions contained within
contracts to which they are a party. Properties of contracts include ability to
assign, delegate, and exclude parol evidence. Several types of contracts
clauses are commonly used to restrict rights and limit liability.
EXERCISES
1. Think of an example of an exculpatory clause that you have signed. For
what type of activity would you be unwilling to sign an exculpatory
clause? If your refusal to sign the exculpatory clause or agreement
prevented you from participating in that activity, would you still refuse
to sign it?
2. Do you think that too many limitations and restrictions can be placed on
parties in a contract? Should there be more government regulation and
standardization of contract terms between private parties? Why or why
not?
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197
6.4 Concluding Thoughts
Contracts are an integral part of business. Without contracts, promises would not
be enforceable, which would wreak havoc on our financial stability, both
individually and professionally.
The law presumes that people who sign contracts have read the contract and
understood its terms. Of course, contract language includes many terms of art, and
simply reading a contract alone may not be enough to fully understand its
implications. Contracts for important matters should be reviewed and explained by
attorneys, so that parties who enter into contracts do not do so without
understanding the agreement.
It’s important to understand the implications of making promises. If those promises
carry legal duties, then, barring a defense, the promise will need to be performed so
that the obligation or duties arising under that promise can be discharged. If the
promise is not performed, and if there are no defenses, then the contract has been
breached. Breach is an actionable claim, with the goal of recovering the loss and
placing the nonbreaching party back to the position that he or she would have been
in if the contract had not been breached.
Recognizing fundamental elements of contracts and how to incorporate
considerations important to you when entering into them can go far toward
ensuring business success. Likewise, the failure to recognize the traps and tricks
that can be incorporated into contracts can derail a good business idea.

KEY TAKEAWAYS
Parties to contracts must not only take care to form the agreement so that it
is legally enforceable, but they must also be aware of the properties of
contracts in general, as well as specific provisions contained within
contracts to which they are a party. Properties of contracts include ability to
assign, delegate, and exclude parol evidence. Several types of contracts
clauses are commonly used to restrict rights and limit liability.

EXERCISES
1. Think of an example of an exculpatory clause that you have signed. For
what type of activity would you be unwilling to sign an exculpatory
clause? If your refusal to sign the exculpatory clause or agreement
prevented you from participating in that activity, would you still refuse
to sign it?
2. Do you think that too many limitations and restrictions can be placed on
parties in a contract? Should there be more government regulation and
standardization of contract terms between private parties? Why or why
not?

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