In law, a contract is a legally binding agreement between two or more parties that is enforceable by law. A legally enforceable contract is an exchange of promises with specific legal remedies for breach.
The MBE has thirty-four questions. Many are 2-5 questions from a single set of facts. Contracts and sales questions are alike on the MBE, except the source of law involved. Contracts questions rely on common law, while the sale of goods rely on Articles II of the Uniform Commercial Code. On essays the examiners have never asked more than two of the six issues on a given question. On crossovers they may ask only one.
Exam approach. First decide if the UCC or common law applies to the fact pattern. Article II of the UCC applies to the sale of goods. Common law applies to the sale or lease of land or personal services. If the fact pattern is a mixture of UCC and common law issues use the predominant purpose test or discuss each issue separately under The UCC or common law. Under Article II, both parties must be merchants if they are not, answer questions under common law. A merchant is any person who makes a livelihood dealing in the subject matter, or who makes affirmative representation, even if it is not true that, that is how they make a living. Distinguish in essay analysis between the subject matter and the status of the parties whether Article II or common law takes precedence.
- I. Contract formation. Did the parties form an agreement?
- Mutual assent. A meeting of the minds describes the intentions of parties to form a contract. A contract is a legally enforceable agreement that takes on the form of an offer and acceptance. There must be an offer and subsequent acceptance for a contract to be valid.
Objective theory of contract formation. A contract is determined by the acts of the parties, not their intent. Consider whether parties are in the preliminary stages of negotiations or has one party made an offer.
At common law a binding agreement between two (or more) parties was determined by the intention (a meeting of the minds) between consenting parties.
Modernly the objective theory of contract relies on the external acts of the parties.
- Offer. A manifestation of one trader (offeror) with the present intent to form a present contract that is communicated to another party (offeree). An offer creates the power of acceptance in the offeree.
Real estate. For a real estate transaction to be a valid contract the offer must identify the land and the sales price.
Sale of goods offers requires the quantity of the goods being sold.
Employment. An employment offer must state the duration of the employment contract.
Under the UCC an offer closes at a stated time or, if no time is stated, a reasonable time. (90 days).
Was the offer revoked?
- Revocable offers. At common law an offer may be revoked at any time prior to acceptance. The only party who can revoke an offer is one who made it. Look for unambiguous words on the part of the offeror that it is no longer open, or acts that show the offeror is no longer willing to hold the offer open and the offeree has received the revocation information.
Express revocation. Words. I revoke my offer to sell you my car.
Implied revocation. An act. The car was sold to someone else.
- An express direct revocation communicated to the offeree is effective upon receipt. Or.
- The offeree finds out the offeror is acting inconsistently with the offer being open.
- Published offers must be revoked by the same means of publication. Receipt by the offeree is irrelevant.
- Offers not supported by consideration or detrimental reliance can be revoked at will by offeror, even if the offeror promised not to revoke.
- Irrevocable offers.
- Firm offers. Under the UCC, an offer by a merchant for the sale of goods states it will remain open for a set time and during that time it is incapable of being revoked. Statute of frauds under UCC § 2-205, requires a writing for a firm offer. § 2-201 requires a writing for goods more than 500.00. A firm offer requires:
- Signed writing by a merchant.
- Assurance the offer will remain open for a set time. If no time is not stated, a reasonable amount of time. No more than 90 days.
- An offeree that relies on a firm offer may recover damages under promissory estoppel.
- Death of the offeror revokes a firm offer.
- An offer that induces action or forbearance of a substantial character must remain open long enough to prevent injustice.
- Firm offers. Under the UCC, an offer by a merchant for the sale of goods states it will remain open for a set time and during that time it is incapable of being revoked. Statute of frauds under UCC § 2-205, requires a writing for a firm offer. § 2-201 requires a writing for goods more than 500.00. A firm offer requires:
Example: Usually applies to contractor bids where a general contract relies on a subcontractor’s bid to submit their own. The subs bid must be held open long enough for the general contractor to get the job. Janke. A general contractor can receive damages if a sub fails to adhere to its bid under promissory estoppel.
- Option contracts are contracts supported by consideration that keeps an offer open for the length of time specified in the terms.
- Detrimental reliance on the offer. The offeror must have reasonably expected reliance.
- Unilateral offers where the offeree has begun to perform must allow the offeree reasonable time to complete performance.
Elements of an offer.
- Intent. Parties must intend to form a present contract. Under the UCC obligations may mature at a later time.
- State of mind. If one of the parties spoke in anger, jest or in a state of hysteria, the question is, could that person, under those circumstances possibly be manifesting a present intent to enter into a contract?
MBE: A man who is serious injured in car accident is rushed to the hospital. He needs emergency brain surgery to survive. A doctor that is on duty, had just undergone a six-hour surgery and is exhausted. He told the man’s daughter that he was too tired to perform the surgery. The daughter frantically seized the doctor by the shoulder and said, doctor you must, “I will see to it that you are paid a fee of 25k. Oh, doctor I promise.” The doctor performed the surgery with professional competency, but four days later the father died. The daughter sent an angry letter to the doctor saying, “You’ll never get one dime from me for that operation. Try to collect and I’ll fight you all the way.” What is the consequence of the daughter for making the statement, “I will see to it that you are paid a fee of 25k, oh doctor, I promise.”
Under the objective theory of contract formation consider whether the statement the daughter made, under those conditions was an offer to enter into a contract or the meanderings of a tormented mind? If it was the latter then there can be no offer and there is no contract. This is a common law personal services fact pattern not governed by the UCC. Subjectively the doctor would say there was a contract, because he had a 25k motive to say so. The daughter would say there was no contract because she had a 25k motive to say she never intended to enter into a valid contract. The question is whether a reasonable person (here, the standard is a professional doctor) familiar with an emergency room and the reactions of those that are near and dear to the knowledge that life is ebbing away, would have concluded that a person who is grabbing him and frantically shaking him was making a present offer to enter into a contract? If the answer is no, then there was no offer, there is no contract and the daughter does not have to pay.
- Content. At common law the offeror must set the essential terms of their offer. If the elements are indefinite, as a matter of law there is no offer and therefore no contract. The elements are:
- Who the parties are. The offeror and the offeree.
- The subject matter.
- The time of performance.
- The price.
Modern courts will reconstruct events that took place at the formation stage to conclude that a contract has been formed. If there is total silence by the traders regarding one of the essential terms, the courts will enforce the transaction by treating their mutual silence as an objective manifestation of consent to trade on reasonable terms.
What is a reasonable term? If the parties have done business in the past, a reasonable term will be deduced from their prior history. If parties had never done business before the court will seek to find commercially reasonable terms from the customs of the marketplace. Prior history has precedence over market terms regarding traders who have done business in the past. At common law if parties sought to speak to the disputed term, but did so in an ambiguous or incomplete manner no court could apply a reasonable term because that would be making a bargain other than the one parties sought to make. Under the UCC, if both parties are merchants they may agree to essential terms in the future. If there is no price set, they may agree to a price from a trade journal, even if that trade journal has not been yet published. Under such circumstances the parties have formed a present contract even though neither knows the price term.
- Communication. Terms must be clearly communicated with no ambiguity or hidden terms. The more complete it is, the stronger the indication of commitment.
Example: There is a conversation about the sale of land, but no mention as to the sale price. This would indicate the communication is incomplete and could not be an offer. The communication as to the essential terms is not clear.
Problems with communication.
- Battle of the forms. A conflict that arises as a result of incompatible terms in standardized forms exchanged between a buyer and seller while negotiating a contract. When companies deal with each other in the course of business, they often use standard form contracts. Often terms conflict (both parties include a liability waiver in their form). The battle of the forms refers to the resulting legal dispute of these circumstances, wherein both parties recognize that an enforceable contract exists, however they are divided as to whose terms govern that contract. Under the UCC § 2-207(1), the additional or different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2).
- Advertisements are not offers unless there is an offer for a reward or if it is specific as to the quantity and expressly states who can accept. However, if an advertisement is specific as to how many items are available, who may accept the offer and limited to a first come, first serve it may be considered an offer.
- Vague or ambiguous terms there is no offer, parties are still in the negotiating stage.
- Preliminary negotiations. Is where parties are merely discussing the possibility of doing future business?
Example: D wrote me, “I need 10 gross of machine parts made to the attached specifications and I am willing to pay 750.00 a gross for them. It is important that I receive these parts by 12.1.01. Let me know right away if you can handle the order.” M replied promptly by mail, “I accept your order.” A week later the manufacturing seller noticed that he overlooked one of the specifications that required a far more expensive fabrication technique than the one he had in mind. Here, the manufacturing seller is guilty of a mechanical miscalculation, but had he accepted an offer or merely acted enthusiastically to a preliminary negotiation? What’s the distinction? Use the objective theory of contract formation. The communication here was through a business letter. People negotiate and extend offers and acceptance by letters. But, what if the same communication took place at a cocktail party? It is far less likely that a court would find and offer.
Example: Four men sitting in a bathhouse are discussing a real estate transaction. One of them left thinking they came out of that conversation with a million dollar deal. Was there an agreement or were parties merely discussing business that they might, or might not do when they were clothed? The emphasis is on the facts. The closer that communication comes to spelling out all of the essential terms of the agreement so the only real thing left for the other party to do is say, “I accept.” Then the more rational the conclusion is that a party that is that specific as to the essential terms was manifesting a present offer.
Did the offer terminate? Termination of offer and defective offers.
- Lapse of time. If the terms of the contract are silent on when an offer expires, it is open for a reasonable period of time. A reasonable period of time is determined by the facts. Under the UCC (90 days).
- Death or insanity. The offeree dies or goes insane.
- Rejection. If an offer has been rejected it cannot be accepted later. Rejection is effective upon receipt. Applies to:
- Counter offer. Rejects an offer: “I’ll not pay 100k, I’ll pay 90k.”
- Conditional acceptance. Adding a new term to the deal. “I’ll accept your offer only if, provided that, so long as…”
- Options. An offeree may reject and still accept later at any time until the option expires. The exception to this rule is where the offeror detrimentally relies on offeree’s rejection in good faith.
- Additional terms for sale of goods are OK as long as there is no language of condition.
- Both parties must be merchants.
- The additional term does not materially change the offer.
- Offeror does not object to the change.
- Termination by operation of law.
- Death or insanity by either party.
- Destruction of subject matter.
- Supervening illegality.
- Acceptance. Acceptance is valid unless the offer expressly specifies otherwise. Method of acceptance:
- Only the offeree may accept an offer. There is no assignment except under an option contract, which may be assigned.
- UCC requires an objective intent to acceptance unless it is conditioned on the offeror accepting new or different terms. There is acceptance if both parties start to perform.
- Mirror image rule. At common law acceptance must be exactly the same as the terms of the offer. Any difference in terms creates a rejection and a counteroffer.
- Mailbox Rule. Only applies to acceptance.
- Acceptance is effective as soon as it is sent.
- Rejection or revocation of an offer is affective upon receipt.
- No mailbox rule for option contracts.
- Letters must have proper address and stamped.
- Does not apply if the offer expressly states “no mailbox rule.”
Example: The offeree sends and acceptance, then a rejection letter. The mailbox rule applies and the offer is accepted, unless the rejection arrives first and the offeror relied in good faith.
Example: If the offeror sends a rejection and then acceptance, whichever arrives first is effective.
Example: Acceptance of unauthorized method is a valid acceptance if actually received by the offeror while the offer was still open.
- Silence never equals acceptance unless the offeree takes the offered benefits with an opportunity to reject them or parties agreed in advance.
- UCC 2-207, If there is a definite and seasonable acceptance, a contract is formed even if some terms are different. The differences are worked out at a later time.
Example: I accept your offer, so long as you trim my tree in the next two days. By its terms, a conditional acceptance is a counter-offer.
Adding terms. At common law adding terms is a rejection and counteroffer. If one of the parties is not a merchant then the terms of the original offer are controlling and the new terms are considered proposals.
Under the UCC acceptance that adds terms is valid unless:
- They materially alter the contract.
- The offer expressly limits acceptance to the terms of the offer.
- The offeror rejects the additional terms in a reasonable amount of time.
Improper performance. Under the UCC if seller sends the wrong merchandise with an explanation this creates a counteroffer. No contract exists. The buyer may accept or reject.
- Express and implied warranties in sale of goods contracts.
- Express warranty. When businesses use the word warranty they refer to a specific type of warranty the UCC calls express warranties. Express warranties are affirmative representations about the quality and features of the goods being sold.
Example: Claiming a watch is waterproof to 250 feet, or that a car gets 35 mpg on the highway are examples of express warranties.
Express warranties under the UCC include more than just affirmative statements. They also include descriptions of the goods being sold. If a buyer is shown a floor sample of the kind of television they want to buy, the sample is an express warranty that the television actually sold is the same type and same quality as the floor sample.
- Implied warranty. In addition to express warranties, the UCC also creates a second kind of warranty, called an implied warranty. As the name suggests, an implied warranty is made, regardless of whether or not it is specifically mentioned. The implied warranties created by the UCC ended the old rule of caveat emptor. “Let the buyer beware.” Implied warranties allow buyers to purchase goods and be confident that they meet certain minimum standards. The two implied warranties the UCC creates are:
- Warranty of merchantability. Under the UCC definition of merchantability, goods must be at least of average quality, properly packaged and labeled, and fit for the ordinary purposes they are intended to serve.
Example: A wristwatch would have to be at least of average quality as compared to other watches in the same price range, it must tell time, and it cannot come in a box labeled Rolex unless it is, in fact, a Rolex. The application of the implied warranty of merchantability is limited to a seller of goods of that kind, meaning the kind of goods the seller usually sells in the marketplace. A seller does not make an implied warranty of merchantability when he sells goods of a kind that he does not normally sell.
Example: A clothing store selling shirts and suits impliedly warrants that the shirts and suits are merchantable because shirts and suits are the kind of goods a clothing store typically sells. On the other hand, if the store sells to the store next door an extra display case it no longer needs, the display case is not subject to an implied warranty of merchantability because clothing stores generally do not sell display cases. Of course, if the seller makes an express warranty regarding the display case, it will be held to any such warranty, but none will be implied unless the goods being sold are goods of a kind the seller normally sells.
- Warranty that goods are fit for a particular purpose. The implied warranty of fitness for a particular purpose applies if the seller knows or has reason to know that the buyer will be using the goods he is buying for a particular purpose. If the seller knows the purpose for which the goods are to be used, the seller impliedly warrants that the goods being sold are suitable for that specific purpose.
Example: A car salesman may sell a car that is perfectly suitable for everyday driving, and therefore is merchantable. But if the car salesman knows the buyer wants to use the car as a racecar, the car salesman also impliedly warrants that the car is suitable to use for racing.
The rationale behind the implied warranty of fitness for a particular purpose is that buyers typically rely on the seller’s skill and expertise to help them find the specific goods that meet their specific need. A buyer who goes to an appliance store may know he wants a refrigerator, but he relies on the appliance salesman to find the specific refrigerator that fits his house, is fits his family purpose and meets any other specific requirements he might have. Accordingly, it is unfair for a seller to sell something they know will not do the job and later tell the buyer it is not his or her fault it did not work.
Disclaimers. Because warranties typically only become an issue when a buyer is dissatisfied, a prudent seller tries to limit the scope of the warranties he makes before a problem arises. The UCC specifically allows sellers to disclaim both express and implied warranties on goods they sell, within certain limits. Interestingly, the UCC does not provide many specific rules regarding how warranties are disclaimed. In keeping with the idea that the purpose of the UCC is to make business transactions easier, the UCC provides that attempts to disclaim warranties should be construed reasonably and enforced unless doing so is unreasonable under the circumstances. This broad rule is followed by some guidelines.
Generally, a seller who wants to disclaim UCC warranties must do so specifically. A general statement that there are no warranties, express or implied is usually ineffective. Just how express a disclaimer needs to be depends on the kind of warranty being disclaimed. An express warranty must be expressly disclaimed. A disclaimer that disclaims the implied warranty of merchantability must specifically mention merchantability in the disclaimer. Finally, a seller may disclaim all implied warranties by stating that the good is being sold “as is,” or by stating some other phrase that makes it plain to the buyer there are no implied warranties.
The UCC requires all disclaimers of implied warranties to be in writing. However, a warranty disclaimer hidden in the fine print of a three-page sales contract will not be enforced because the UCC also requires that a disclaimer be conspicuous. A section of a contract is conspicuous if it clearly stands out from the rest of the contract and draws the eye of the reader. Common ways to make contract provisions conspicuous is to put them in bold type, different colored type, larger type, or in all capitals. Many disclaimers combine several of these elements, disclaiming implied warranties in bold red capitals when the rest of the contract is in regular black type.
Because some of the UCC rules regarding disclaimers apply to some warranties and not others, a prudent seller ensures that all of his disclaimers meet all of the UCC requirements. That way, a seller is never left with an insufficient disclaimer because he accidentally forgot to use bold print. With this in mind, all disclaimers of warranties should be in writing, should be conspicuous, and should specifically mention the warranty being disclaimed. Some sellers even go so far as to put a line next to the disclaimer for the buyer to initial, just so there is no question that the buyer saw the disclaimer.
But there are outer limits to what even the best-drafted disclaimer of warranties can accomplish. Just as a disclaimer that is too broad will not be enforced, neither will a disclaimer that takes all rights away from the buyer. Unless all warranties have been effectively disclaimed, a buyer usually must have some meaningful remedy if the goods he receives are defective. Additionally, most states have consumer protection statutes for transactions involving the purchase of consumer goods. These statutes often provide the buyer with remedies other than those provided by the UCC and also often provide that a consumer’s rights under the statute cannot be abridged by means of a disclaimer.
Delivery obligations of seller under the UCC. If no place is agreed upon delivery is to the seller’s place of business.
Shipments. Delivery is complete when the seller gets the goods to a common carrier, makes reasonable arrangements for delivery, or notifies the buyer. (FOB city where seller is.)
Destination contracts. Delivery is not complete until the goods arrive where the buyer is. (FOB city where buyer is.)
- Implied in fact contract and quasi-contract.
- Implied contract. An implied-in-fact contract (implied contract) is a contract agreed upon by non-verbal conduct, rather than by explicit words. The SC defines it as an agreement implied in fact’ as founded upon a meeting of minds, which, although not embodied in an express contract, is inferred, as a fact, from conduct of the parties, in light of the circumstances as their tacit understanding. Although the parties may not have exchanged words of agreement, their actions may indicate that an agreement existed anyway. Generally, an implied contract has the same legal force as an express contract.
Example: When a patient goes to a doctor’s appointment, his actions indicate he intends to receive treatment in exchange for paying reasonable doctor’s fees. Likewise, by seeing the patient, the doctor’s actions indicate he intends to treat the patient in exchange for payment of the bill. Therefore, it seems that a contract actually existed between the doctor and the patient, even though nobody spoke any words of agreement. They both agreed to the same essential terms, and acted in accordance with that agreement. There was mutuality of consideration. In such a case, the court will probably find that the parties had an implied contract. If the patient refuses to pay after being examined, he will have breached the implied contract.
- Quasi-contract. A contract that exists by order of a court, not by agreement of the parties. Courts create quasi contracts to avoid the unjust enrichment of a party in a dispute over payment for goods or services. In some cases a party who has suffered a loss in a business relationship may not be able to recover for the loss without evidence of a contract or some legally recognized agreement. To avoid this unjust result, courts create a fictitious agreement where no legally enforceable agreement exists.
Example: Homebuilder (H) built a house on A’s property. However, the homebuilder signed a contract with B, who claimed to be A’s agent but, in fact, was not. Although there is no binding contract between A and the homebuilder, most courts would allow the homebuilder to recover the cost of the services and materials from A to avoid an unjust enrichment. A court would accomplish this by creating a fictitious agreement between the homebuilder and A and holding A responsible for the cost of the builder’s services and materials.
Quasi contracts sometimes are called implied-in-law contracts to distinguish them from implied-in-fact contracts. An implied-in-law contract is one that at least one of the parties did not intend to create but that should, in all fairness, be created by a court. An implied-in-fact contract is simply an unwritten, nonexplicit contract that courts treat as an express written contract because the words and actions of the parties reflect a consensual transaction. The difference is subtle but not without practical effect.
A quasi contract may afford less recovery than an implied-in-fact contract. A contract implied in fact will construct the whole agreement as the parties intended, so the party seeking the creation of an implied contract may be entitled to expected profits as well as the cost of labor and materials. A quasi contract will be created only to the extent necessary to prevent unjust enrichment. As one court has put it, contracts implied in law are merely remedies granted by the court to enforce equitable or moral obligations in spite of the lack of assent of the party to be charged. Gray v. Rankin, 721 F. Supp 115 ). The amount of recovery for an implied-in-law contract usually is limited to the cost of labor and materials because it would be unfair to force a person who did not intend to enter into a contract to pay for profits.
Quasi contracts are made possible by the doctrine of quantum merit (as much as is deserved”), which allows courts to imply a contract where none exists. Quantum meruit includes implied-in-fact contracts as well as quasi contracts. Courts also use the term quantum meruit to describe the process of determining how much money the charging party may recover in an implied contract.
- Quantum meruit is the measure of damages where an express contract is mutually modified by the implied agreement of the parties, or not completed. While there is often confusion between the concept of quantum meruit and that of unjust enrichment of one party at the expense of another, the two concepts are distinct. The concept of quantum meruit applies to the following situations:
Example: When a person hires another to do work for him, and the contract is either not completed or is otherwise rendered un-performable, the person performing may sue for the value of the improvements made or the services rendered to the defendant. The law implies a promise from the employer to the workman that he will pay him for his services, as much as he may deserve or merit.
The measure of value set forth in a contract may be submitted to the court as evidence of the value of the improvements or services, but the court is not required to use the contract’s terms when calculating a quantum meruit award. This is because the values set forth in the contract are rebuttable, meaning the one who ultimately may have to pay the award can contest the value of services set in the contract.
When there is an express contract for a stipulated amount of compensation for services, the plaintiff cannot abandon the contract and resort to an action for a quantum meruit on an implied assumpsit. However, if there is a total failure of consideration, the plaintiff has a right to elect to repudiate the contract and may then seek compensation on a quantum meruit basis.
Example: A talks to his neighbor B and tells him he’s going to build a wall on their property that will give a benefit to both. A says it would be cheaper for both of them if A performed the labor instead of hiring a professional. The neighbor agrees the wall should be built, but no price is negotiated. A builds the wall, and then asks the neighbor to compensate him for the benefit of the wall that he conferred on the neighbor (usually half the value). The neighbor refuses. A is entitled to some compensation based on quantum meruit. This is because there was an implied promise between A and the neighbor, which is derived from contract law, because the man was acting under the assumption that the neighbor would pay for part of his services. A files suit in court on the basis of quantum merit. A makes an estimation of value conferred on the defendant, which the defendant has not paid. A will likely win because of quantum meruit.
Void and voidable contracts.
Void. A void contract is unenforceable by either party.
Example: A gambling contract will not be enforced because of its illegality.
Voidable. A voidable contract is enforceable at the option of the person with the power to declare it null.
- II. Consideration. If the parties formed an agreement is there a contract?
At common law a contract had to be supported by consideration. There are two theories of consideration.
Benefit-detriment theory. Where a contract must be either to the benefit of the promisor or to the detriment of the promisee to constitute consideration Detriment to the promisee is the essential test of the existence of a consideration.
Bargain theory. Where the parties subjectively view the contract to be the product of an exchange or bargain. The bargain theory has largely replaced the benefit-detriment theory in modern contract theory, but judges often cite both and unknowingly confuse the two models in their decisions. These theories usually overlap; in standard contracts, such as a contract to buy a car, there will be both an objective benefit and detriment.
Example: The buyer experiences a benefit by acquiring the car; the seller experienced a detriment by losing a car and the subjective experience of entering into a bargain. However, there are certain contracts which satisfy one but not the other. For instance, a deal in which the promisee feels subjectively relieved, but hasn’t actually gained any legal rights, might satisfy the bargain theory but not the benefit-detriment theory. Alternately, a deal in which an actor takes detrimental actions possibly in reaction to an offer, without having viewed the deal as a bargain, wouldn’t be viewed as a contract under the law.
The main purpose of the shift from benefit-detriment to bargain theory is to avoid inquiries into whether consideration is adequate. For example, if a person promised you their car for $1.00 because they needed to get rid of it, then the $1.00 might seem adequate. However, if it was your birthday and your friend wrote down “I give you my car in consideration of one dollar,” this same consideration would not seem adequate. Thus whether $1.00 is consideration does not depend on the benefit received but whether the $1.00 had actually been bargained for.
In some jurisdictions, contracts calling for nominal or consideration will be upheld unless a particular contract is deemed unconscionable. However, in other jurisdictions, the court will reject “consideration” that had not been truly bargained for. Occasionally the courts in these jurisdictions may refer to “adequate” or “valuable” consideration, but in reality the court is not examining the adequacy of consideration, but whether it had been bargained for. The traditional notion that courts won’t look into the adequacy of consideration, an ancient notion in the English common law, doesn’t square with the benefit-detriment theory (in which courts are implicitly analyzing if the parties are receiving a sufficient benefit) but does square with the bargain theory (in which only the subjective intentions of the parties are considered).
There are three main purposes cited for the consideration requirement. The first is the cautionary requirement – parties are more likely to look before they leap when making a bargain than when making an off-the-cuff promise of a gift. The second is the evidentiary requirement – parties are more likely to commemorate, or at least remember, a promise made due to a bargaining process. The third is the channeling requirement – parties are more likely to coherently stipulate their specific desires when they are forced to bargain for them.
- Consideration. Doesn’t apply to the UCC unless there is a moral obligation. At common law a bargain for legal detriment of both parties was required usually in the form of money or property.
Example: A agrees to sell his car to B for 100.00. B’s payment of 100.00 is the consideration for A’s promise to sell the car.
Adequate consideration. Any consideration no matter how small is OK.
Example: A landlord tells tenant; “If you repaint the apartment, I will renew your lease at the same rental rate.” Is there consideration? Yes, the landlord exchanged consideration by taking less rent and the tenant’s time, labor and cost to repaint the apartment would suffice as consideration.
Bilateral contract. Where each party promises to perform an act in exchange for the other party’s performance. Enforceable only if there is consideration.
Unilateral contract. One party makes an offer to another and the other party may only accept by performing an act rather than by offering something in return. Enforceable only if there is consideration. At common law an offer was not accepted until performance was complete. Modernly if a party significantly performs there is a contract enforced under promissory estoppel.
Example: A offers B 5.00 to bring him a hotdog. When B brings A the hotdog A has fully performed. B must pay the 5.00. The problem with unilateral contracts is that any time prior to B’s full performance A may change their mind.
Implied promise. Evertight Roofing. Modernly the starting point of performance is acceptance of an offer for payment to roof a house.
Lack of consideration. Someone who promises to do something and doesn’t do it is a lack of consideration.
- Gifts. Are not not enforceable contracts, nor are they supported by consideration. However, if a gift induces reliance a court will enforce it under promissory estoppel.
Hamer v. Sidway. If a promise requires anything of the promisee it is not a gift. It is a valid contract.
Example: Grandfather leaves a promissory note to support his granddaughter so she doesn’t have to work. Granddaughter quits her job in reliance on that note. The court will enforce the promissory note as a contract based on detrimental reliance, despite the fact the note was a gift.
- Past consideration is not valid consideration. Something that is already done is done. It does not change the legal position of the parties. A finds B’s cat and delivers it to them. B says, “I’ll pay you a 100.00 reward because you found my cat.” B never pays. Here, there is no consideration because the cat was already found. The promise is not legally binding.
- Preexisting duty. A party is already legally obligated to perform terms agreed to. A promise given in exchange for something already done doesn’t satisfy the bargain requirement.
Example: Fishermen attempt to change the terms of their salary, after they had begun to perform their duties is not legally enforceable without new consideration. Therefore modification of an existing contract without new consideration is not legally enforceable because it was not entered into in good faith.
Performing or promising to perform an existing legal dusty is insufficient consideration. Once a party agrees to do something under a contract, the party cannot change the terms without new consideration and expect the new terms to hold. Under the UCC § 2-209 modifications may be made free of the common law preexisting duty rule even without consideration. But the statute of frauds writing requirement must be satisfied if it is for the sale of goods where the price equals $500.00 or more.
- Any new consideration promised is adequate consideration.
- Third party promise to pay.
- Unforeseen difficulties that are so severe it excuses performance.
- Honest dispute as to the duty.
- UCC good faith changes in existing sale of goods contract is OK.
- A promise to forebear from suing may be adequate consideration.
Examples of preexisting duty:
Pay Less: One party has performed their end of a bargain, but the other party refuses to pay unless the amount owed is lowered. For example, a contractor performs work on a home for $10,000 only to have the homeowner refuse to pay anything unless the contractor agrees to take $8,000. The contractor could accept the $8,000 and sue for the $2,000 still owed.
Pay more: One party refuses to perform unless paid more money than the bargained for price. For example, a contractor agrees to renovate a bathroom for $10,000. He tears apart a bathroom, but refuses to repair it unless the homeowner pays an extra $2,000. The homeowner could agree to pay the extra money, but then refuse to when the contractor finishes the work. If the homeowner paid the extra money, they could sue later under duress to recover the $2,000.
Public duty: The party already has a public duty to perform the act. Example: A government employee polygraph expert asks a criminal defendant about an unrelated crime during the administration of a polygraph. The criminal admits to the crime and the employee seeks a reward for finding the wrongdoer. Because the employee already had a public duty to find out about crimes they were not entitled to the reward under the legal duty rule.
- Partial payment of an existing debt is not consideration for a release of the full balance of that debt. The modification is not enforceable because there is no new consideration.
Example: “I will pay you 500.00 of the 1000.00 that I owe you, if you promise not to sue me for the remainder.” Here, there is no valuable consideration. The rationale is that the payment of a debt already owed is not new detriment and therefore not consideration.
- Illusory promises. Words that give an illusion of a promise don’t create an obligation. (I promise to do this if I like it.) If the promisor hasn’t committed in any manner, therefore is no consideration.
Wood. V. Lady Duff Gordon,18 N.E. 214 (1917). Duff-Gordon contracted with Wood giving an exclusive right to market and license all of her designs and to endorse designs with her name. The exclusive contract required that they split all profits from Wood’s sales but there was no express clause that stated that he would perform. Lucy subsequently placed endorsements on clothes without Wood’s knowledge and in violation of the contract. She did not split profits and Wood sued. The trial court denied Lady Duff-Gordon’s motion for a judgment on the pleadings. The intermediate appellate court reversed on the grounds that the contract lacked mutuality because Wood never promised to do anything. Wood appealed the dismissal of the complaint.
- May a promise to use reasonable efforts be implied from the entire circumstances of a contract? Yes. A promise to use reasonable efforts may be implied from the entire circumstances of a contract.
- Can an implied promise to use best efforts be considered valuable consideration? Yes. An implied promise to use best efforts in contract performance can be considered valuable consideration.
- Can the duty of good faith compensate for vagueness in an agreement to avoid invalidation of a contract clearly intended by the parties? The duty of good faith can compensate for vagueness in an agreement to avoid invalidation of a contract clearly intended by the parties.
- Promissory estoppel or detrimental reliance as substitutions for consideration. Modernly, where a party makes a false statement to another and they rely on that statement in good faith and to their disadvantage. To see that justice is done a court will treat the statement as an enforceable promise and prevent the party that made the statement from denying it.
On an exam first look to see if the contract has no consideration if not, then use promissory estoppel.
- Detrimental reliance. Detrimental reliance is a term commonly used to force another to perform their obligations under a contract, using the theory of promissory estoppel. Detrimental means that some type of harm is suffered. Promissory estoppel may apply when the following elements are proven:
- A promise was made.
- Reliance on the promise was reasonable or foreseeable.
- There was actual and reasonable reliance on the promise.
- The reliance was detrimental.
- Injustice can only be prevented by enforcing the promise.
Is there a defect in contract validity? Illegality, unconscionability and public policy.
- Illegality. Forbidden by law. If the purpose behind a contract is illegal (boat rental to run drugs), the contract is voidable by the innocent party. The innocent party must be unaware of the purpose or did not involve themselves in moral turpitude.
At common law an illegal agreement is one that the courts will not enforce because the purpose of the agreement is to achieve an illegal end. A contract that requires merely legal performance on the part of each party, such as the sale of packs of cards to a known gambler, where gambling is illegal, will nonetheless be enforceable. A contract directly linked to the gambling act itself, such as paying off gambling debts will not meet the legal standards of enforceability.
Example: An employment contract between a blackjack dealer and a speakeasy manager. The employee has no valid claim to wages if gambling is illegal in that jurisdiction. A famous example is the California case, Bovard v. American Horse Enterprises, 247 Cal. Rptr. 340 (1988) where the California Supreme Court refused to enforce a contract for payment of promissory notes used for the purchase of a company that manufactured drug paraphernalia. In Bovard, the defendant agreed to purchase the company from the plaintiff. Both parties were aware the company manufactured drug paraphernalia. In order to purchase the company the defendant signed promissory notes, payable to plaintiff. Defendant fails to pay on the notes. Plaintiff sued to enforce them. The courts held that a contract does not have to be illegal in order for a court to decline to enforce it. Here, the court declined to enforce the contract in the interest of public policy.
- Unconscionability. A defense against the enforcement of an entire contract or a provision that is unfair or oppressive to one party in a way that suggests abuse during its formation. A contract is most likely to be found unconscionable if both unfair bargaining and unfair substantive terms are shown. An absence of meaningful choice by the disadvantaged party is often used to prove unfair bargaining. To determine if terms are extreme, balance freedom of contract against fundamental fairness.
- Substantive unconscionability is unduly harsh or repressive in terms.
- Procedural unconscionability is where language is hidden in fine print.
- Remedies. Rescission of the entire contract or any unconscionable terms. No punitive damages.
- Public policy. In order to be enforceable, a contract cannot violate public policy. If the subject matter of a contract is illegal, one cannot enforce the contract.
Example: A contract for the sale of illegal drugs violates public policy and is not enforceable. A court won’t even hear the matter.
- Exculpatory clauses. A contract provision that attempts to contract away liability for intentional torts, or gross negligence is unenforceable.
- Covenants not to compete. Balance the freedom of contract versus the restraint of trade. Consider whether there is a need for the protection. The time limitation must be reasonable. There must be a reasonable geographic location limitation.
Example: An employment contracts where a former employer agrees not compete with a former employer.
Example: A sale of a business where the seller agrees not to compete against the purchaser.
- Contract modification. Service contracts and other contracts not governed by the UCC require new consideration for the modification of a contract under the preexisting duty rule. At common law contract modifications must be supported by new consideration. Under the UCC § 2-209 Mutually agreed modifications needs no new consideration to be enforceable the requirement is good faith on the part of both parties. Must be in writing.
- III. Is there a legal reason an agreement should not be enforced?
- Capacity. Who made the deal? Is it enforceable?
- Minors. A contract cannot be enforced and is voidable against a minor.
- A minor need only return as many of the goods as possible.
- A minor cannot disaffirm necessaries, such as food, shelter and clothing. (Not autos, stereos, etc.)
- Mental incapacity. Includes drugs and alcohol. A contract is voidable if they are incapable of understanding the contract or are unable to reasonably perform due to their illness and the other party knows of this condition. Those that lack the ability to understand their agreement, includes people under the influence of drugs or alcohol and the elderly and insane. An agreement cannot be legally enforced.
- Minors. A contract cannot be enforced and is voidable against a minor.
Applies to defendants, not to plaintiffs.
Example: An adult hires a 16-year-old to babysit and they don’t show up. There is no contractual obligation of the minor to babysit. Conversely, if the adult changes their mind, the minor can sue.
- Duress. How did the parties deal with each other? The threat leaves the defendant with no reasonable alternative but to accept the contract or new terms. To do what one is legally entitled to do cannot be duress. Traditionally, duress only applied to a threat to do an illegal or tortious act. Modernly, duress is an improper threat that left open no reasonable alternative.
- Physical duress. “Sign the contract or I’ll break your arm.”
- Economic duress. Some type of improper economic threat is made.
Example: A threat to breach an existing contract.
Example: A threat to breach a contract unless more money was paid to a subcontractor. The agreement to pay is made and then later rescinded after performance. Failure to pay is valid where there was no reasonable alternative. There needs to be new consideration.
Statements made before the agreement was entered into. What did one party tell the other?
- Undue influence. Persuasion that tends to be coercive. High pressure on a mental or emotional weakness.
- Misrepresentation/fraud. A valid defense to contract formation. A false statement made by one party to another that party relied it no matter how innocently made. It renders the contract voidable. A contract is voidable if the innocent party reasonably relied on a material misrepresentation. Does not apply to puffing.
- Common law caveat emptor. Let the buyer beware. The purchaser was responsible for finding all flaws. Modernly:
- Duty to disclose where there is a relationship of trust.
- Half-truths may constitute misrepresentation.
- Concealing of truth is misrepresentation.
- Failure to correct a mistake. (Diamond for cubic zirconium).
- Innocent misrepresentation. Many states permit rescission only, no damages.
- Common law caveat emptor. Let the buyer beware. The purchaser was responsible for finding all flaws. Modernly:
Remedies for misrepresentation.
Intentional. Expectation damages.
- Caveat emptor. Let the buyer beware.
- Modern view. Where facts are exclusively within the knowledge of one party and the other party doesn’t have reasonable access to them, there is a duty to disclose.
- Mistakes. Problems that parties believed the facts to be. Sherwood v. Walker Relief was granted where there were mutual mistakes and a risk assumed by either of the parties.
- Ambiguity. A contract term capable of more than one interpretation.
Each person has a different meaning in mind. Neither person had any reason to know about the interpretation given by the other person.
IV. Third party beneficiaries. Assuming there’s an enforceable agreement do the terms of that contract or the subsequent conduct of either party that formed it confer any rights or impose any duties upon non-traders?
- Intended beneficiaries. There are two categories of third party beneficiaries in contract law, intended beneficiaries and incidental beneficiaries. An intended beneficiary may bring action for breach of contract. In order to bring an action for breach the third party must establish:
- A contract exists between A and B where the third party is identified.
- A clear intent of A and B that the contract primarily and directly benefit the third party.
- Breach of the contract by either A or B resulted.
- Damages to the third-party resulted from the breach.
- Incidental beneficiaries have no enforceable rights under a contract
- V. Assignment of rights and delegation of duties What does it mean to assign contract rights?
- Assignment is the transfer of rights from one part to another. Assignment is only permitted if it does not substantially change the duty or risk of the obligor. An assignment cannot increase obligations of the other party. Parties may draft a contract so that assignment is prohibited.
Example: if a contract entitles A to receive $1000 for painting a house, A may transfer that right so that B may receive the money.
Example: if a manufacturer contracts to deliver sweaters to a store in the same city as the sweater factory, the other party can’t assign delivery to a different store in another state because it would impose a greater obligation on the manufacturer than originally bargained for.
- Delegation of duties. Is where a party to a contract gives another person the responsibility of carrying out their performance that was agreed to in a contract. The delegating party remains obligated to perform unless there is a novation. There are three parties involved, the who incurred the obligation to perform under the contract is called the delegator, the party who assumes the responsibility of performance of the duty is the delegatee and the party performance is owed to is called the obligee. A delegation is voidable if it poses any threat to the commercially reasonable expectations of the obligee. A task that requires specialized skills or a unique characteristic of the promisee cannot be delegated.
Example: A specific celebrity is hired to make a speech, they could not delegate the task to another person, even if the other person would give the same speech, word for word. However, a delegation of performance that does not pose such a threat will be held to be valid. In such a case, the obligee will be under an affirmative duty to cooperate with the delegatee to the extent necessary for the fulfillment of the delegator’
Delegation of duties under a contract is permissible.
Delegation is not allowed when it would change the nature of the agreement.
Example: if a party hires a famous chef to cook for a wedding, the chef cannot delegate the duty to cook to someone else, because the party has specifically contracted for the experience and individual skill of this chef.
Promise to pay a debt. It is generally not permissible to delegate the promise to repay a debt. Parties can also draft into the contract that delegation will not be allowed.
- Distinguishing delegation from assignment.
A parallel concept to delegation is assignment, which occurs when one party transfers his present rights to receive the benefits accruing to the assignor under that contract. A delegation and an assignment can be accomplished at the same time, although the right to sue for nonpayment always stays with delegator. Under the common law, a contract clause prohibiting assignment also prohibits delegation. Another common law rule requires that a party to a contract cannot delegate performance that involves special skills or reputation although it is possible to have a novation under such circumstances.
VI. Statute of frauds. There are certain circumstances where a writing is required to make a contract enforceable. The writing requirement must contain the signature of the party to be charged and a note (stationary/letterhead), the amount of the goods (quantity) . Promissory estoppel will bar using the statute of frauds where a party attempts to use it to prevent enforcement. What contracts are within the statute of fraud?
- An agreement for the sale of goods of 500.00 or more.
- A real estate contract involving a transfer of an interest for more than one year. A lease of an apartment for one year is not within the statute of fraud.
- Service contracts not capable of being performed within a year of the date of the contract.
- VII. Parole Evidence. Is a rule of substantive law used in contract disputes where the courts rely on the terms of the final written agreement to decide both party’s intent. An agreement in writing is more reliable than an earlier oral or written agreement in another document. At trial one of the parties is seeking to offer into evidence something that is not written in the four corners of the document to either get out of the contract or to have the court clarify a mistake or ambiguous term. Courts generally will not hear parol evidence.
The fact pattern in a bar question has to state the party’s have reduced their agreement to a written expression, the parties are now litigating the terms of that agreement and one of the parties is seeking to bring in evidence of some term, which is not found within the four corners of the writing. All this show there is a parol evidence issue.
The systematic approach to answering a parol evidence issue:
- Integrated writings. The final agreement that both parties intended as their final agreement. If the judge determines the writing is the final agreement parol evidence will not be heard.
- If a term is added after parties agreed to terms that is not parol evidence it is a subsequent modification and parol evidence doesn’t apply.
- If the judge has ruled there is an integrated writing and that the evidence a party is attempting to enter into evidence is parol evidence, they may not enter it to contradict or add to the terms of an integrated writing.
- If the evidence explains an ambiguity or defines a term it will be admitted and the jury will hear it.
When will parol evidence be used?
- Fraud. Parol evidence may be used as proof of fraud in the inducement, facts or fraud in the execution.
- Partial integration. Parol evidence may be used to show parties formed an agreement, but intended the writing to cover some, not all of the agreement. The judge will allow this if the evidence looks incomplete on its face.
- Collateral agreement. On the day parties entered into an agreement they actually intended to form two agreements. One is an integrated writing and the other is obviously less significant. No collateral term can contradict the integrated writing.
- Merger clause. A clause intended to be the complete and final agreement of two or more documents.
- Mistake in integration. Parol evidence may be introduced to correct mistakes.
Example: The number 97 should have been 79. A party may show that this was typing error that resulted in accidentally reversing the numbers.
- Ambiguity. Parol evidence may be used to explain ambiguities in a written agreement.
Example: The term chickens was used where one party thought it meant boiling hens and the other thought it meant both boiling hens and friars. Courts could use oral statements and writings to resolve such an ambiguity.
- Adding terms to an incomplete deal. Parol evidence may not contradict but may clarify the party’s intention.
Example: There is a sale of goods agreement and nothing in the contract mentions how the goods are to be packaged. One of the party claims the goods were to be packaged six to a box and had always been the party’s intention. Courts will make a determination if the additional term should be integrated into the final agreement.
- Parol evidence as a defense to the enforceability of a contract.
Example: Seller agrees to deliver 100 lbs. of beef each week to the purchaser, intended as the final writing. The buyer states, ”Right before we made the final written agreement, I was promised as much beef as I could purchase, more or less than 100 lbs. I have several witnesses who heard this.” If the buyer is trying to change the contract so the seller is obligated to sell different amounts, the rule will keep the court from hearing the evidence. But, if the buyer says, “There has been a material misrepresentation and I should be able to get out of this deal.” The evidence will be heard.
- VIII. Conditions. If the contract obligations have matured, have the traders performed and on time? If there has been no performance, has performance been excused? Once all of the persons that may have rights or duties have been determined, traders or third parties who may have rights or duties on the contract, determine if the obligations that were created by their exchange of promises have matured into present duties to perform. Fix a time and order of the obligations that were merely promised at the stage of forming the agreement. Do to this use the law of conditions that arise by operation of law.
- Conditions. Express terms are used by traders in forming a bargain, but there are also conditions implied in fact, though unspoken by the traders they arise by inference as to what the parties obviously assumed. Implied conditions are the last measure to fix the time and performance, if the parties have not settled the matter using express conditions.
- Condition subsequent. Express conditions that insert a condition that discharges liability to perform the promise. Terms such as if, provided that, so long as, subject to, until, on condition that.
- Condition precedent. Inserts a contingency that must be satisfied before liability on the modified promise becomes absolute. If the condition precedent never occurred there is no duty on the other party’s part to perform. The condition is excused.
- Condition concurrent. Inserts a contingency that must be satisfied simultaneously with maturing liability on the modified promise.
- Material breach. At common law only a material breach excuses the other party from non-performance.
Example: A hires B to paint their house white, B paints the house purple. Must A pay? No, because painting the house purple is not only a breach, it’s a material breach, which is a major error.
Example: A hires B to paint their house white, B paints the house white but there are some minor problems like paint on the floor, lacking an appropriate layer and some minor touch up problems. Is there a material breach? No. Should there be a reduction in price? Yes. However, no reasonable person would believe A is excused from paying anything.
Jacobs and Young v. Kent. A plumbing contractor was to use a certain brand of piped in the construction of a home. They used pipes of another brand. The issue is whether the non-breaching party was excused from paying the plumber? The court agreed there was a breach in contract, but concluded the pipes used were just as good as the ones that were specified in the contract. Therefore, there was no material breach and the owner was not excused from paying.
Example: A painter contracts to paint ten apartments and only paints three. If there is a numerical performance, and it is less than half, it is a material breach therefore the other party is excused to perform.
- Covenants are not conditions but are promises.
- Constructive conditions are conditions created by operation of law. Completing work is a constructive condition precedent to the payment performance.
- Anticipatory repudiation. Did a party not do what they said they would do? If yes, the other party can immediately stop performing and sue for breach of contract.
Example: An agreement was entered into in April, for one of the parties to work for three months, beginning in June, as a travel companion. In May, the person that hired the travel companion changed their mind and repudiates the contract. The travel companion immediately got another job and had a claim for damages.
- Adequate assurance: Where there are reasonable grounds for insecurity. (I may not be able to pay you for your work.) A contractor would have reasonable grounds for delaying their work until they received adequate assurance of the owner’s ability and willingness to perform. Failure of an express condition excuses a party from performance an event not certain to occur that must occur before performance is due. Conditions limit obligations otherwise created.
Magic words if, provided, on condition that, so long as, only if.
- When is an express condition satisfied and when does it fail?
Strict compliance rule. 99 out of 100 is not strict compliance. Pipes that are just as good, is not strict compliance.
Example: A agrees to buy a house from B, but the agreement provides that purchase is conditioned on the house being appraised for 100k.
What if the appraiser valuation is 95k? Is there an agreement? No, because where there is language of an express condition in a contract that particular provision must be strictly complied with.
Example: A wants to buy a house built with certain pipes and contractor used different ones. The purchaser did not use express condition language in the contract, and was therefore bound to the purchase. If the purchaser had stated they would buy the home, only if those certain pipes were used they will not have to pay.
- Impossibility/impracticability and frustration of purpose. Excusable non-performance can arise in three fact patterns, where the performance obligations are objectively impossible, meaning that no one on the face of the earth could carry out that performance obligation, where the performance obligations have become commercially impracticable, meaning performance is not possible except by an expenditure of funds grossly disproportionate of what the parties had assumed at the performance stage, and frustration of purpose. Here, the party seeking an excuse will argue that subsequent to the contract formation circumstances have dramatically altered the ability to perform, the party has no value to the other and they now seek to be excused from performing their contract duties claiming frustration of purpose.
- Impossibility. No one could possibly carry out the contract performance.
Taylor v. Caldwell A contract between a concert promoter and a concert hall owner to rent the hall on a specified date was entered into between parties. Between the time of the contract and the time for the use of the concert hall, it burnt down. The court held the promoter could not sue the concert hall owner because there was a later event that was unforeseeable that made renting the hall impossible.
Example: A contract between A and B and B is going to paint A’s house for 1000. As B begins to pain the house, it burns to the ground. Here, there is a later occurrence, it was unforeseeable, is B excused from performing? Yes, it is impossible to paint a house that no longer exists.
Example: B and H agree for B to build an addition on H‘s house. B begins the work, but before he finishes the addition burns down. There is a later unforeseen event, but it doesn’t make performance impossible because it’s possible to build the addition again.
Suez Canal. Due to hostilities in the Middle East the canal was closed. There were numerous shipping contracts entered into before the closing, and as a result of the closing, shipping became much more expensive. Can the shippers, who entered into the contracts before the closing of the canal, get out of their contracts? The court held there was a later, unforeseeable occurrence, not withstanding the instability in the Middle East, but they didn’t think it made performance impossible. If the only thing that happens is performance becomes more expensive, then there is no impossibility or impracticability excuse on non-performance available.
- Impracticable. Where the performance obligation has become commercially impracticable. This means performance cannot be accomplished except by an expenditure of funds grossly disproportionate as to what the parties had intended at the formation stage.
- Frustration of purpose. The parties seeking excuse will argue that subsequent to the formation of the contract circumstances have so altered that the performance of the other party no longer has any value or utility therefore the moving party is now seeking to be excused from their own contract duty.
Example: A entered into an agreement with B to rent an apartment, on a particular day to view a coronation parade. Both parties recognized the rental was a special agreement related to the coronation. A paid a higher fee as a result. After the contract was agreed to, but before the even took place the coronation parade was cancelled. A wanted out of the contract because of the unforeseen event of the cancellation. B refused to return the rental fee. Here, the court could not use the doctrine of impossibility, because it was still possible for A to rent the apartment on that particular day. Since the doctrine of impossibility wouldn’t work, the court used the doctrine of frustration of purpose.
- There must be an agreement based on a mutually understood purpose.
- There must be a later unforeseen occurrence.
- While the later unforeseen occurrence does not make it impossible to perform, it does eliminate the mutually understood purpose.
- IX. Discharge of duties. What happens after an agreement excuses non-performance? Duties under a contract are discharged when there is a legally binding termination of that duty by a voluntary act of the parties or by operation of law. The discharge of a contractual duty under operation of law occur through illegality, merger, statutory release, such as a discharge in bankruptcy, and objective impossibility. Merger takes place when one contract is extinguished because it is absorbed into another. Among the ways to discharge a contractual duty are impossibility or impracticability to perform personal services because of death or illness; or impossibility caused by the other party.
- Modifications. Performance under the original contract is excused because of a later agreement. Modifications are viewed as a brand new contract. In order for a modification to be legally enforceable there has to be new consideration.
Example: There is an existing employment contracts and later on there are changes in the terms. Generally, those changes are enforceable as an agreement that excuses the old performance obligation.
Under the UCC a sale of goods requires no new consideration.
- Novation. A mutually agreed between both parties intended as a substitution of the original contract. (Party substitution)
Example: A and B enter into an agreement for A to paint B’s house. Later, A and can’t do it, and A tells B that C can paint his house. A and B agree to allow C to paint the house. C fails to paint the house, or worse does a terrible job. This excuses A from performing and liability.
- Accord and satisfaction. The two most significant methods of voluntary discharge are accord and satisfaction and novation.
- Accord. Original contract duties are discharged due to a change in terms. Here, the change is in what is being done, not the parties.
- Satisfaction. is a change in performance.
Example: A loans B 1000.00 with interest. Later, they agree that instead of paying the loan B will paint A’s house by a certain date.
- Impossibility. There are two types of impossibility of performance that discharge the duty of performance under a contract.
- Subjective impossibility. Is inability of promisor to perform because of illness or death.
- Objective impossibility. Nobody can render the performance. The destruction of the subject matter of the contract, the frustration of its purpose, or supervening impossibility after the contract is formed are types of objective impossibility.
- X. Defenses to formation. Is there a defense to enforcement of the contract?
- Mistake. Mistake of the traders could preclude the formation of an agreement. There are mutual and unilateral mistakes to consider.
- Mutual. If both parties are mistaken as to a fact on which the contract was made, the mistake is material and the party seeking to avoid the contract may do so. Mutual mistakes are voidable.
- Unilateral. A mistake by one party that has a material effect on the exchange is voidable by the mistaken party if:
- The effect of the mistake makes enforcement unconscionable.
- The other party had reason to know of or caused the mistake.
Remedies for mistake.
- Rescission/Restitution Court treats the contract as though it never happened and attempts to return the parties to status quo.
- Reliance. If rescission will not return parties to status quo, the court can give the injured party reliance damages, putting the plaintiff in the same dollar position they were in before the contract was entered into.
Example: P has a contract to become a McDonald’s franchisee and spends 100k building one. McDonalds then breaches. The courts will reward the amount of money P spent relying on McDonald’s to build the franchisee.
- Reformation. The court may adjust the terms of the contract to redress any unfairness stemming from the mistake.
- Misunderstanding. May be due to ambiguity in the terms. Restitution is the remedy for a misunderstanding.
- Neither party is aware of the misunderstanding.
The Peerless rule. Raffles v. Wichelhaus 159 Eng. Rep. 373 (1864). Raffles contracted to sell 125 bales of cotton to Wichelhaus. The goods were to be shipped from Bombay to Liverpool, England on a ship named Peerless. Neither party was aware that there were two ships names Peerless carrying cotton from Bombay to Liverpool, one arriving in October and the other in December. Wichelhaus thought he purchased cotton arriving on the October ship, but Raffles sent his cotton on December ship. Wichelhaus refused to accept delivery of the cotton arriving on the December ship and Raffles brought this lawsuit for breach of contract. The court held that if a latent ambiguity arises that shows there had been no meeting of the minds there is no mutual assent to contract. Parol evidence is admissible to determine the meaning each party had assigned regarding a latent ambiguity.
Two boats with the same name in a harbor. The buyer meant the boat that sailed in October and the seller meant the boat that sailed in December. The court held there was no contract because an objectionable third party could not tell which ship so the contract was void.
- There must be a material misunderstanding for the contract to be rescinded.
- If a party knows the other party has attached a different meaning to a term the other, the unknowing party’s terms form the basis for the contract.
- c. Where the courts determine one party more at fault it will penalize it by enforcing the other’s terms.
- Ambiguity of language. Contract terms that are capable of having more than one meaning. At common law both latent and patent ambiguity precluded the formation of a contract. Applies to material terms that are open to at least two reasonable interpretations. Each party must attach a different meaning to the term and neither party knows or has reason to know the term is open to at least two reasonable interpretations. If one party knows there is a contract under the terms of the innocent party.
- Latent. An ambiguity that is open to more than one meaning. If both parties have a different interpretation to that term there can be no contract because courts cannot give preference to one interpretation over the other. If one of the parties is not at fault because to the ambiguous term was hidden from them, the courts will interpret the ambiguity in favor of the party not at fault.
- Patent. Obvious ambiguity. At the formation stage the parties are guilty of using language to frame an essential term that is obviously susceptible to more than one interpretation, yet neither party attempted to clarify it. If the parties are equally at fault there is no contract because a judge has no rational basis to prefer the interpretation of the negligent seller to that of the negligent buyer.
- Misrepresentation and fraud.
- Misrepresentation is an innocent misstatement.
- Fraud consists in representations that are known to be false due to nondisclosure or concealment of facts.
- Nondisclosure. Failure to disclose material information. Informed consent ensures that a party knows the risk of entering into a contract.
- Undue influence. One party taking advantage of their position of power over another. Free will to bargain is not possible.
- Duress. Restraint or danger in the present or impending, which is severe or apprehensive in nature and intended to deprive a person of free will intended to destroy volition for the purpose of obtaining consent.
Parol evidence as it applies to mistakes in contracts. Evidence of prior or contemporaneous agreement that contradicts contractual terms is inadmissible if the written contract is intended as integrated writing (complete and final expression of the parties).
Merger clause. A merger clause presumes integration.
Capacity to contract. After an offer, acceptance and consideration of a contract have been established to form a contract, the next element is to determine the capacity to contract. All sane and sober adults can form contracts, but there are laws to protect people from being exploited in contract situations. The intent is to protect individuals who may not have the ability to make decisions in their own best interest. Contracts are not legally binding for:
- Minors. A person under the age 18 (or their guardian) can disaffirm a contract.
Contracts for necessities such as food, clothing and shelter against a minor may be enforced or businesses would not want to deal with them. There are times when a good or service is necessary for a minor to have.
Example: A teenager may need to rent a tuxedo to attend his graduation or to be a groomsman at a family wedding. Normally teens do not have need for a tuxedo. The business should enter into contract with the teenager because of the social need.
- People with a mental disability or illness.
- People with impaired judgment.
- Alcoholic/drug addicts.
- XI. Remedies for breach of contract. If performance of the contract has matured and they are not excused and have not been performed there is breach. What remedies are available for the non-breaching party?
- Remedies under a contract. The non-breaching party has a duty to mitigate their damages. Avoidable damages are never recoverable.
- Sale of goods. Damages for the sale of goods is expectation damages.
- If the buyer breaches the seller gets deficiency in resale plus costs.
- If the seller breaches the buyer gets the difference between cost and the contract price.
- Courts will order specific performance for unique goods unless they are already sold to a BFP.
- Lost volume seller gets lost profits.
- Sale of land.
- Specific performance since all land is considered unique.
- Unless already sold to a BFP.
- The seller can also get specific performance even though money is not unique.
- Service contracts. Specific performance is never available but a court may enjoin the defendant from working elsewhere.
- Employment contracts.
- Employees must use reasonable diligence to find a similar position.
- Construction contracts. Must cease working, building and racking up costs.
- Liquidated damages clauses.
- Valid if damages are difficult to ascertain when the contract was formed.
- The amount agreed was a reasonable forecast of actual damages.
- Under the UCC the amount of damages is close to what the actual damages actually are.
- Duty to mitigate.
- If no contract or unenforceable contract, is quasi-contractual relief available?
- Promissory estoppel.
- The promisor must have reasonably expected the promisee would detrimentally rely.
- The reliance is of a definite and substantial character.
- Promissory estoppel.
- Unjust enrichment.
- One party has conferred a benefit on the other.
- With a reasonable expectation of being compensated.
- The benefits were conferred at the request of the other person.
- Not rewarding damages would result in unjust enrichment.
- Quasi-contractual relief may exceed the contract price.
- Types of remedies available. Anytime contract rules lead to an unfair result apply equity.
- Expectation damages. Damages recoverable for breach of contract that are designed to put the injured party in the position they would have been in had the contract been completed. Expectation damages are composed of incidental and consequential damages. Expectation damages is to be contrasted with reliance and restitution damages, which are limited to incidental damages.
- Sale of goods. Damages for the sale of goods is expectation damages.
Example: (P) has a contract to be a McDonald’s franchisee and spends 100k building one. McDonalds breaches. The courts will find it hard to award expectation damages (future earnings) because they are too speculative. In dollar terms what would the non-breaching party have received if there were no breach? What did the plaintiff actually receive? Compare the valuation between what was promised and what was received.
Example: H offers to pay P 1000.00 when they finish painting H’s house. P breaches. H can’t find anyone that will not paint the house for less than 1200.00. P must pay H 200.00.
Hawkins v. Mcghee. A doctor promised a 100% perfect hand. Instead, the plaintiff was left with a hairy matted and scarred hand. Here, the plaintiff didn’t get the expectation desired. The court placed a dollar value on the 100% perfect hand as contrasted with what the plaintiff received if the contract had been performed. Since the courts could not find a dollar amount they awarded restitution damages, the amount of money the plaintiff paid to the doctor.
- Consequential damages are only available if they are foreseeable at the time the contract was entered into.
- Incidental damages are costs that are always recoverable for finding a replacement.
Example: A hires B to paint their house. B breaches and A has to pay 25.00 in advertising fees to find another painter.
- Liquidated damages. A contract provision that sets the amount of damages if a party breaches the contract. Valid so long as at the time of contracting:
- Actual damages would have been hard estimate.
- The amount stipulated was a reasonable forecast of the actual harm
- Punitive damages are never allowed in a contract action because contract damages are meant to compensate the nonbreaching party not to punish the wrongdoer.
- Restitution/unjust enrichment. Monetary damages paid to put the defendant in the position they were in prior to forming the contract.
- Nonbreaching party can recover the value of their performance, even if it is greater than the contract price.
- The breaching party can recover the benefit conferred minus damages to the nonbreaching party.
- Quasi-contractual relief grants relief for unjust enrichment.
- Grounds for rescission:
- Mutual mistake will always be grounds for rescission.
- Unilateral mistake will be granted if it goes to the basis of the bargain and hardship to the mistaken party outweighs the harm to the nonbreaching party.
- Impossibility of performance.
- Lack of capacity. Minors.
- Laches. An unreasonable delay by plaintiff in initiating their clam that results in prejudice to the defendant.
- Unclean hands. The plaintiff cannot be guilty of unfair dealing with respect to the transaction sued upon.
- Grounds for rescission:
- Grounds for reformation:
- Laches. An unreasonable delay by the plaintiff in initiating his claim would result in prejudice to the defendant.
- Unclean hand. The plaintiff cannot be guilty of unfair dealing with respect to the transaction sued upon.
- Sale to BFP.
- Parol Evidence rule, statute of frauds and negligence are not good defenses.
- Grounds for reformation:
- Specific performance. An order of a court that requires a party to perform a specific act, usually what is stated in a contract. It is commonly used in the form of injunctive relief concerning confidential information or real property. While specific performance can be in the form of any type of forced action, it is usually used to complete a previously established transaction, thus being the most effective remedy in protecting the expectation interest of the innocent party to a contract. It is usually the opposite of a prohibitory injunction but there are mandatory injunctions that have a similar effect to specific performance.
Under the common law, specific performance was not a remedy, with the rights of a litigant being limited to the collection of damages. However, the court of equity developed the remedy of specific performance as damages often could not adequately compensate someone for the inability to own a particular piece of real property, land being regarded as unique.
There are circumstances where an order of specific performance would not be granted including:
- Where specific performance would cause severe hardship to the defendant.
- The contract was unconscionable or illegal.
- The claimant has misbehaved (no clean hands).
- Performance is impossible.
- Performance consists of a personal service.
- The contract is too vague to be enforced.
- The contract required constant supervision.
- Mutuality was lacking in the initial agreement of the contract.
- The contract was made for no consideration.
Traditionally, equity would only grant specific performance with respect to contracts involving chattels where the goods were unique in character, such as art, heirlooms, and the like. The rationale behind this was that with goods being fungible, the aggrieved party had an adequate remedy in damages for the other party’s non-performance.
Article 2 of the UCC displaces the traditional rule in an attempt to adjust the law of sales of goods to the realities of the modern commercial marketplace. If the goods are identified to the contract for sale and in the possession of the seller, a court may order that the goods be delivered over to the buyer upon payment of the price. This is known as replevin. In addition, the UCC allows a court to order specific performance where the goods are unique.
Hadley v. Baxendale. A contract to fix a repaired machine part required returning it using the fastest method available. The defendant failed to use the fastest method available. The plaintiff owned a mill and not having the part caused it to be closed for weeks with weeks of lost profit. The carrier argued that they had no way of knowing the mill was shut down, all they knew was it was a machine part and they should not be responsible for losses they did not foresee. Parties need to know their foreseeable risks before entering into an agreement, so they know what to charge regarding those risks.
Specific performance: available only if money damages are insufficient (always wrong answer!).
Reformation. Must have a written contract.
Rescission and restitution
Reclamation. The right of an unpaid seller to get their goods back. (Insolvency of buyer).
A good faith purchaser (BFP) keeps the goods.