BUSINESS LAW 5 LECTURE HIGHLIGHTS

 

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Chapter 2: Resolution of Disputes, pg. 1

In this chapter, lectures zeroed in on how a lawsuit is initiated (filing a complaint and filing an answer) and what transpires between the time the answer is filed and a trial commences (if a trial does occur) which is called the discovery phase. We established an understanding that a complaint is a document that contains the plaintiff's allegations and that the plaintiff has the burden of proving the allegations at trial by a preponderance of the evidence. The allegations contained in the complaint are just that, allegations! A statement by a party in a lawsuit of what that party hopes to prove is essentially the definition of an allegation.

In the answer, the defendant generally denies the allegations in the complaint. When this occurs there exists a factual dispute. However, not every lawsuit involves a factual dispute. There are some lawsuits in which both the plaintiff and the defendant agree on the facts but disagree about the law. In these situations there is not factual dispute.

You are expected to understand the discovery process and what the parties are attempting to accomplish during discovery. Each side attempts to learn as much as possible about the facts of the case. The parties attempt to gather as much evidence as they can so that they can come to a realistic assessment of the facts and strength or weakness in their and the opponent's case. How is this accomplished?

Interrogatories, depositions, admissions and requests for the production of documents are the means used to discover evidence.

Interrogatories is an inexpensive to obtain information. Only a party to the lawsuit can be served with interrogatories.

A Deposition is a procedure wherein the deponent must answer questions under oath. It provides an opportunity to assess how the deponent will do when testifying at trial. A deposition is an effective discovery tool but can be quite expensive. The lawyer(s) must be paid and the deposition transcript (which is prepared by the court reporter who was present at the deposition) can be quite costly.

A Request For Admissions is an attempt to narrow the issues in the lawsuit by getting the other party to admit to certain facts. When this occurs, it takes less time to try the actual case because the need to prove the facts that have been admitted is no longer necessary.

A Request For the Production of Documents can prove quite valuable to the requesting party when documents are produced that assisting proving some or all of the contested facts.

Pre Trial Motions

There was also discussion about the types of pre trial motions that are filed and what a party filing such a motion is attempting to accomplish.Motion to Dismiss, Motion For Summary Judgment, Demurrer are the more common pretrial motions that parties file. A pretrial motion that is granted by the trial court will result in an early victory in favor of the party that filed it and obviously eliminate the need to proceed further to trial. Students are expected to know the difference between the various types of pretrial motions.

Motion to Dismiss Filed after plaintiff files complaint but before answer
Motion for Judgment on the pleadings Filed after both complaint and answer are on file
Demurrer Specific type of Motion to Dismiss (failure to state valid claim)
Motion for Summary Judgment Based on there being no triable issue of fact

A trial is a contest between the parties with each trying to prove the facts that best support their own position, and with each trying to disprove the facts being relied on by the opponent. As previously discussed, not every fact in every lawsuit is the subject of a dispute. In some cases, the parties agree to the facts (stipulate to the facts).

There are motions that are raised in connection with the trial:

Briefing the Cases

Case briefing is an essential component to this class. Much time was devoted to a discussion of the importance of learning how to brief cases and why each student should make the effort to learn the technique. By briefing cases a student will better understand the issues presented in the case and will be in a better position to do well on the quizzes because I will allow students to use the case brief templates when taking the quizzes Emphasis was placed on the fact that briefing cases is a learned technique and that - with some hard work and focus - this technique can be learned with the first few weeks of the semester.

The Procedural History of the particular case is covered in the left column of the template. Pretrial motions and their outcome, verdicts at trial (and whether the trial was a jury or court trial) and the appellate history of the particular case are all covered in this section of the case brief template. To find this information should not be difficult. Once you locate it, merely fill in the template. By knowing which party prevailed and at what stage of the proceeding the party prevailed should help to give you a better overall view of the particular case you are reading. The Substantive aspect of the case is dealt with in the right hand column of the template. The substantive aspects of the case have to do with the alleged and/or stipulated facts, proven facts, and the law that the court applies (applicable rule of law)or instructs the
jury to apply in resolving the case.

Some cases will involve disputes wherein the plaintiff and defendant agree to the facts (meaning the facts are stipulated) and the dispute will involve the law. In other cases, the plaintiff and defendant will dispute one another's version of the facts. When this happens, the trier of fact (jury or judge depending on whether it is a court or jury trial) will be obliged to decide what actually happened (what the facts are) before the law can be applied. As you become more familiar with the briefing process, you will not have any difficulty knowing the difference between stipulated facts and a factual dispute.

Cases are decided by an application of the law to the facts of the particular case. The source of the applied law is either the Restatement, the Uniform Commercial Code, and/or precedent (case law). The law that is applied to the case will be in the form of a rule of law (rol). I expect you to know the rule of law in each and every assigned primary case!

 

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Chapter 9: Introduction to Contracts, pg. 18

In this chapter we cover a substantial amount of new vocabulary. Terms such as valid contract, void agreement, executory contract, partially executed and partially executory contract, unenforceable contract, voidable contract, unilateral contract and bilateral contract are discussed among other definitions. I emphasize that it is your responsibility to learn the vocabulary terms and that these terms will (in one form or another) appear on your unit examination.

Chapter nine serves as a window to the contract law that will be covered over the course of the semester. Each of the assigned chapters coversa particular component of a contract and it is only after we complete chapter 18 that we are able to look back and fully understand the many elements that make up a valid contract.

We address the distinction between a promise and a contract. We learn that every contract contains promises (express or implied) but that every promise or exchange of promises do not necessarily create a contract. A contract is an agreement which both parties intend to be a binding legal commitment. A contract creates both legal rights and duties and is enforceable in a court of law. Thus, an agreement between two friends to meet for lunch at a given place and time would be an agreement but not an enforceable contract because it is most reasonable to infer that they merely intended a social meeting or commitment.

Fairness & Equity

The concepts of Promissory Estoppel and Quasi Contract are also discussed in this chapter. These contract principles are applied in circumstances when no valid contract has been formed between the parte is and when unfairness would result if the court chose to do nothing at all (because there was no valid contract).

Quasi contract (implied in law contract) recovery occurs if, according to the facts of the particular case, one party would otherwise be unjustly enriched at the expense of the other party. This involves circumstances where one party provides something of value to the other and both parties know (or should know) that the person who provided the benefit did so with the expectation of being paid. To allow the recipient to retain the benefit without having to compensate the provider would amount to the unjust enrichment of the recipient which the courts will not
allow.

The principle of Promissory estoppel is applied to a fact situation involving a carelessly made promise that causes the one promised to rely in some way and suffer a hardship when the promise is broken. The promise that was made does not create a contract because the promisor (the one who made it) does not seek anything in return for the promise. However, if the facts indicate that the promisor, as a reasonable person. should have been able to foresee that reliance would occur if the promise was made, then breaking the promise is considered to be a reckless act, and a court is apt to enforce the promise if a hardship results to the promisee.

Much time is spent discussing the two-sided coin of quasi contract and promissory estoppel and in making the distinctions between these two legal principles. Emphasis is placed on the importance of these non-contract theories and knowing when and why a court would resolve a given legal dispute by applying one or the other, and why a court would refuse to apply one or the other.

Source of Law: Restatement 2d; Uniform Commercial Code and Stare Decisis (case precedent)

Chapter nine also addresses the various sources of law available to the litigants and court in a contract dispute. We discuss the differences and similarities between these different sources and why one would be applied to the exclusion of one of the others. We draw the distinction between goods, services, real estate and intangibles and we also discuss a hybrid contract (one by which both goods and services are involved.

Historical Perspective

Contract law has undergone change from its inception to the present. It is important that you understand the disparity between the classical approach to resolving contract disputes in court and the approach taken modernity.

Laissez faire: Historically, judges would only look at whether the elements needed for a contract were present or missing. If the required elements were there, the court would rule that a contract existed. Issues such as fairness, good faith, unequal bargaining power between the parties, etc. were not a concern for the courts. Hands on Approach:

Modernity, the judges take what has been coined as a ‘hands on’ approach in resolving contract disputes. The court will take fairness into account. The court will examine the bargain itself and if it feels that a party was taken advantage of (agreed to terms because of no choice in the matter), it will null and void the agreement. What Effect, if any, does this modern approach have on contract formation? Throughout this semester - as you examine various situations involving the formation of contracts between parties - you will begin to appreciate the fact that the modern approach to contract law has infused a great deal of uncertainty into transactions even though it has accomplished its objective of arriving at a just and fair result.

Verbal Contracts vs. Written Contracts

There is generally a misconception on the part of students taking this course with regard to the legal significance of verbal agreements. Many students are of the opinion that only written agreements are enforceable. This is not true! Verbal (oral) agreements are enforceable. The issue presented in trying to enforce ANY agreement is whether the particular agreement was INTENDED to be a legally binding contract. You will soon realize that there exist many situations and circumstances wherein people intend to legally bind themselves to a contract based on verbal commitments. Note: "An oral contract is worth the paper it is written on." The above phrase suggests that oral contracts (although theoretically legally enforceable) are not worth a whole lot because they are so difficult to prove in court. The moral of the above is that it is far more prudent to reduce every agreement into a writing so that proof will exist in the event that a dispute arises and a lawsuit follows. This caveat sounds great in theory, but is weak in practice. Consider the many oral contracts that you enter into as an ordinary part of your daily life: Purchasing gasoline; eating at a restaurant; buying merchandise; taking clothing to the cleaners; purchasing tickets to sporting or entertainment events, etc. These transactions are contractual in nature and would obviously become cumbersome and time consuming if a writing was required to legally enforce rights and or obligations created by such agreements. In Some Circumstances there must be Written Evidence As you delve into this semester’s material, you will learn that laws in various states require that certain types of transactions (sale of real estate; employment contracts that cannot be performed within one year, etc.) are not legally enforceable UNLESS there exists written evidence of the particular agreement. However, in most instances an oral agreement will be enforced if proven in court. Are you able to find ANY agreement in chapter 9 ( consider both primary and problem cases) that is oral and was ruled enforceable?

Problem Cases

 

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Chapter 10: The Agreement: Offer, pg. 36

Every contract requires proof of an agreement. The rules of offer and acceptance are used to determine whether an agreement was reached. Chapter 10 deals with the rules regarding the offer and Chapter 11 speaks to the rules regarding the acceptance.

An offer is made by the offeror to the offeree and it consists of several elements.

An offer requires:

An offer is either bilateral or unilateral. Bilateral offers consist of promises for promises. Unilateral offers consist of a promise or promises for an act or forbearance.

There are certain categories of proposals that may or may not be offers and there are existing rules of law (default rules) that dictate what a court is likely to decide when faced with one of the categories. Price quotes, general auctions, and advertisements are not likely to be interpreted as offers by a court. There are of course circumstances which may influence the court otherwise. Auctions to the 'highest bidder without reserve' and rewards are likely to be construed as offers. Bids, on the other hand, could go either way. An important factor when a bid is involved is whether the parties included the many things that bids -which are construed as offers- normally contain. The more areas the bid covers, the more likely the court is to conclude that the parties intended that the bid serve as an offer. The less formal the bid is, the less likely the court is to rule that the bid is an offer. A bid that is submitted in writing is more likely to be construed as an offer than an oral bid!

There are any number of circumstances that if present would cause the offer to terminate. If the offer does terminate before the offeree accepts it, no contract can occur. It is thus of paramount importance to understand if the offer did exist at the time acceptance was attempted. The various ways that an offer can lapse are: time lapse; destruction of the subject matter being offered; death or insanity of either offeror or offeree; illegality; rejection by the offeree and revocation by the offeror.

Revocation occurs when the offeror communicates her intent to withdraw (take back) the offer and as a general rule, offeror's are empowered to do so. There are some circumstances, however,wherein the offeror loses her right and power to revoke the offer. In other words, the offer will become irrevocable. It is important that you are able to recognize the circumstances that cause an offer to be irrevocable. They are: Option contracts; Promissory estoppel; Certain statutes; Firm offers under the UCC, and the commencement of performance of a unilateral offer.

The offeror is the 'master of the offer'. This has far-reaching ramifications which the student needs to understand.

When reading and briefing the primary cases you may find it helpful to take the following approach:

Problem Cases

 

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Chapter 11: TheAgreement: Acceptance, pg. 54

 

An acceptance of an offer creates a binding contract. Acceptance, at common law, embraced the 'mirror image' rule of law which meant that the acceptance was required to be the mirror image of the offer. An unconditional, unequivocal assent to the terms of the offer was what was required. A purported acceptance - one that was conditioned upon demands not included in the offer - was a counter offer and it had the effect of canceling out the original offer. Modernly the courts are more flexible and what may not have been viewed as an acceptance at common law, often qualifies as one modernly. A bilateral offer requires a return promise as the acceptance. A unilateral offer that bargains for an act or action, requires the performance of the act as the acceptance. A unilateral offer that bargains for forbearance, requires the forbearance as the acceptance.

Responses That Do Not Qualify as an Acceptance

An offeree might respond to an offer in any number of ways. The particular response must be accurately identified by you because each different response carries with it a different legal consequence! Obviously, an acceptance timely given, results in a valid contract. The other types of reactions by the offeree are an inquiry, ignoring the offer, expressly rejecting the offer, making a counteroffer and impliedly rejecting the offer. By ignoring an offer an offeree runs the risk that the offer will terminate via time lapse. By making inquiries of the offeror (asking questions) the offer will remain valid unless of course the questioning persists for an unreasonable time period which would then result in the offer lapsing due to time lapse. An express rejection will have the effect of canceling out the offer. The same is true with regard to an implied rejection. Counter offers are generally implied rejections!

Objective Theory of Contract Intent

Remember that contract intent is measured not by what a person was actually thinking or subjectively intended but rather by an objective standard (based on what a reasonable person would believe the person intended). What a person said, and how a person said it, and the other surrounding circumstances - including what is considered customary by society's norms - will tell us what is reasonable to believe.

So . . . whether an acceptance was intended depends on the objective standard being applied. Whether a rejections was intended depends on the same standard. The same is true regarding a counter offer.

Silence As An Acceptance

As a general rule of law, silence is not an acceptance. A contract requires an agreement and an agreement requires outwardly manifested mutual assent (an offer and an acceptance). Silence, a general proposition, is not an outward manifestation of intent to be bound by a contract. Of course, there are circumstances that would cause a court to rule that silence does constitute an acceptance. Silence would be viewed as an acceptance if during the course of past dealings it became the manner in which the offeree manifested assent.. Assume that Seller delivered produce to Buyer at 5:00 a.m. every Monday. Assume that Buyer's employees loaded the produce into Buyer's wharehouse and that Buyer wired a check to Seller on the following Friday. On the particular occasion at issue, the produce that was delivered was not acceptable to Buyer who believed it to be spoiled. The Buyer stored the produce in the back part of the warehouse intending to to return it to Seller but forgot. Buyer never wired a check to Seller and never informed Seller that produce was unacceptable. On Saturday, Seller contacts buyer to inform him that the money has not yet been received. Buyer explains to Seller that the money was not wired because the product is defective. What result? The buyer would be bound by contract because the course of conduct established in their past dealings was that Buyer's silence between the date of delivery and the following Friday manifested the Buyer's assent. In other words, the buyer -because of their past dealings- fell under an affirmative duty to tell the seller if he did not want the produce. Refer to your outline and the text for further explanation.

What Is the Effect of The Absence of a Writing?

The answer to this questions depends on whether the parties bargained for a writing. If their agreement was contingent upon a written contract being drafted and signed, and this did not happen, then the court will find that no contract ever came into being. However, if the preparation and execution of a written contract was merely an afterthought, the failure to accomplish this goal will not have any effect on the previously formed contract. In other words, assume that A and B are negotiating and A says, "O.K., this is my final offer take it or leave it. I will sell for $10,000.00." B replies by saying, "O.K., darn you drive a tough bargain, but it's a deal." A then says, "Incidentally, could you have your secretary draw up a written contract - which we will both sign - just to have a record of the deal"? B says, "Sure, it's a good idea." Assume that the secretary never gets around to preparing the written draft. Is there a contract? Yes.

Battle Of The Forms

The battle of the forms occurs when merchants use their own form(s) (prepared by their own legal staff) to form a contract. Merchant A submits its offer using its own form, and Merchant B accepts the offer by using its own form. The forms are consistent as to subject matter, quantity and price but inconsistent in other areas. At common law there would be no contract. The form used to signal the acceptance would be construed a counteroffer and it would void the original offer. However, the UCC departs from this view and a contract might result insofar as those parts of both forms this are consistent. Refer to your text and to your outline regarding the specific rules pertaining to the issue of battling forms.

Mail Box Rule (MBR)

The mail box rule dates back to the common law and it is often applied to determine the moment in time that the acceptance actually occurred. According to this rule, the mail becomes the agent of the offeror if the offeror used it to transmit the offer. Think of the mail as an extension of the offeror. The theory employed was the the offeror, by using the mail, was impliedly authorizing the offeree to do the same when accepting the offer. It followed that an acceptance occurred the moment the offeree 'dispatched' her acceptance by placing it back into the mail. Of course there was proof required that the acceptance was properly addressed and carried adequate postage. The disadvantage to the offeror was that she was often unaware of there being an acceptance since there was a lag between the time the acceptance was mailed and received. The MBR can be eliminated by the offeror (master of the offer) by merely stipulating in the offer that the acceptance is not valid until it is received at offeror's principal place of business or some other address. The MBR will not be applied if the acceptance is improperly addressed or if inadequate postage is used. It will neither apply to those situations involving a Post Acceptance Revocation or a Post Revocation Acceptance!

When and How is the Offer, Acceptance, Revocation or Rejection Validly Communicated?

The area of validly communicating the Offer, Acceptance, Revocation or Rejection is a tricky one and it involves different rules depending on which of the four (offer, acceptance, revocation or rejection) you are considering. It is important to understand that the word communication takes a different meaning than we generally understand it to mean. In face to face dealings, communication means precisely what we know it to mean. An offer is validly communicated the moment it is expressed. An acceptance, rejection and revocation are also validly communicated the moment they are said. The difficulty occurs in situations wherein an intermediary - the mail - is the means used to transmit the information. Offers are not validly communicated until read. An acceptance is validly communicated (if the MBR is applicable) when properly dispatched. If the MBR is not applicable, the acceptance is not validly communicated until received. Both the rejection and the revocation are validly communicated when received.

What is an offer is transmitted via mail and the offeree first dispatches her acceptance but changes her mind and then dispatches a rejection? Or what if an offer is transmitted via mail and the offeree first dispatches her rejection but changes her mind and then dispatches an acceptance? The above hypotheticals address the phenomenon of Post Acceptance Rejection and Post Rejection Acceptance. The law applicable to either of these scenarios is that whichever is received first is the valid one. Receipt does not require that the recipient be aware of the presence of the correspondence.

Problem Cases

 

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Chapter 12: Consideration, pg. 71

Consideration consists of bargained for legal detriment. mutuality of obligation exists when each party to the agreement incurs legal detriment that is bargained for. A legal detriment attaches only if one agrees to give up a legal right or to assume a legal obligation. A promise to do that which a person is already under a legal obligation to do (under a pre existing legal duty to do) does not create legal detriment. An agreement by one to compensate another for what the other has already done does not create legal detriment because no new obligation is being assumed and no legal right is being given up. This is called past consideration. Thus, A's promise to pay B $1,000.00 for having returned to A his lost dog, does not establish any legal detriment to B because B is not giving up a legal right nor assuming a legal duty.

A valid contract not only confers legal obligations on each of parties, but it also establishes legal rights in each party. A sensible approach to the cases in this chapter is to identify the agreement between the parties. After doing so, consider separately what the offeror has offered to do and what the offeree has agreed to. Has the offeror made a proposal which amounts to the offeror giving up a legal right or assuming a legal duty? If so, there is legal detriment to the offeror. Next consider what the offeree has agreed to. Has the offeree agreed to give up a legal right or assume a legal duty? If so there is also legal detriment to the offeree and there exists consideration because there exists mutuality of obligation.

The comparative value of the bargained for consideration is not a significant issue. In other words, if A promises to pay B $10,000.00 for an object of art that most art dealers believe to be worth closer to $2,000.00 it is of no real consequence. The agreement between A and B is a valid contract because there exists mutuality of obligation! A has promised to pay $10,000.00 and this amounts to A agreeing to do that which A was not under any legal duty to do, i.e., pay $10,000.00 to B. In turn, B has agreed to give the art object to A and this amounts to B agreeing to give up the right to the art object.

After you achieve the feel for what consideration is and you learn how to determine if each of the parties to the agreement has at least bargained for something from the other party, you must then further examine the facts to see if any of the circumstances exist that would preclude a finding of legal detriment. What are these circumstances?

Pre Existing Legal Duty
Past Consideration
Gratuitous Promises
Illusory Promises

A preexisting duty problem exists in a situation where a party promises to do that which the party is already under a legal obligation to do. A fireman promising to put out a fire, a lifeguard promising to retrieve a struggling swimmer from the ocean, a motorist promising to obey the speed laws, a building contractor promising to complete the house that he is already contractually obligated to complete are all examples of persons agreeing to do something that the law already requires they do. A contract (job description) or a law can create the preexisting duty!

Gratuitous promises are essentially promises to confer a gift and nothing more. A gratuitous promise does not bargain for anything in return even though it may bring great satisfaction and pride to the promisor/ donor. In other words, there is no resulting legal detriment to the promisee because there has not been a promise to perform a legal obligation or to give up a legal right.

Past Consideration does not create legal detriment because no new legal obligation is assumed and no legal right is being given up. If A promises to B $1,000.00 for having returned to A his stray dog Sparky, where is the legal detriment to B? There isn't any. B is neither agreeing to take on an obligation nor agreeing to give up a legal right. B has already - IN THE PAST - returned the dog to A. Consideration requires bargain for something prospective and not agreement for that which is retrospective (has already happened).

Illusory Promises are those which give the impression of creating legal detriment but don't. An illusory promise by one party will cause the agreement to be void due to lack of mutuality of obligation. Promises to do that which is impossible to do make the promise illusory. An agreement to purchase or sell that contains a clause allowing a party to cancel at will, makes the entire agreement void because the party with the right to cancel made an illusory promise. That party cannot be required to perform under the agreement. If the party who had the right to cancel agreed to give written notice to affect cancellation the promise would not be illusory. The legal detriment was the agreement to do that which the party was not previously obligated to do, give written notice. Refer to the textbook and outline and see how 'output' and 'requirement' contracts fit into the scheme of illusory promises.

The chart below lists the legal theories that might be available and if proven could result in the agreement being enforced even though one of the above four circumstances exist.

 

Preexisting Duty
Commercial Impracticability, Benefit Theory
Past Consideration
Moral Obligation
Gratuitous Promises
Promissory Estoppel
Illusory Promises
Promissory Estoppel

 

Assume that Builder and Owner agreed that builder would construct a home for owner for $500,000.00. Builder was extremely cautious in bidding out the project and did what a reasonable builder would do insofar as consulting soil engineers and experts. Shortly after the builder broke ground he realized that there was an ancient concrete slab that would have to be removed. Assume that this would require substantial work and substantial increased costs to builder. If owner promised to pay builder $100,000.00 to go ahead and build the house, it could be argued that builder would not be entitled to the additional 100k because he was under a preexisting duty to build the house. However, if the builder could prove commercial impracticability,the builder would be entitled to the extra money.

Assume debtor promised to pay creditor an old debt that had been discharged in bankruptcy or barred by the statute of limitations. This without more would be unenforceable because of lack of mutuality of obligation. What legal detriment is there to the creditor? None! Some states apply the theory of moral obligation. These jurisdictions theorize that the promise to pay is enforceable even though it technically lacks consideration because the debtor has a moral obligation to pay it. The moral obligation is the substitute for the lack of legal detriment.

Assume Uncle promises $50,000.00 to his academically talented niece who just graduated first from her law school. There is obviously no legal detriment to the niece because she did not agree to assume any legal obligation nor did she agree to give up any legal right. She merely responded to the generous promise by saying, "Gee, how great." If she can prove that she justifiably relied and that she would suffer hardship if the promise wasn't kept, she would be able to enforce the promise. This is an example of promissory estoppel.

Assume that the paralyzed telephone linesman agreed to return to work in exchange for his employer's promise to give him a lifetime employment contract including cost of living increases, etc. The promise to return to work is an illusory one and would result in a court ruling that the agreement was void. If, however, the linesman relied on the promise for lifetime salary by building an expensive home with a substantial mortgage and perhaps sold his existing home, he might be able to prove the elements of promissory estoppel.

 

Subsequent Contracts

Another part of chapter twelve addresses the issue of the subsequently formed contract between the parties to the original contract. This is not an uncommon commercial phenomenon and it requires an examination of the subsequently formed contract to determine if it is supported by consideration (mutuality of obligation). You are expected to know all of the subsequent contracts! They are: rescission contracts; modification contracts; novation contracts; accord and satisfaction contracts, and a contract to pay a lesser amount.

 

Rescission Contract Contract to cancel the original contract
Modification Contract Contract to change the original contract
Novation Contract Contract to substitute in a new party and out an original party
Accord and Satisfaction Contract Contract to compromise an unliquidated debt
Contract to pay a lesser amount Contract to pay less on a liquidated debt

 

Liquidated vs. Unliquidated

Knowing the difference between a liquidated debt and an unliquidated debt will assist you greatly when you analyze the issue of consideration in an accord and satisfaction contract as well as in a contract containing an agreement to pay a lesser amount than the agreed amount actually owed.

A debt is liquidated if both parties are in agreement as to the amount owed. In an express in fact contract the amount to be paid is set forth in an express manner. The amount is obviously liquidated if the contract is wholly executory. If no dispute arises as to the quality of the good or service rendered and if it was delivered timely, then the amount continues to be liquidated. The creditor has a legal right to the liquidated sum and the debtor has the legal duty to pay it when due. What if the debtor offers and the creditor accepts - as payment in full - a lesser amount? Is this a valid contract? It depends! The facts must show that consideration was bargained for and received on both sides. The problem that occurs is whether there is legal detriment to the debtor. We know that there is legal detriment to the creditor because the creditor gave up the legal right to the full amount. If the facts show that the debtor agreed to pay at an earlier time, in a different medium, or perhaps at a different location, then the debtor has also incurred a legal detriment and the agreement is binding. Incidentally, a debt that arose from an implied in fact contract (where the parties impliedly agreed that a reasonable amount would be charged and paid) is liquidated if the debtor believes that the amount charged by the creditor is reasonable. The same rules as stated directly above apply.

A debt is unliquidated if there is a dispute as to the amount owed. A debt can become unliquidated if the debtor claims that the creditor (assume an implied in fact contract) is charging an unreasonable amount or (in an express in fact contract) the goods were defective, delivered untimely, or the service was not performed as promised. In this case an agreement between debtor and creditor that a lesser amount be paid as payment in full will be a binding accord and satisfaction contract. The legal detriment to the creditor is that the legal right to sue was relinquished and the debtor incurred a legal detriment by then agreeing to pay a sum certain to the creditor.

Problem Cases

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Chapter 13: Reality of Consent, pg. 89


If an agreement lacks real consent, the party who did not really consent may avoid the contract or, in the alternative, sue for damages. A contract lacking real consent is considered voidable (see Chapter 9 lecture notes). The choice to avoid this type of contract is with the party who did not really consent! The consenting party is left with no choice. The legal right to avoid this type of contract lies with the party who can prove that she did not really consent to the agreement.

Up to this point in the semester we have established that contract intent is based on the behavior of the parties and other surrounding circumstances (objective theory of contract law) and that the subjective beliefs and feelings of the parties is actually immaterial with regard to the process of offer and acceptance. In this chapter however, the state of mind of the party who is alleging no real consent is crucial to the outcome of the dispute. So it is here, for the first time, that we are going to concern ourselves with the subjective aspect (what the person was actually thinking and believed to be the facts). An example would be: Seller and Buyer enter into an agreement for the sale and purchase of a car owned by Seller. Seller told Buyer that the car had 25,000 miles when in fact it had 45,0000. The seller also turned back the odometer to reflect 25,000 miles. The seller was consciously lying to Buyer when he made this statement. Assume that Buyer eventually learns the truth about what happened. Did the Buyer REALLY CONSENT to this contract? No! Buyer bargained for a car that he believed to have only 25,000 miles but that actually had 45,000. So. . . the buyer bargained for one thing and got something different. The contract lacked real consent and the buyer has some choices available to him. He can sue to rescind the contract or he can sue for damages. The seller, on the other hand, is without any choice. He is at the whim of the buyer.

Example # 2:
Seller and Buyer enter into an agreement for the sale and purchase of Seller's home. During negotiations Seller informed Buyer that the home was 4500 square feet when in fact it was less than 4000 square feet. The seller actually believed the information to be true because she was told this when she bought the home from the person who sold it to her. She never attempted to confirm this information. Assume that Buyer eventually learns (months after moving in) that the home is less than 4000 sq. feet. Did the buyer really consent to this agreement? The answer is again, no! The buyer bargained for one thing and received another. The buyer's state of mind was that he was getting a home that was 4500 square feet when in fact it was less than 4000 square feet. The buyer believed he was getting a certain thing but got something else The difference between examples one and two, insofar as how the misinformation was passed from one party to the other, is that in example one the seller acted with the purpose of deceiving the buyer and in example two the seller had no intent to deceive the buyer but was negligent in dealing with the buyer. The first example is one of fraud and the second example is one of innocent misrepresentation. The curious fact is that in each of the two examples the buyer really didn't consent and received something less valuable than what was bargained for.

THE PREAMBLE to this chapter (and the next as well) has to do with the procedural aspect of voidable contracts. The party claiming lack of real consent can assume either an affirmative or negative posture regarding the dispute. If this party chooses to file a lawsuit for rescission or damages the party treated the lack of real consent as a SWORD, but if this party chooses to not perform the contract because it lacks real consent (i.e., while contract is wholly executory, the buyer learns that the seller lied about the mileage and now refuses to buy the car) and issued by the other party, the lack of real consent issue is being treated as a SHIELD. The sword is a metaphor for acting aggressively or affirmatively. The shield is a metaphor for acting defensively. When studying cases in this chapter you should determine if the lack of real consent is being asserted as a sword or shield. If it is relied on by the plaintiff it is being used as a sword. If it is pleaded by the defendant, it is being asserted a shield.

What Are The Reasons that Real Consent Would be Lacking?

There are a host of reasons why real consent would be lacking. Your objective should be to learn each and every one of these reasons and be able to distinguish between the various ones. Here are the reasons why a party might claim that she really didn't consent to the agreement:

She was lied to about the consideration she bargained for and received
The other party misrepresented the facts regarding the consideration she bargained for
She was mistaken about the consideration she bargained for and received
She was forced to enter into the contract
She had implicit trust in the other party to the contract and was unduly influenced/persuaded by him to form a contract
She was in a dire economic situation and entered into the contract under circumstances of economic duress
FRAUD
INNOCENT MISREPRESENTATION
MISTAKE

The above three theories of lack of real consent are in many ways very similar and in others quite different. I suggest that you spend considerable time learning the nuances between fraud, innocent misrepresentation and mistake (both unilateral and bilateral). An excellent way to approach this area is to study the problem cases. Analyze the problem cases with the goal of determining which involve fraud and which involve mistake or innocent misrepresentation. I have provided some vocabulary terms that you should learn in order to facilitate learning the above theories.

fact: something that is capable of proof because it existed in the past or exists presently

opinion: it is merely what a person believes will or will not happen or to be the case and includes beliefs about value

latent: hidden; not something that a reasonable person would either know about or think to ask about

patent: obvious, something that a reasonable person would either know or be negligent in not knowing

active concealment: conduct that is designed to hide a particular condition

innocent nondisclosure: the failure to volunteer information because the person armed with the information forgets to disclose it

fraudulent nondisclosure: the intentional withholding of information with the intent to deceive the other person

material: important enough that the court or jury would conclude that it contributed to a party's decision to form the contract

immaterial: not important enough that it would have influenced the party's decision to enter into the contract

justifiable reliance (under common law): to conduct the type of investigation that a reasonable person would have conducted

justifiable reliance (under modern law): proof that relying party was not irrational in believing the information furnished

unjustifiable reliance:

punitive damages: damages designed to punish the fraudulent party

lay person: an ordinary person without any expertise or special knowledge in a particular area

an expert: a person who has expertise and special knowledge in a particular area

extrinsic: does not involve the bargained for consideration as it is collateral in nature

intrinsic: it is directly related to the bargained for consideration

 

FRAUD

A party behaves fraudulently by intentionally deceiving others. This can be done by lying or by conduct that is intended to create a false impression (turning back the odometer or whitewashing termite infested areas of wood) or by silence that is intended to prevent the other person from realizing the true character of a particular condition (not telling the home buyer that old septic system beneath the house is periodically emitting terrible odors). A party who has behaved fraudulently can be sued for punitive damages.

INNOCENT MISREPRESENTATION

A party has engaged in innocent misrepresentation by negligently or carelessly creating a false impression in others. Seller who is asked about the square footage of a home tells the buyer that the home is 4,500 square feet (when in fact it is 3,800). Seller actually believed the home to be 4,500 sq. ft. because this is what he was told when he bought it. He never had the home measured! His misrepresentation, although innocent, was nonetheless negligent and it caused damages to the buyer. Seller sells his car to buyer forgetting to inform buyer that when driven in - excess of 65 mph - the car suddenly pulls to the left and vibrates considerably. In neither of these examples did the seller intend to mislead the buyer!

MISTAKE

A mistake is not the fault or the result of anything the other party (nonmistaken) to the contract did. A party who is mistaken has been influenced by a third party or has himself misperceived the circumstances. Assume the buyer, while looking through the home, concluded that the home was quite large, at least 4,500 sq. ft (it was only 3,800) and made the purchase believing this to be true. This would be a mistake. It is not fraud because the seller did not lie about anything. It is not innocent misrepresentation because the seller did not misrepresent anything. In fact, there was nothing that the seller said or did to cause the buyer to believe that the house was 4,500 sq. ft.

 

WHAT ARE THE SIMILARITIES BETWEEN FRAUD, INNOCENT MISREPRESENTATION AND MISTAKE?

 

 

WHAT ARE THE DIFFERENCES BETWEEN FRAUD, INNOCENT MISREPRESENTATION AND MISTAKE?

 

 

Subtle Points:

Keep in mind that persons who prove fraud or innocent misrepresentation can avoid their contracts! But what about a person who is unable to prove all of the elements of fraud or innocent misrepresentation? What recourse, if any, is available? Assume that the victim proves all of the elements of innocent misrepresentation except the materiality of the misrepresented fact(s)? By not being able to prove innocent misrepresentation, the victim will not be able to avoid the contract, but will be able to recover damages for breach of contract.

A person who is the victim of a unilateral or mutual mistake will not be able to recover damages because the nonmistaken party has not lied or misrepresented anything. Thus no breach of contract has occurred.

UNDUE INFLUENCE

Undue influence is a question of fact and requires proof of the following:

In ordinary 'arms length' contract relationships there is no special trust placed in one party by the other. Each party is expected to be cautious and diligent in asking about and discovering all pertinent facts relating to the pending transaction. There exists no basis for one party to believe the other will be protective and not take advantage, etc. The opposite is true if there exists a special relationship (attorney-client; patient-physician; real estate broker-client, etc.) When there exists a special relationship it is only normal to be trusting and confident that the party in the superior position will watch out for the party in the inferior position and not take advantage. It is in these situations that the weaker party may be taken advantage of (unduly influenced) by the other party and if so, there is a basis to avoid the contract due the lack of real consent.

Problem Cases

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Chapter 14: Capacity to Contract, pg. 107

Lack of capacity to contract can be based on any one of three theories: Minority; Insanity and Intoxication. If a person lacked capacity when she entered into a contract, and she can prove this, she can avoid the contract. Again, as in Lack of Reality, the victim of lack of capacity may assert this theory as either a sword or a shield. Most of the material in the chapter deals with the topic of minors so this will be our beginning point as well.

Minors have always received special attention and protection from the courts with regard to their contractual obligations and rights. Prior to 1972 an individual was not considered an adult until he or she was 21! The law changed at that time and the age of majority dropped to 18! Thus, at least for the purpose of contract liability, younger persons who were now considered 'adults' would be held responsible for their contractual obligations. The reason for this change was not because over time the evolution of young persons was such that it was decided that 18 year olds functioned in an equivalent way to 21 year olds and should thus be treated accordingly. The change was fostered by the fact that many of our young men were drafted into the armed forces and they were sent overseas (to Vietnam). Many of these young men lost their life in a war that turned out to be anything but popular. The thinking of the time was to lower the voting age to 18 so that they persons could have a voice ( a vote ) as to who was elected to public office. The conventional wisdom was that these persons would now have some control over their own destiny by at least be able to decide who to vote into public office. As it turned out, 18 year olds came to be considered adults for all purposes with the exception of the right to drink alcohol.

The best way to approach the cases that deal with the issue of lack of capacity based on minority is:

  1. First identify which party is the adult and which is the minor
  2. If the minor is the plaintiff, you know the lack of capacity theory is being used as a sword
  3. If the lack of capacity theory is being asserted by a defendant, you know it is being used as a shield

Next, make sure that you view the facts of each case through the eyes of the adult to determine whether any of the theories that would prevent the minor from avoiding the contract are present. These theories are:

  1. The minor lied about her age
  2. The minor bargained for and received a necessity
  3. The minor ratified the contract
  4. A Superior Court approved the contract
  5. The minor intentionally destroyed the subject matter of the contract
  6. A particular statute makes this contract unavoidable

The main point here is that as a rule a minor may avoid his contract unless any one of the above 6 circumstances apply to the particular contract into which the minor entered.

According to some jurisdictions, a minor who lies about his age is behaving in a cunning and sophisticated way (vs. an infantile way) and is thus estopped from being able to avoid the contract. Not all states subscribe to this thinking. California, for one, does not. In California, a minor who lies may still avoid the particular contract but is subject to a lawsuit for fraud by the adult. The rationale for California's view is that lying is adolescent behavior which one would expect from a minor and the minor should still be abbot avoid the contract. The states that will not allow the lying minor to avoid the contract reason that by lying, the minor is estopped from avoiding the contract.

A necessity traditionally was that which the minor needed for subsistence. It included shelter, clothing, medical and dental treatment and in some cases legal representation. The basics, so to speak. Modernly, what is viewed to be a necessity has been somewhat expanded and depends on the lifestyle of the particular minor. Should a minor bargain for and actually receive a necessity, the minor is legally bound to pay for the reasonable value of that received. Be sure you realize that if the contract price is unreasonable then the minor will not have to pay it. So, if a minor sees a dentist and enters into an express contract to pay the dentist $500.00 for dental work and the dentist performs the services competently, the minor will have to pay only what is reasonable (and not the entire amount) if it is excessive. Intoxicated persons as well as insane persons also must pay the reasonable value for necessities actually provided. The reason for this rule is that by requiring payment providers of necessities are more likely to provide them and this will accrue to the benefit of those who are in need of them. Any other approach might discourage people from providing necessities and this could prove detrimental to those who are in need.

Ratification is a concept that applies to circumstances wherein the minor, after reaching majority, by words, conduct, a combination of the two, or silence, manifests that he approves of (ratifies) the contract that he entered into when he was a minor. Since the minor is now an adult and theoretically mature enough to make a well informed decision, he should be bound to the contract. Another way to view ratification is to realize that a minor can disaffirm a contract at anytime while still a minor and within a reasonable period of time after reaching adulthood. What is reasonable is a question of fact.

At 17, Minor enters into K
Minor turns 18
Reasonable time to Disaffirm
Minor Ratifies Contract

Following the above continuum, realize that after the minor turns 18, there is a period of time within which the minor can still avoid the contract ( disaffirm it). However, by waiting too long, the court will conclude that the minor impliedly ratified the contract. Ratification can also be express. After attaining majority minor tells the adult he is keeping the car or writes to the adult and informs him that he likes the computer and wants to upgrade it are both examples of express ratification and will prevent the minor from be able to avoid the contract. What is a reasonable period of time depends on the consideration the minor received pursuant to the contract and how quickly it tends to depreciate. A car, for an example, depreciates rather quickly. So . . . a minor who buys a car and then turns 18, will have a shorter period of time within which to disaffirm than a minor who buys a painting or jewelry.

Frequently a minor and adult will submit their wholly executory contract to a Superior Court and seek the approval from the court for the purpose of protecting the minor. The procedure followed is that the minor and adult submit the wholly executory contract to the court and ask the court to approve it. If the court does approve the contract the minor will be bound by it. This is not an uncommon occurrence. Consider the fact that many situations exist wherein minor enter into very lucrative contracts which no adult would do without the assurance that the contract cannot be broken (avoided). Movie stars, athletes, musicians, etc., are examples of minors who enter into significant contracts.

Minors who intentionally destroy the consideration will not be able to avoid their contracts. This view requires no explanation beyond the obvious. The issue that will sometimes surface is whether the minor has actually intentionally destroyed the object as opposed to neglecting it and allowing it to lapse into a very poor condition. The latter does not constitute intentional destruction however. If the minor gives the consideration to a third person who will not return it, same result. This is not intentional destruction.

There exist statutes (laws) that make certain types of contract unavoidable. Contracts for life insurance, automobile insurance, and contracts for government loans to students are some of the types of contracts that are in this category. Should a minor enter into one of these types of contracts, the minor will not be able to avoid it.

Summary

After identifying both the minor and the adult and determining the sword and shield aspects of the lawsuit, look at the case through the eyes of the adult and determine whether or not any of the above six circumstances (that would make the contract unavoidable) exist. If one of the six does exist the minor will not be able to avoid the contract. If none of the six circumstances is present you must then explore further to determine if the minor has satisfied his obligation with regard to returning the consideration and whatever else the law of the particular jurisdiction requires.

Return The Consideration

All jurisdictions require that the minor must return the consideration to the adult (in whatever condition it is in) to the adult as a condition to being able to avoid the contract. At common law, the minor was not required to do anything beyond returning the consideration to the adult. This is an area where there is much conflict between the states as some place a greater burden on the minor. In some states the minor must also pay the adult for the use of the consideration ("Benefit Rule") and other states require that the minor, in addition to returning the consideration, place the adult in statu quo ante by reimbursing the adult for the use of, depreciation to (including that caused by willful or negligent damage) the consideration.

Mentally Incompetent persons may avoid their contracts provided the mental incapacity was such as to render them incapable of appreciating the nature of the subject matter of the contract and the rights and obligations affected by the contract. This area of the chapter and law present two different fact situations. One such fact situation involves the person who enters into a contract after having been adjudicated mentally insane by a court of law. In this case such person is without the civil right to contract and the agreement is null and void. It makes no difference how rational and sane the person appeared to the other contracting party and it makes no difference how fair the agreement was. Incidentally and curiously, the sane person is charged with constructive notice of the adjudication of incompetency because it is public record.

The second fact situation involves a person who is mentally incompetent and who enters into a contract with a sane person but who has never been adjudged incompetent by a court. What happens here? In order to avoid this contract, the incompetent person's representative must prove that the person was incompetent at the time of the contract and that the sane party either knew this or was negligent in not knowing it. We discussed in class how one goes about proving that the alleged incompetent was indeed incompetent at the time the contract was formed.

Intoxicated persons are also able to avoid their contracts provided the intoxication affected their ability and capacity to form the contract in the first place. Modernly it makes no difference whether the intoxication is voluntary and knowing or involuntary. The old version of this law was that a person who knowingly intoxicated himself could not avoid his contract. That has obviously changed.

Problem Cases

 


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Chapter 15: Illegality, pg. 119

A contract is illegal if it violates the letter of the law or the spirit of the law. If a statute (law) proscribes certain conduct and a contract bargains for the proscribed conduct, then the contract is illegal. However, a contract can also be ruled illegal if it violates public policy. Public policy involves that which affects public morals and welfare. In other words, a contract that bargains for activity that offends or negatively affects public morals and or welfare is illegal. Although this definition lacks precision, you should be able to get a feeling for the concept of illegality as you proceed through the text and cases in this chapter.

This chapter contains several new vocabulary words and terms that you must know.

A contract that on its face bargains for tortious or criminal conduct is illegal. A contract that on its face bargains for legal consideration but that would result in tortious or criminal wrongdoing is also illegal.

Contracts that contain exculpatory clauses are closely scrutinized by the courts. Although exculpatory clauses are not illegal per se, they are not particularly favored. These clauses are often used by corporations and business people to shift the loss away from themselves in the event their negligent conduct results in injury to person, property or reputation. The prudent approach would be to have liability insurance, but to do this becomes very expensive and sometimes prohibitive after submitting one or more claims. Thus by drafting agreements that contain exculpatory clauses it is the hope of the person or entity using such clause that the prospective injured party will not ever bother to sue if injured.

The following is an overview of what you should know about these clauses. No court will enforce an exculpatory clause that bargains for an agreement to not sue for injuries caused by gross negligence or intentional wrongdoing. No court will enforce an exculpatory clause that bargains for release for ordinary negligence if the conduct producing the harm involves gross negligence or intentional wrongdoing. In other words, to be enforceable, the clause must bargain for release for ordinary negligence and the conduct that produces the harm must not be more wrongful than ordinary negligence.

An exculpatory clause that is used by a person or entity providing a service that affects the public interest is illegal. The legislature is simply unwilling to allow certain categories of persons and or companies to lower their standard of performance under contracts and not pay the consequences for so doing (which is exactly what exculpatory clauses accomplish, if enforced). Doctors, lawyers, accountants, architects are a few of the examples of services that affect the public interest. From time to time we all need the service of one or more of these individuals and we would lose whatever trust and confidence we have for these providers if they were allowed to hide behind exculpatory clauses. Banks, common carriers (airlines, trains, public transportation) are additional examples of service providers who are not legally permitted to enforce exculpatory clauses when sued by persons injured as a result of negligence.

The placement of the exculpatory clause (in the body of the contract) and the language used to exculpate seems to require a slightly different standard than other contract content. The courts realize that when agreeing to not sue for injuries and or damage caused by another's negligence, a very important right is being given up. Accordingly, the law requires that there be fairness in how and where these clauses are put into the contract. The language must be clear and unambiguous and the clause is required to appear in a relatively obvious location in the document (adjacent to where party agreeing to exculpate is to sign his or her name). Click here!

Contracts containing covenants against competition are relatively common in the business world, but present the potential problem of illegality because the right to earn a living is such a basic and necessary one in our society. These covenants are found in two types of contracts, employment contracts and contracts for the sale of a business. The covenant (regardless of the type of contract) must be ancillary to the particular contract. A covenant against competition that is collateral to a contract of employment or one for the sale of a business is illegal. Ancillary means that the clause must be a part of a contract of employment (part of the bargained for consideration) or part of a contract for the sale of a business (part of the bargained for consideration) or it is illegal. If Employer hires employee and bargains for employee's promise to not perform after terminating the employment then the clause would be ancillary, If Seller sells his business to Buyer and promises to not compete against Buyer then the clause is ancillary. Contrast these examples to the following: X approaches Y who is operating a business in Santa Monica. X offers Y 1 million to close down his business and not to compete with anyone in the future in this type of business. This promise to not compete is NOT ancillary to an employment contract or one involving the sale of a business. X did not purchase Y's business.

Courts look at three factors when assessing the legality of covenants against competition; Whether the covenant adversely affects members of the public; Whether the covenant is reasonable as to space and time; and whether the promisee has a protectible interest. Spend time on this area because it can be somewhat tricky. The courts are concerned about unnecessarily depriving a person of the right to earn a living. The promisee of the covenant must prove that the geographical area protected was one wherein the promisee was doing business and that the time component was reasonable as well. The term of art used by the courts is that the covenant must be reasonable as to time and space. Assume that employee promises that he will not compete against promisee in "any of the five adjoining counties for a period of 2 years." If the promisee only performed business in three of the five adjoining counties, the covenant would be unreasonable as to space. If the seller promised to not compete for a period of "ten years and within a five mile radius" the court could well conclude that the buyer should not need ten years to establish a foothold in the area and that the seller is being deprived the right to earn a livelihood. Of course, these are questions of fact.

In some instances, a covenant will have an adverse impact on members of the public even though it is reasonable as to time and space insofar as the promisee is concerned. If the covenant does adversely affect members of the public it will be ruled illegal. In one case an orthopedic surgeon promises to not practice orthopedic medicine for 2 years after leaving the clinic that hired him and within a radius of five miles. After he left the clinic it did not immediately hire a replacement. The nearest orthopedic physician was located a great distance away. The physician left the clinic and he immediately set up a practice about three miles from the clinic. The clinic sued to enforce the promise and the court ruled the covenant illegal.

Regulatory vs. Revenue licenses present another potential issue of illegality in contract law. The government regulates who may enter certain areas of service and issues a license to those considered qualified. Schooling and passing an entrance level examination (state bar exam, exam for accountants, etc.) are two of the prerequisites to earning such a license. There is generally a background investigation that is conducted as well. A person who contracts to provide the type of service that requires a regulatory license must have one in order to enforce the contract. In fact, to perform such a service without the license is a crime! A revenue license or business license is one that is issued to a business for a particular calendar year. The purpose of a revenue license is to raise revenue for the community in which the business is being conducted. If a business is for some reason without a business license this will not make a contract between a patron and the business illegal. The contract is still enforceable. You might have a fact situation involving a doctor who has not paid his annual dues or a lawyer who has not paid his annual dues and is without a license for that particular year. This does not amount to not having a regulatory license. This amounts to not having a revenue raising license. The fees paid for annual licenses are used by the American Medical Association or the State Bar Association to pay the expenses incurred in running the association. The doctor and the lawyer having graduated medical and law school and having passed their state boards earn the right to practice their respective professions and enforce contracts relating thereto.

Remember that contracts that bargain for a person to influence a public official must not bargain for undue influence of the public official or be performed in a manner that involves the undue influence of the public official. Bribery would of course be an example of undue influence as would offering other favors not condoned by society. It is not illegal however to bargain for a person to attempt to persuade or dissuade a public official to vote one way or another.

Another issue presented in this chapter pertains to the issue of contracts that are only partially illegal and whether the particular contract is divisible. If the contract is ruled divisible the illegal part will be declared unenforceable and the legal part will be enforced. This cannot happen, of course, if the underlying intent of the parties is eclipsed by the court enforcing only the legal part.

What if the contract bargains for illegal activity and one of the parties, before the illegal activity occurs, seeks to rescind the contract? Will the court come to the assistance of a party who attempts this?

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Chapter 16: Writing, pg. 144

 

The Statute of Frauds (1), was passed because the courts were cynical about the honesty of the parties to contract lawsuits. The courts feared that the parties would commit perjury to prove their respective positions regarding the contract lawsuit. The Statute of Frauds was passed in 1677 to make it more difficult for a party to a contract lawsuit to lie and 'defraud' the court. The statute focused on the more important contracts of that time and it required sufficient written evidence of the particular contract. The written evidence had to be signed by the party refusing to perform the contract (the party to be charged). The existence of sufficient written evidence signed by the party to be charged would make the testimony of the party who was attempting to prove the existence of a contract more believable and the testimony of the party trying to disprove the existence of a contract less believable. The statute is a law that pertains to evidence required to prove certain types of contracts. The statute makes any of the particular contracts unenforceable if there exists no written evidence or insufficient written evidence. The law in various states differs as to the effect of a violation of the statute. In some states, a contract that violates the statute is void. In other states, a contract that violates the statute is unenforceable only if the other party raises the issue in a timely fashion.

If the contract does not fall under the Statute of Frauds it need not comply with it. Listed below are several phrases, all of which mean the same thing.

If the contract does fall under the Statute of Frauds it must comply with its requirements and the only way to satisfy the statute is by proving the existence of sufficient written evidence. Listed below are several phrases, all of which mean the same thing.

Approach to Statute of Frauds Problems

The defendant will be the party who raises the Statute of Frauds defense. The defendant will allege that the particular contract (which the plaintiff is suing to enforce) is unenforceable because it violates the statute. It will be the defendant's burden to prove that the contract does in fact come under the statute. If the defendant succeeds in proving this, the burden will shift to the plaintiff to prove that the contract satisfies the statute (there exists sufficient written evidence) or that the facts of the case permit the plaintiff to circumvent (get around) the statute. The plaintiff will be able to get around the statute by proving either; estoppel, a judicial admission or part performance. However, if the defendant fails to prove that the contract falls within the statute, then the case is treated just like any other contract lawsuit: the plaintiff will prevail if the evidence introduced proves that a contract was formed.

An acronym that may help you to remember the types of contracts covered by the statute is MY LEGS

1.MARRIAGE
2. YEAR&1 DAY
3. LAND
4. EXECUTOR'S PROM
5. GOODS
6. SURETY K

1. A CONTRACT in consideration for the act of Marriage

2. A CONTRACT - per its terms - that is impossible to perform within one year and one day from date it is formed

3. A CONTRACT for the transfer of an interest in real estate (land); leases over a year; hypothecations

4. A CONTRACT wherein an executor promises to pay decedent's debt from his own funds

5. A CONTRACT for the sale of goods for over $500.00

6. A COLLATERAL CONTRACT (surety contract) containing a promise to answer for the debt of another

 

THE PART PERFORMANCE DOCTRINE

A CONTRACT in consideration for the act of Marriage None
A CONTRACT impossible to perform within 1 year + 1 day Full performance by one side
A CONTRACT for transfer of interest in real estate Possession(with permission),part payment, subimprovements
A CONTRACT by executor to pay decedent's debts None
A CONTRACT for sale of goods for over $500 Part payment;part delivery;commencement of specially made prod.
A CONTRACT to pay debt or default of another(collateral None

 

Summary Of Statute of Frauds Issues:

The Statute of Frauds is a law that requires sufficient written evidence in order to be able to enforce certain types of contracts. Without sufficient written evidence the contract is unenforceable if the contract is covered by the statute. Proof of estoppel, a judicial admission or part performance will enable a party to get around the statute if there exists insufficient written evidence.

The Parol Evidence Doctrine (PED)

The PED is a law that limits parol evidence under certain circumstances. The PED does not apply to a contract lawsuit unless the parties to the alleged contract signed an all-inclusive merged (see synonyms below) written contract AND one of the parties is trying to introduce parole evidence (of written or oral discussion) that occurred before the written contract was signed or at the time (contemporaneous) the written contract was being signed. Moreover, the PED prohibits only the type of evidence that either contradicts, adds to or varies from the written contract. In spite of the existence of a merged written agreement, evidence will be admitted if it is introduced to:

Below, I have set forth the synonyms for the type of written contract that will trigger the PED.

How Will I Know Whether A Particular Written Contract is Completely Integrated?

If a written contract contains a merger clause (integration clause) then it is safe to assume that the parties intended it to be merged. If the contract does not contain a merger clause then it will become a question of fact as whether it is or is not merged. The more formal the written contract is, the greater the likelihood that it is merged. Pre-printed contracts of adhesion are merged.

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Chapter 17: Rights Of Third Parties, pg. 167

 

This chapter is about the rights of third parties relating to a contract that was formed between two other parties. The term privity of contract speaks to a direct contract relationship between contracting parties (offeror-offeree) and is a concept that we have been studying throughout the course of this semester. There are three theories that create rights in third parties: assignments, delegations and third party beneficiary contracts.(1) Your objective should be to learn how to recognize the difference between these three theories and, of course, be able to recognize one from the other. You will also be expected to learn the vocabulary terms (names given to the parties of each theory) related to each theory.

An Assignment: Assignor, Assignee & Obligor

A Delegation: Delegator, Delegatee & Obligee

Third Party Beneficiary Contract: Promisor, Promisee, Third Party Beneficiary, Intended Beneficiary, Creditor Beneficiary, Donee Beneficiary, Mixed Beneficiary & An Incidental Beneficiary

Points Of Importance

Remember that a third party will realize no greater contract rights or burdens that those bargained for by the original parties to the contract. Also note that if there exist infirmities with the contract (it is unenforceable, voidable, etc.), the third party will be faced with the same infirmities. The concept at work is that the third party rights are derivative (derived from the underlying contract).

It is extremely important that you remain clear about the existence of both rights and duties in a contract and that rights are assigned and that duties are delegated! It is also important that you recognize that once obligated to perform a contract duty (or duties), the obligor must do so unless released by the obligee ( via a novation) or unless the duty is satisfactorily performed by a third party delegatee. Also consider that an assignment of rights has absolutely no bearing on the assignor's duty to perform. It is unaffected by the assignment!

Assignments (1) occur as the result of a present transfer of an existing contract right. The assignor is the party transferring the right, the assignee is the person receiving the transferred right, and the obligor is the party to the original contract who always had the duty to perform the duty correlating to the assigned right. Thus if Seller contracted to make and deliver goods to Buyer and Buyer assigned the right to the goods to X, the seller would remain obligated to make and deliver the goods, but to X and not Buyer. The seller (obligor) had always been under the contract duty to make and deliver the goods!

There are several requirements regarding assignments:

Special Problems Re: Assignments:

Consideration is not required between assignors and assignees

In each assignment, the assignor impliedly warrants to the assignee that a valid assignable right actually exists and that the assignor has neither done anything to impair it nor will do anything to impair it. The effect of this law of warranty is that an assignee whose right is defeated (who cannot enforce the assignment against the obligor) has a valid claim against the assignor for breach of the implied warranty. For example, if A assigns his rights to B and then to C and then to D, only one of the assignees will be able to enforce the assignment against the obligor. The other two assignees will be able to bring a lawsuit against A (the assignor) for breach of the implied warranty.

After receiving notice of the assignment the obligor performs to the assignor instead of the assignee. Once an assignment has been made, the assignee steps into the shoes of the assignor and is the only one with the right. The assignor, by operation of law, becomes a trustee and has two choices: to return the consideration to the obligor or to pass the consideration on to the assignee. Failure to do one of these things would subject the assignor (now trustee) to a lawsuit by both the obligor and assignee.

In the case of successive assignments there are two views regarding the assignees rights. You should know both; first to receive assignment is the one with the right; first to notify obligor is the one with the right!

Delegations involve the transfer of a contract duty or contract duties. The transferor is the delegator and the transferee is the delegatee. The obligee is the party to the original contract who was owed the duty from the beginning. Thus if P agrees to build O a home and later attempts to delegate this obligation to X, the right to have the home built was originally and is still owed to O. O is therefore the obligee! Here are the issues that can surface when a delegation is attempted:

Your ability to correctly analyze the above possibilities is necessary in order for you to adequately understand the process known as delegation of duties! I have set forth the relevant considerations below.

Third Party Beneficiary Contracts

Third party beneficiary contracts when formed result in a benefit to a third party or third parties. The benefited third party (beneficiary) may be able to successfully sue the promisor for breach of this type of contract, but only if able to prove that it was the intent of either the promisor or promisee to confer a benefit. If this is proven then the beneficiary has standing to sue and can recover for breach of said agreement. Those beneficiaries who are unintended have no standing to sue and are called incidental beneficiaries. (1)

How can you determine whether a particular beneficiary is Intended or Incidental?

Look at the wording of the contract to determine if the person or class of persons is mentioned

If the contract was verbal, establish via discovery if it was the intent of either the promisee or promisor to confer a benefit to this party

Determine if the promisee was under a legal obligation to the beneficiary (if so, an inference can be drawn that the promisee intended to satisfy this obligation)

Can the promisor and promisee rescind or modify their third party beneficiary contract?

There can be no modification of third party beneficiary contracts once the rights of the particular beneficiary vest! There are different rules that pertain to this legal phenomenon and you should be familiar with all of them.

What if the beneficiary is not specifically named in the contract but a class of persons (prisoners, motorists, accredited emergency room hospitals, physicians, etc.) are named?

By proving that one is a member of an identifiable class, a person qualifies as an intended beneficiary and has standing to sue!

Problem Cases

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Chapter 18: Performance & Remedies, pg. 184

There are many circumstances that can result in a discharge of a contractual obligation. When discharged from a contractual obligation the party no longer has any legal liability for not performing under the contract. Below is a list of the various circumstances that discharge a party from his or her contractual obligations. The list is lengthy. The trick to learning this chapter is in figuring out how and by whom the particular doctrine is raised.

Death Insanity Commercial Impracticability
Commercial Frustration Impossibility (Illness) Rescission
Material Alteration Anticipatory Breach Failure of Conditions
Material Breach Bankruptcy Statute Of Limitations
Supervening Illegality Accord & Satisfaction

I have listed, above, the circumstances that if proven will result in a discharge of contract obligations. You should be able to define each of the above examples and identify the primary or problem case(s) in which a particular example was relevant to the outcome of the case. I have highlighted two (2) of the above in red because I believe that they warrant more focus and concentration than the others. To recite the definitions for each of the above theories would be repetitious. The text provides ample definitions and explanations and so does the course outline. Moreover, class lecture also covered these theories in depth!

What is a Breach Of Contract?

A breach is a broken promise, and only if it is material in nature, can it affect a discharge of contract obligations. An immaterial breach of contract will not discharge obligations under the contract, but will entitle the victim of the breach to recover compensatory damages caused by the breach. The party who breached the agreement (in a minor way) will be entitled to recover under the contract less the money that is required to compensate the victim of the breach. If a party commits a material breach of contract, the non breaching party will be excused from performance under the contract and the party who breached will be relegated to the recovery of quantum meruit (reasonable value for any benefits conferred).

How Can A Party Who Is Accused Of A Material Breach Prove Otherwise?

The Doctrine Of Substantial Performance is what the party accused of a material breach will try to prove. This doctrine consists of several elements - each one of which must be proven - and will enable a party who can prove all of the elements to recover under the contract. It should be obvious to you that proving 'substantial performance' establishes that the breach was only minor.

I feel it worthwhile to list below the elements of this doctrine because it is so essential to an understanding of this chapter!

The breaching party acted in good faith (did not intentionally breach the contract) and conducted himself honestly
The task was complex and it would be unfair to deny recovery under the contract in spite of the breach
A far greater percentage of the work was done correctly than that which was not
The non breaching party can be adequately compensated in damages

i.e.

Builder and Home Owner enter into contract. Builder agrees to build according to plans and specifications and Owner promises to pay $150,000.00. Builder completes job and requests payment. Owner refuses to pay anything. Builder sues. Owner alleges that Builder breached the contract and that the breach was material and that as a result, he is discharged from the contract. Builder alleges that he substantially performed his obligations under the contract and is entitled to recover the $150,000.00 less any monetary loss caused by the minor breaches that occurred. If builder can prove the above elements of the Substantial Performance Doctrine, the builder will be able to recover under the contract less compensatory damages to Home Owner. If Builder is unable to prove all of the elements of the Substantial Performance Doctrine, then he will not be able to recover anything under the contract. He might be able to recover in quasi contract if he can prove that unjust enrichment would otherwise result.

Failure Of Conditions (FOC)

Contract promises are either absolute (I agree to buy your car for $10,000.00) or conditional (I agree to buy your car for $10,000.00 provided I am satisfied with the findings of my mechanic). A conditional promise does not ripen into a contract obligation unless and until the condition is met. In the above hypothetical - involving the car and the mechanic's findings - the buyer will not fall under any duty to buy the car unless and until he receives satisfactory findings from his mechanic. If the mechanic returns an unfavorable report and the buyer refuses to purchase the car, he will have a complete defense if sued for breach of contract by the seller. His defense will be Failure Of Conditions.

How Do We Know If Contract Contains Conditional or Absolute Promises?

The language used in the contract will tip you off. The type of language that spawns conditions is as follows: "on condition that", "provide", "only if", "subject to". "so long as", "if", etc. If this language appears in the agreement then the condition is an express condition. If the contract is silent regarding conditions, the court can still conclude that there existed an implied condition because it is most logical under the circumstances.

i.e. Home Seller agrees to sell her home to Buyer for $200,000.00. Buyer and Seller agree that Buyer will pay $20,000.00 down and that Seller will loan the balance to Buyer and that Buyer must repay loan in 15 years at an interest rate of 8% and provided Buyer is is promoted to Vice President of his company within the next 30 days. Assume that Buyer never receives the promotion and notifies Seller that he is not going through with the deal. If Seller sued for Breach of Contract the Buyer's defense would be FOC (failure of the express condition precedent that he be promoted with 30 days). Buyer would prevail.

Express Condition of Personal Satisfaction (involving mechanical fitness)
Express Condition of Personal Satisfaction (involving subjective taste)
Implied Condition Precedent
Express Condition of Timely Performance (Time Is Of The Essence)

Above I have set forth the different types of conditions. You should be able to define these and certainly recognize them in the
cases you study. You should also recognize that a condition can be waived by the party it was intended to protect, or it can be disregarded by the court (not enforced) if the court believes it would be unfair to apply it! Only the party who was intended to be protected by the condition can assert its failure to avoid the contract. However, it is this same party who can choose to waive the condition.

I.e. In the above hypothetical (wherein Buyer promised to buy the car provided that his mechanic provided him with a satisfactory report), the Buyer upon receiving an unsatisfactory report could still choose to go ahead with the transaction and purchase the car. The Seller would not assert this FOC as an excuse for refusing to sell it.

Exercise:

It might be helpful for you to consider the underlying hypotheticals with regard to the various available defenses to a breach of contract lawsuit.

Assume A sues B for breach and contract and B asserts the defense of Commercial Frustration: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of Material Alteration of the contract: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of Supervening Illegality: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of Impossibility (based on illness): What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of Anticipatory Breach: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of an Accord & Satisfaction K: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of Commercial Impracticability: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of a Rescission K: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of Failure Of Conditions: What must B prove to prevail?

Assume A sues B for breach and contract and B asserts the defense of Statute of Limitations: What must B prove to prevail?

The Law Of Damages & Remedies

In a lawsuit for breach of contract, the plaintiff will attempt to obtain monetary compensation for the direct loss caused by the defendant's breach. These damages are called compensatory damages. In some instances a plaintiff will also attempt to recover indirect loss caused by the breach. The plaintiff would seek consequential damages in this situation. The plaintiff's lawsuit may be an attempt to recover the damages that the parties stipulated to in advance. These are called liquidated damages. The lawsuit may involve an allegation by plaintiff that the defendant acted fraudulently or in bad faith. Punitive damages would be the plaintiff's objective under these circumstances. In no situation would a plaintiff initiate a lawsuit to recover nominal damages. Nominal damages are what a court or trier of fact awards if the plaintiff proves the alleged breach of contract but fails to prove that it caused any monetary loss.

The remedy of specific performance is what a plaintiff suing for breach of contract would seek if the remedy at law is inadequate! The remedy at law for monetary compensation is inadequate when the facts of the case are such that monetary compensation is inadequate. It is inadequate if the bargained for consideration is unique and cannot be obtained elsewhere and no damage amount can be established. A valuable painting, a home, a broken covenant against competition, would all be examples of circumstances that would require a court to order the remedy of specific performance (injunctive relief). When granting injunctive relief the court merely issues an order directing the party to stop engaging in certain conduct or to perform the contract promise. Examples would be: The Court issues the following order,"Defendant you are hereby ordered to stop competing against X forthwith. In your agreement with Seller you promised that you would not compete for 2 years and within a 3 mile radius. I am ordering you to honor that promise", or "Seller, this court is ordering you to transfer to Buyer forthwith the Van Gogh painting that was the subject of your contract." You and Buyer entered into a K for the sale and purchase of this particular piece of art and Buyer has no adequate remedy at law for monetary relief. So . . .fork it over."

Mitigation of Damages: Remember that when suing for breach of contract and damages caused thereby, there must be proof (where relevant) that the plaintiff attempted in good faith to mitigate damages.

Problem cases

 


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