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					Chapter 13


13.1       Lawful subject Matter
13.1.1      Introduction
We all have the freedom to deal or refuse to deal with anyone else. However,
just as some limitations must be placed on our freedom of speech and free-
dom of religion to protect the public, limitations are also imposed on ones
right to contract. The necessity that any contract have a lawful purpose
is fundamental in the law. Courts treat contracts based on illegal subject
matter as void. Illegal subject matter is classified into three categories:

   1. Contrary to statute,

   2. Contrary to common law, or

   3. Contrary to public policy

    Ignorance by the parties as to what constitutes illegality cannot make
valid a contract that is void because of an illegality.

13.1.2      Intent
If both parties intend that their contract be performed illegally, it usually will
not be enforced by the courts. This is true even though actual performance
was lawful. If only one of the parties intends to perform illegally, the courts
will usually uphold the contract.

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   A contract to drive a truck, for example, may be performed either ac-
cording to law or in violation of the law. If there is no evidence of an intent
by both parties to perform the contract illegally, the truck driving contract
would be valid.
   Another extreme example is where an action to collect for the sale of a
gun, where the seller knows the buyer intends to commit murder with the
gun, would not be successful. If the seller had no knowledge of the intended
use of the gun and complied with the law in all other respects in the sale,
the contract of sale would be valid and enforceable.

13.1.3     Contracts Contrary to Statute or Common Law
If the subject matter of a contract is contrary to an existing statute or the
common law, the contract is usually void. The contract may be legally void
if it conflicts with the implied meaning of the statute or the intent of the
legislature where the law was passed.

Law Passage Following Contract Formation
If a continuing contract, one in which performance will take place over some
length of time, is formed and later a law is passed making such performance
unlawful, the entire contract is not necessarily rendered void. Performance of
the contract subsequent to the passage of the statute cannot be recovered for
in the courts, but the contract can be enforced as to the parties performance
prior to the passage of the statute. For example, after the United States
entered World War II, Congress passed several regulations outlawing the
sale of various items needed for the war effort. In a case resulting from these
restrictions, where a new car sales agency had leased premises for the sole
purpose of the display and sale of new cars, it was held that because of
the government restrictions on the sale of new cars, the lease contract was
terminated. By way of historical note, you will notice that you cannot get a
1942, 1943, 1944 automobile. The government restricted their manufacture
and sale.

Type of Statute
In considering the legality of a contracts subject matter, there is a distinction
between the laws passed for protection of the public and laws that have as
13.1. LAWFUL SUBJECT MATTER                                                  193

their primary purpose the raising of revenue. If a contract violates a statute
passed for the protection of the public, it is treated as void and unenforceable.
If the contract violates a revenue statute, it is usually enforceable. An exam-
ple is found in state licensing laws, such as those for business establishments
and professionals. If the purpose of the licensing law is to protect the pub-
lic and safeguard the lives, health, property and welfare of citizens, such as
licensing of professional engineers, a contract for professional services made
by one who is not licensed in the state will not be enforced by the courts.
If the primary purpose of the law is to collect revenue, such as gasoline tax
laws, the courts usually enforce the contract and impose a penalty on the

Harm to Third Person
If a third person would be harmed in connection with the performance of a
contract, the subject matter of the contract probably would be held unlaw-
ful and not enforceable. Where the contract, for example, is an inducement
to commit a crime or a tort, but the commission of such crime or tort is
not necessarily required to perform the contract, the courts will examine the
strength of the inducement and the general nature of the contract. Life in-
surance may be an inducement to murder; fire insurance an inducement to
commit arson. For this reason, an insurable interest often must be shown
before insurance can be obtained. A contract in the performance of which a
party to the contract must breach an existing contract is usually unenforce-
able in the courts.

Contracts in Restraint of Trade
The U.S. economy is based on the principles of free enterprise and freedom of
competition. Contracts that tend to create a monopoly or maintain price lev-
els artificially, or in other ways restrain trade may be unlawful. The penalty
for violation of these statutes is up to triple the amount of damages shown,
plus payment of the other sides attorneys fees and court costs. Such agree-
ments include those by two competitors to fix prices, or to divide markets.
In this area of law, which is also called Antitrust or Fair Trade Practices,
other business practices are not so clear cut. For example, is it unlawful for
a computer software manufacturer to require his customers to also buy main-
tenance services for the software. If so, are both the maintenance services
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agreement and the underlying software license agreement unenforceable? The
law is not always clear in these areas. It depends on whether other service
providers would be eased out of business, thus lessening competition in a
relevant segment of the economy.
    There are many employment agreements in which the employee agrees
that he or she will not compete against their former employer once they leave
such employment. Such noncompetition clauses, or covenants not to com-
pete, are considered restraints of trade and were strictly construed against
enforcement by the common law. In some states, such covenants are pro-
hibited in certain employment relationships. Generally however, such non-
competition provisions are enforceable to the extent necessary to protect
the legitimate business interests of the employer, such as involving the dis-
semination of trade secrets or the maintenance of goodwill. Under recent
decisions, the provisions of a noncompete clause must be reasonable as to
the restrictions on territory, scope of the former employees activity, and the
time period of the restrictions. In such reasonable contracts, the provisions
will be upheld and enforced, since you cannot force an employee not to be
able to use the skills and knowledge learned over previous employments, so
long as the new employment does not involve the divulgence or use of trade
secrets learned from a former employer.
    Usually, contracts involving the sale of a business typically state that the
seller agrees not to enter into the same type of business in the same market
area for a given period of time. Again, if these restrictions about type of
business, market area and time are all reasonable, the restrictions probably
would be upheld in court. It is where these restrictions are unreasonable that
they are held to be in violation of the law.
    Engineers, among others, are often asked to sign preprinted employment
agreements that detail their obligations as employees. These agreements
contain, among other things, noncompetition clauses, provisions dealing with
the employers duty regarding confidentiality, and provisions regarding the
ownership of inventions. Such contracts normally provide that all inventions
of an employee which relate to the employers business belong to the employer.
Some forms have even indicated that inventions made by an employee within
a year or so after the employment relationship ends are presumed to belong
to the employer. Some states have statutes limiting the enforceability of such
provisions, and in other states such provisions are considered unenforceable
as contrary to public policy. In other states however such contracts are
13.1. LAWFUL SUBJECT MATTER                                               195

In some states, where usurious interest is charged, the courts will not aid
in collection of principal or interest. Today, with credit providers charging
upwards of 22%, 23%, it is not clear what usury is today. Some states have
statutes limiting the amount of interest that can be charged on the loan of

Wagering Contracts
In most states, wagering contracts are illegal. Thus, it usually is up to the
courts to determine whether a particular contract is a legitimate business
transaction or a wager. The test used by courts in making this determina-
tion centers around the creation of the risk involved. By way of example, in
a business contract calling for future delivery of a commodity for the pay-
ment of a present price, risk of loss resulting from a change in price of the
commodity between the present and the delivery date is assumed by at least
one of the parties. Has a risk been created for the purpose of assuming it?
The courts answer no, providing that future delivery is actually intended.

Other Types of Violation
A contract to withhold evidence in a court case is probably unlawful. So
are contracts that tend to promote litigation. This is one reason why contin-
gency fees for lawyers or others connected with a trial are sometimes frowned
upon. If the would-be plaintiff stands to lose nothing in a court case, this
is an incentive to undertake the litigation. However, as you well know, the
personal injury litigation area is usually embarked upon using contingency
fee contracts.
    A large category of unlawful contracts are those that either restrain mar-
riage or promise divorce. The courts generally do everything within their
power to promote matrimony and discourage its disillusion.
    Contracts that are immoral in subject matter or tend to promote im-
morality will sometimes be declared by the courts to be unlawful and against
public policy. The problem inherent in these types of cases is the determi-
nation of whose moral standards are to be applied. Some might argue today
that a contract by a doctor to perform an abortion would be a contract
against public policy. However, the Supreme Court has ruled on that issue
and at present, such contracts would not be against public policy.
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13.1.4     Contracts Contrary to Public Policy
In addition to the requirement that contracts conform to the written and
unwritten laws of the community, the courts also require conformity to pub-
lic policy. Public policy is rather difficult to define because of its continuous
change. For example, contracts in the past restricting the sale of real es-
tate and houses to people of color were enforceable up until 1949. In 1949,
public policy changed in a Supreme Court decision, and such contracts ever
since have been unenforceable. This example indicates that public policy
must change to conform to changing ideas and mores, as well as to changing
technology. Just as city planning, for example, has had to change to incor-
porate clover leafs and jet transportation, the moral standards supporting
public policy also change as time goes on. For example, I am old enough to
remember that years ago there was something in the public culture known
as foul language. My personal feeling is that that there is no such thing as
foul language today.
    Contracts that are held contrary to public policy are those that have
enforced and encouraged injury to society in some way. Thus, courts have
held that a contract may be unenforceable because of an evil tendency found
to be present in the contract. Again, different persons definition of evil
tendency can lead to various interpretations of this particular definition.
    An “evil tendencies” type of contract is one that causes corruption of a
public figure. Such a contract might be subject to censure in the courts,
such as seen in the various bribery trials of public officials. However, this
brings up the rather sensitive problem of lobbying. Where does bribery end
and lobbying begin? The ongoing controversy regarding election reform and
the lobbying industry abounding in the federal and state capitols today raise
issues, in my judgment, about the theory of evil tendency and public policy
in our legal system The text gives the following three examples of lobbying
efforts that should be considered:
  1. The end sought to be accomplished by the lobbying must be a lawful
     objective one which, if accomplished, would improve the public welfare,
     and at least, do it no harm.
  2. The means used must be above reproach. Generally, a lobbyist must
     be registered and the lobbying practices used must not involve threats
     or bribery or secret deals.
13.1. LAWFUL SUBJECT MATTER                                                197

  3. Courts generally treat contingent fees based on the passage of legisla-
     tion as being against public policy.

    A recent example from my own observation and in the newspapers will
set forth what public policy is. The leader of the majority party in the Senate
was extolling the HMO industry to donate money to his party in an effort to
defeat legislation that had been introduced in the House of Representatives
restricting the HMO industry. The legislation was introduced by another
member of his same party. I leave that to the students own reflection, and I
will not comment further on this particular situation.
    Assume, for example, that Green is hired as a consultant for an engineer-
ing design job with payment to depend on his ability to obtain the acceptance
of the design by political officials. Green, being human, might be tempted
to go beyond what is considered right and ethical to obtain the fee. In the
courts eyes, contingent fees are an inducement to the use of sinister and cor-
rupt means of gaining the desired objective. However, contingency fees are
allowed for attorneys in certain cases, with the idea that more lawyers will
make their services available to persons who otherwise could not afford legal
fees, such as accident victims. However, my personal experience indicates
that where other attorneys have taken cases on contingent fees based upon
the outcome and an award of damages, these cases are difficult to settle and
compromise since the attorney wants to make his maximum fee.

Fraud or Deception
Obviously any contract that practices fraud or deception on the third person
is against public policy. Where one agrees to pay another a thousand dollars
if that other will recommend the first party for a particular job as a nuclear
engineer, without knowing anything of the first partys qualifications for the
job, that contract would be against public policy. In contrast, payment for
recommendation from an employment agency will be quite enforceable. The
employment agency is in the business of recommending people for jobs for
a fee. Those who hire based on individual recommendations have a right to
assume that such recommendations are given freely and without prejudice.

Breach of Trust or Confidence
Contracts that breach a trust or a confidential relationship are against public
policy and will not be supported in a court. For example, a five percent
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kickback agreement for the purchase of goods could not be enforced in court.

Sources of Public Policy

Public policy is found in the federal and state constitutions, in statutes, in
judicial decisions, and in the decisions and practices of government agencies.
Lacking all of these, a court must depend upon its own sense of moral duty
and justice for its decisions. This brings to mind the statement of one of
the Supreme Court Justices indicating that he cannot define pornography,
however he knows what it is when he sees it.

13.1.5     Effect of Illegality on Contracts

Court actions based on agreements that are illegal, immoral, against public
policy, intended to promote the commission of a crime, or are forbidden by
statute probably will be unsuccessful. The example given is that of a member
of a gang of thieves, on being cheated out of a share of the loot, went into
court to try to force a split. The court would contend that the agreement
amongst the thieves to split the loot is void, being based on a crime. The
public interest is best served if the court does everything in its power to
discourage the crime. This, of course, brings into mind the classic movie
with Humphrey Bogart and John Houston titled, The Treasure of the Sierra
Madre. This involved an agreement to split loot, however by the end of the
movie the stolen gold dust was carried on the arms of the wind, leading to
a satisfactory conclusion before the parties could enter a court. As a matter
of futher interest, I recommend the movie.
    The term “public interest”, which is the determining factor in such cases,
is based on the courts opinion as what would be the greatest aid to the public.
Thus, you will see in many judicial decisions a court going out of its way to
determine what would benefit the public most. Of course, there are many
decisions that seem to take the public interest and do it a disservice in favor
of some individual or corporate interest. That gets into the political nature
of the law, and something beyond the scope of this particular course.
13.2. STATUTE OF FRAUDS                                                      199

13.2       Statute of frauds
13.2.1     Introduction
An oral contract is usually as enforceable as a written one, but a written
contract has at least one major advantage. Its terms are easier to ascer-
tain since it is very hard to prove in court what one person said to another
sometime ago, particularly when the two parties are now on opposite sides
of a contract dispute, and each of the individuals contradicts what the other
party has said. While it is true that an oral contract may be as enforceable
as a written one, it is sound common sense to put in writing any contract of
more than a trivial nature. Discussed now are those contracts which must
be in writing.

13.2.2     The English Statute of Frauds
The Fourth Section. Its time for us to delve into history again. In the year
1677 the English Statute of Frauds was passed as an Act for the prevention of
frauds and perjuries with the objective to relieve the courts of the necessity of
considering certain types of contracts unless they were in writing and signed
by the party against whom they were to be enforced. According to Section
IV of the Statute, the only writing required was the minimum needed to
establish the material provisions of the agreement. These criteria were that
the writing had to accomplish the following:

  1. Reasonably identify the subject matter of the contract;

  2. Indicate that a contract has been made between the parties;

  3. State the essential terms of the contract; and

  4. Be signed by or on behalf of the party to be charged.

    The writing was not required to be all in one document, but if not, there
must be connection between the various documents which was apparent from
the documents themselves. Only the person sought to be charged with a con-
tractual duty has to have signed the agreement. The signature could consist
of initials, be rubber-stamped in ink or pencil, or anything else intended by
the party to constitute identification and assent to the agreement. Also, the
signature could appear anywhere on the document.
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    Section IV of the English Statute of Frauds has become law in all of the
states of the United States today with only minor modifications. According
to the Fourth Section, no action shall be brought on certain types of contracts
unless the agreement that is the basis for the action is in writing and signed
by the defendant or the defendants agent. The following types of contracts
are subject to the written requirement:

  1. Promises of an executor or administrator of an estate to pay the debts
     of the deceased from the executors or administrators own estate.

  2. Promises to act as a surety for the debt of another.

  3. Promises based on marriage as a consideration.

  4. Promises involving real property and houses and buildings.

  5. Promises that cannot be performed within a year.

The Seventeenth Section
The Seventeenth Section of the English Statute of Frauds is also in effect
in all states of the United States. This section sets forth the requirements
for an enforceable contract having to do with the sale of goods, wares or
merchandise. The section states that unless one of the following three actions
is taken to secure such a transaction where the consideration is at least 10
pounds Sterling, the contract will be unenforceable at law:
    Part of the goods, wares or merchandise must be accepted by the buyer.
The buyer must pay something in earnest towards the cost of the goods.
Some note or memorandum of the agreement must be made and signed. The
10-pound Sterling minimum has been changed to $500 U.S. by each of the
states with the adoption of the Uniform Commercial Code in each state.

Promises Requiring More Than a Year To Perform
The one-year time period starts to run from the time of making of the agree-
ment. For example, an oral contract to work for another for a year starting
two days from now would be unenforceable under the Statute of Frauds. If
a contract is made today, time will start to run on that contract tomorrow,
since most courts hold that parts of a day do not count in the running of
13.2. STATUTE OF FRAUDS                                                    201

    An example sets forth how this provision of the Statute of Frauds is en-
forced. Suppose White promises orally to pay Black $80,000 if Black will
build a certain house for White. This is a service contract, not one for real
property. No time limit is set on the construction. The fact that actual
construction took place over a two-year period would not bring the contract
under the Statute of Frauds. If the contract could be completed within one
year no matter how improbable this may be, an oral contract for its perfor-
mance is binding. By the same reasoning, a contract to work for someone
“for life” or to support someone “for life” is capable of being performed in
one year and need not be in writing.
    Take the situation where an oral contract cannot be fully performed
within a year, but if one of the parties nonetheless fully performs, is that
party unable to enforce the contract against the other. The majority of
courts treat full performance by a party as removing the contract from the
effect of the one year requirement of the Statute of Frauds, even though
the party took more than a year to perform. While most courts would en-
force such a contract, some courts still hold that one partys full performance
does not remove the contract from the written requirement of the Statute
of Frauds. This is also an example of how the law is different from state to
    In situations where the statute of frauds applies and there has been at
least a partial performance, most courts allow the party who has partially
performed to recover the value of the services already rendered. This is be-
cause courts will refuse to allow the Statute of Frauds to be used as a defense
by someone who uses it to secure an unfair advantage and thus defraud the
other party to the agreement.

Sales of Goods
A large majority of the states have adopted the Uniform Commercial Code
governing the sale of goods within those states. The drafters of the UCC
adopted the rule of the Seventeenth Section of the English Statute of Frauds
in slightly altered wording.
    If a transaction involves goods of a value great enough to be governed by
the Statute of Frauds, an oral agreement will be valid only if:

  1. Some of the goods are accepted by the buyer, or
  2. The buyer pays part of the purchase price in earnest, or
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  3. The buyer signs a note or memorandum as to the terms of the sale, or

  4. The party to be charged with the contract formerly admits that a
     contract was made, or

  5. The goods are to be specially made, or not suitable for sale in the ordi-
     nary course of the sellers business, and the seller has taken substantial
     steps to begin performance of the contract.

    In the case of a contract for the purchase of goods not now in existence
but to be made by the seller, theres a question whether this is a contract for
services to be performed and not for goods. If the contract is primarily for
services rather than goods, the Statute of Frauds under the UCC will not
apply. Moreover, an oral sales contract is enforceable if the seller has begun
making the goods or has made commitments for procuring the raw materials
to make the goods.

Promises of Executors or Administrators
An executor is a person appointed in a will by a testator to enforce the terms
of the will. An administrator serves a somewhat similar function where the
deceased died without a will. The administrator is appointed by a court to
collect the assets of the estate of the deceased, pay the estates debts, and
distribute the remaining estate to the heirs, those persons entitled to it by
    If the executor of an estate agrees to pay the debts of the deceased from
the executors own estate, the executor is acting as a surety for the debt
of another. Thus the executor is saying if the estate of the deceased is
insufficient to pay you, I will pay the debt. These contracts have to be in

Promises to Act as Surety
A promise to act as a surety for anothers debts is quite similar to an ex-
ecutors promise to pay the debts of the deceased. The requirement that
a contract to answer for the debt default or miscarriage of another person
must be in writing covers all types of guaranty and surety contracts. Lending
institutions frequently require either collateral or a responsible co-signer as
13.2. STATUTE OF FRAUDS                                                   203

security for a loan. Such contracts again must be in writing. In an indem-
nity agreement, one person agrees to pay anothers debts to third persons.
For example, your insurance company agrees to pay your debts to persons
injured in an automobile accident as a result of your negligence.

Promises in Consideration of Marriage
Marriage is said to be the highest consideration known under the law. The
Statute of Frauds applies particularly to situations in which the agreement to
marry is based on consideration such as a marriage settlement. If Mr. White
agreed to give Black $10,000 in consideration of Blacks marriage to Whites
daughter, the contract would have to be in writing to be enforceable. This
does not mean that when a man and woman simply agree to get married with
neither giving up anything but their unmarried status, such an agreement
will have to be in writing. Oral promises to marry are actionable under the
Common Law if one of the parties attempts to breach the promise to marry
the other.

Real Property Transactions
Transactions involving “lands, tenements and hereditaments”, that is real
property, must be in writing to be enforceable at law. Real property is
anciently defined as consisting of land and those things permanently attached
to the land, or immovables. Personal property, then, includes removables or
things not firmly attached to the land. A house or building is considered as
real property.
    Minerals in the soil, water rights and trees on the land are usually con-
sidered by the courts as real property requiring a writing for their sale. An
exception exists in dealing with the natural fruits of the land. When the con-
tract contemplates immediate severance or removal of these things, an oral
contract to such effect will be enforceable. Thus, the sale by the land owner
of a stand of timber to be cut and sold by the purchaser, with the owner to
receive payments, is an enforceable oral contract if cutting is to begin imme-
diately. However if the cutting is to begin 10 months from now, the contract
is unenforceable because the trees are considered as being firmly attached to
the land, and the contract must be writing. Also, an oral contract to sell
the fruit in an orchard as it ripens would be enforceable under the Statute
of Frauds. Also, an oral lease for a year or less is valid but a lease must be
204                                           CHAPTER 13. CONTRACTS

in writing if it is to run longer than an year.

The Effect of the Statute of Frauds

In certain states, contracts are void unless in compliance with the Statute
of Frauds. In most states, however, a contract failing to comply with the
statute is merely voidable, meaning that the parties may void the contract
if they so desire. In these states, the Statute of Frauds operates as a defense
to the enforcement of the contract. However if the Statute of Frauds is not
raised as a defense, the court will enforce the contract.
    When one party has completed performance under an oral contract, that
party has probably enriched the other party. Thus a court of equity may
recognize the obligation created by such performance and enforce payment
by the other party under a quasi-contract theory of recovery. Generally when
the result will be inequitable or grossly unfair, the courts will not allow the
Statute of Frauds to stand as a defense.

13.3       Performance, excuse of performance and
13.3.1     Introduction
We now begin dealing with the exceptional situations where a party has
bargained away more than intended, or where performance became more
difficult than expected. Public attention is usually called to these exceptional
cases; they are publicized in court cases and in newspaper articles. Keep in
mind, however, that these cases are the exception to the general rule and that
the vast majority of contracts are performed satisfactorily and with benefit
to both parties. For example, each time you walk into the store, purchase
something and pay for it and walk out, you have successfully performed a
    In this portion of the lecture, we shall see how parties are held to their
bargains, what constitutes performance of a contract, or constitutes a real
offer to perform. This takes into account the fact that the law will discharge
a persons obligations or, in effect, excuse that persons performance under
certain circumstances.

13.3.2     Performance
In theory, one to whom a contractual obligation is owed has a right to pre-
cise performance of the obligation by the other party. Anything short of that
performance constitutes a breach of the agreement. Obviously the nature of
the obligation undertaken determines the required performance. For exam-
ple, when a stated amount of money is owed, payment of a lesser amount
will not satisfy the obligation. Take those situations, however, where a con-
tract requires the construction of an office building where exact performance
may not always occur and cannot seriously be expected. This is particularly
true where research and development is to be part of the performance of the
contract, as is the case in many engineering contracts.

13.3.3     Conditions
Many contracts are written so that the parties intend that performance by
one party will be followed by performance by the other party. For exam-
ple, one may contract to have a machine built and installed at a plant with
payments to be made when the installation is complete and the machine
is successfully operating. A condition such as the installation and success-
ful operation would constitute a condition precedent in the contract, where
payment is not due until that condition precedent is satisfied. One type of
condition precedent is obtaining an architects certificate upon the completion
of a building.
    A frequent source of confusion is the distinction between a condition
precedent and a condition subsequent. A condition subsequent is a condition
that, when it occurs, ends an existing contract. For example, the insurance
policy states that if the house is ever left vacant for a period of 30 days or
more, the insurance will no longer be in effect. Such conditional event is
defined as a condition subsequent.

13.3.4     Architects Approval
In those contracts where an architects approval is required as a condition
precedent to the owners duty to pay the contractor, the courts usually enforce
this type of contract. However, we must recognize that architects are human
also, and are capable of human error. For example, the architect may have
become deceased, or become insane at the time the certificate is required, or
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the architect may unreasonably or fraudulently refuse to issue the certificate.
Under these extreme circumstances, the court ordinarily dispenses with the
requirement of the architects certificate. If there is any sound reason for the
architects objections though, the court will probably enforce the requirement.

13.3.5     Satisfactory Performance
The purchaser of the performance under the contract may include a provision
that the performance must be satisfactory to the personal taste of the buyer.
In contracts like these, the person who is paid to perform may have to con-
tinue performing until the personal taste of the buyer is satisfied. Of course,
if the buyer is never satisfied, the courts may determine that the contract is
illusory and void the contract.
    The nature of the contract may also be such that even though satisfaction
of the buyer is specified, the contract requires mechanical or operational
suitability. If performance is such that it would satisfy a reasonable person,
the court will then deem the conditions satisfied despite the arguments of the
purchaser that they personally were not satisfied. Thus, where one agrees to
install an air-conditioning system for another to the others satisfaction, and
after the installation if the purchaser is not satisfied, the installer may still
be able to collect by proving that the air-conditioning system will do that
which a reasonable person would expect it to do.

13.3.6     Completion Date
Where performance of a contract is to take place by a certain date, and
performance extends beyond that date, any of several situations can result.
If the time for performance is not important, there may not even be a breach
of the contract. Thus, many contracts include provisions for liquidated, or
specific, damages, sometimes called penalty clauses that state an amount
to be paid for each days delay in performance beyond the date set forth
in the contract. If the amount specified is a reasonable estimate of the
difficult-to-calculate damages to be caused by delay, the provision is usually
enforced. However, if the specified amount of liquidated damages is excessive,
the courts will hold that the clause is really a penalty clause and will refuse
to enforce it. If there is no liquidated damage clause in the contract and
performance runs beyond the time agreed on, the party aggrieved can sue
the other party for damages due to the delay. Ordinarily nothing but an

unreasonably late performance gives the buyer sufficient grounds to terminate
the contract and pay nothing. Where the performance is not unreasonable,
the buyer must accept the performance but at a price reduced by the damages
   In certain circumstances, the time of performance of a contract is critical.
Thus, you will see a clause in many contracts to the effect that “time is of
the essence”. In such instances, courts generally will allow termination of
the contract for late performance.
   This completion date provision is usually in construction contracts, and
that is why you usually see highway construction projects being worked on
day and night towards the end of the contract period to complete the job
within the time specified.

13.3.7     Substantial Performance
Many building contracts, or contracts where machinery or equipment is to be
built and installed, are performed in a manner that deviates from the exact
terms of the agreement. Obviously, if variations from specifications are not
allowed, few projects could be undertaken and fewer yet would ever be paid
for. If the result accomplished under the contract performance approximates
closely the results specified, the contractor can still recover the contract price
since the performance has been substantially the same as that specified.
    In cases of gross inaccuracies, or substitutions that do not fit specifica-
tions, the claim is no longer substantial performance. Just where the line
is to be drawn between substantial performance and an outright breach is a
question of fact and is usually submitted to a jury, where experts testify as
to whether or not the final product will work for its intended purpose.
    The extent of damages in such instances is usually determined by the
value of the performances rendered compared with the value of the perfor-
mance as specified, or the cost of additional work to complete the perfor-
mance properly. If the performer under the contract willfully abandons the
performance or the work is unreasonably poor, then there has been a breach
of the contract and not substantial performance.

13.3.8     Impossibility of Performance
When anyone undertakes a contractual obligation, that person assumes cer-
tain risks. However, one can hedge against such risks in various ways. Con-
208                                          CHAPTER 13. CONTRACTS

tract clauses can state that if certain things occur, you will be excused from
performance. A contractor can add enough money to the price to cover
contingencies. You can purchase insurance against the risks you assume.
However, you cannot cover liability for your performance if the public is in-
jured by your performance. For example, injuries resulting from the collapse
of a public building caused by the contractors negligence could allow recovery
against the contractor by either the injured person or the insurance company.
Presumably the contractor will have its own liability insurance to cover such
claims. There is no way that one party to a contract can excuse itself from
liability due to its own negligence. Such clauses are prohibited as a matter
of public policy.

Death or Illness

Usually the death or illness of a party to a contract does not discharge that
contract. That persons estate or those appointed to act for that person must
take over and complete the obligations. Only where a contract is such that
personal services are involved, such as a performer, will death or incapacity
due to an illness serve as a lawful excuse for non-performance. By way of
example, the death or illness or insanity of a freelance consulting engineer
would discharge the engineers remaining obligations to its clients.

Destruction of an Essential to the Contract

This means that something is destroyed without which the contract cannot
be performed. Suppose for example that a construction company is hired
to build an addition to a plant, but before the work can begin, the plant is
destroyed by fire without the fault of either party. The obligation to perform
is terminated. If construction had begun, however, and work had been half
finished, the obligation to complete the structure would still be ended by
the fire. However, the construction company could collect for the work com-
pleted, in addition to any materials that had been accepted. However, if the
contract had been for the construction of a building by itself, not an addi-
tion to an existing structure, and if a fire destroyed the construction project
when it was half finished with no one at fault, the construction companys
obligation would not be ended, and the contractor would have to rebuild and
complete the project.
13.4. PREVENTION OF PERFORMANCE                                            209

Unexpected Hardship
On new contracts, the parties run the risk that conditions may not remain
as they were when the contract is entered into, and that conditions also
may not be as they seem. Material price increases or wage increases usually
cut deeply into the profit margin of a contract. If the cause of hardship is
anything the contractor reasonably could have anticipated, courts will not
relieve the contractor of his duties. Where the difficulties are such that no
one reasonably could have anticipated them, the court will probably relieve
the burden or lighten the load on the contractor.

Commercial Frustration
This results when a contract is made to take advantage of some future event
not controlled by either party. The event is then called off or cancelled and
as a result the purpose of the contract is said to have been frustrated. In
this case, the courts would probably allow the parties to void the contract.

13.4      Prevention of performance
Each contract implies that the parties will allow the other to perform his or
her obligations. If one party prevents or stifles the other partys performance
of the contract, then that party will discharge the other partys obligation.
The interfering party also has breached the contract and may be sued for

13.5      Waiver
A waiver consists of a voluntary giving up or relinquishment of a right to
which one is legally entitled. The person must have intended to give up the
right. If a machine contracted for varies significantly from the description
in the contract, the recipient has a right to refuse to accept the machine.
However, with knowledge of the differences involved, the purchaser agrees to
accept the machine for a slightly lower price, and then keeps the machine
and uses it, they have waived their right to return the machine and get one
according to specifications. In a personal vain, several years ago I was selling
a car at its 10 year anniversary, and the purchaser asked whether he could
210                                           CHAPTER 13. CONTRACTS

take the car to a garage and have it inspected. I agreed. Upon returning, the
purchaser indicated that the car had a cracked engine block of which I was
unaware. I then asked the purchaser whether he still wanted to purchase the
car. He said yes he did, and I sold it to him for a 25

13.6       Agreement
13.6.1     Renunciation
In a contractual situation, where there are no rights of a third party involved,
the parties to the contract may discharge their contract by mutual agreement
without performance in several ways. The parties may agree not to be bound
by the terms of the original agreement, where they may make a new contract
agreement discharging the old one. Both of the parties may ignore their
rights under the contract, each going about their respective business in such
a manner that a waiver of performance may be implied from their actions.
The release of one party constitutes a consideration for the release of the

13.6.2     Accord and Satisfaction
This occurs when a party agrees to accept a substitute performance for the
one to which that party was entitled. This is the “settlement out of court”
that one frequently hears about in connection with both contract, tort and
other cases. The term “accord” refers to a separate agreement substituted
for the original one, and “satisfaction” occurs when the conditions of that
accord have been met.

13.6.3     Novation
A novation replaces one of the parties to a contract, and all the parties to
the contract must agree to it. A common example of a novation occurs
when a person buys a house or a car from another, substituting himself
or herself as a mortgagor, and agreeing to make the loan payments to the
lending institution. Usually the consent by the lending institution to the
substitution of parties is required.
13.7. TENDER OF PERFORMANCE                                                 211

13.6.4     Arbitration
In many state and federal court actions it is possible to substitute a procedure
known as arbitration for a form of court action. In such instances, a dispute
is submitted to an impartial umpire or board of umpires whose decision on
the matter is final and binding. Arbitration is used by the courts today as a
means of relieving crowded court dockets, and many of the court rules set up
the procedure to give arbitration decisions almost the same force as a court
    One of the main advantages of arbitration is that the disputing parties
decide who the person is to act as a judge and jury. They can if they desire
select someone who has a specialized knowledge in the field involved, and
some consider that this often results in a more equitable decision than a
judge and jury might render in court. The other side of that coin is that you
may want someone who knows nothing about the subject matter in question
so that the lawyer can educate the person making the decision in the way
that would be most beneficial to your case. Additional advantages of the
use of arbitration stem from the speed of the procedure and the cost savings
involved. Arbitration can afford an immediate solution, and if the costs are
controlled, a cost savings will benefit.
    An ancillary to arbitration is the use of mediation to resolve a dispute,
where a third party is brought in as a referee to try to move the parties
towards a settlement position that they can both agree upon. The mediators
function is merely to enhance a settlement of the dispute. If the mediation
is not successful, the parties then continue on their way to court, or if they
decide, through arbitration. I personally have acted as a mediator recently
in a matter and to be quite honest with you I believe the parties were further
away from settlement at the end than when I started the process. However,
that was due to outside circumstances and I cannot take the blame for that
myself. As the cost of litigation and dispute resolution increases in our so-
ciety, the popularity of arbitration and mediation as a means of resolving
disputes has increased considerably.

13.7       Tender of performance
The tender of performance under an agreement, if refused, could discharge
the obligations of the party tendering performance. A lawful tender of per-
212                                          CHAPTER 13. CONTRACTS

formance consists of the following:

  1. The party offering to perform must be ready, willing and able to per-
     form the obligation.

  2. The offer to perform must be made in a reasonable manner at the
     proper time and place according to the contract; and

  3. The tender must be unconditional.

    There is one notable exception to the rule by which a tender of perfor-
mance discharges an obligation. If the tender is an offer to pay a debt that is
due and payable in money, the debt is not discharged by refusal of the pay-
ment. However, there are two important effects: (1) the accrual of interest
is stopped, and (2) any liens used to secure the debt are discharged.
    If a debt is payable in money, and an offer is made to pay with something
else, such as a check, the creditor has no duty to accept the check. If the
offer to pay is made before maturity of the debt, the creditor also need not
accept payment. This would occur in situations where there is a substantial
interest payment to be made the longer the debt is in existence. Thus, in
mortgage agreements, you usually find a penalty clause for prepayment of
the mortgage because the bank is then deprived of interest over the length
of the remaining portion of the mortgage.

13.8      Anticipatory breach
A contract may be breached before the time the performance has arrived. If
the party who is to perform the contract notifies the other party that they
cannot or will not perform when the time comes, that party is said to have
repudiated the contract. This constitutes an anticipatory repudiation of the
contract giving the other party several choices of action:

  1. The non-repudiating party may accept the repudiation and immedi-
     ately sue the other party for whatever damages may have been caused.

  2. The non-repudiating party may treat the repudiation as inoperative,
     await performance, and if there is no performance hold the breaching
     party responsible for any resulting damages.
13.8. ANTICIPATORY BREACH                                                   213

  3. The non-repudiating party may accept the repudiation and obtain per-
     formance from someone else if it is possible to do so.

   Anticipatory repudiation does not apply to the payment of a debt. Al-
though a debtor may notify a creditor that the debt will not be paid when
due, the creditor must wait until the duty to pay has actually been breached
before taking action.

13.8.1     By Operation of Law
Laws and rules have been promulgated to provide for the discharge of a
contract as a matter of law. These are alterations of the contract, the Statute
of Limitations, and bankruptcy.

Alteration of the Contract
If a contract is intentionally altered by one of the parties without the consent
of the other, the obligations of the other parties under the contract could be
discharged. A party cannot be held to the others later changes in the contract
terms if that party never consented to the changes.
    When one party materially alters a written contract without the oth-
ers consent, the contract is rendered unenforceable. However, if the non-
consenting party later finds out about the alteration and then continues to
treat the contract as if it were in force, then the alteration may be said to
have been ratified and accepted. If the alteration is ratified, the contract will
be enforceable even by the party who made the alteration. For example, if
one pays off a debt in scrip, rather than legal tender, if the scrip is accepted,
then the contract is presumed to have been ratified and accepted.

The Statute of Limitations
Each state has adopted a law that limits the time during which a lawsuit
can be brought for breach of contract. Many of the states specify a certain
length of time for oral contracts, normally two years, a longer time for writ-
ten contracts, sometimes as much as five years, and still a longer time for
contracts under seal, sometimes 20 years. The State of Florida specifies four
years for oral contracts and five years for written contracts. A party who
has a right of action on a contract must take such action within the time
limits stated in the Statute of Limitations otherwise the party will lose their
214                                           CHAPTER 13. CONTRACTS

right to take such action. The time is figured from the date the cause of
action accrued, which is usually when the contract was breached. However,
there is the possibility of renewal of the time period whenever the debt is
acknowledged, such as by partial payment. Under most statutes, time does
not continue to run while the person who has breached the contract is outside
the state.
    Another situation under the Statute of Limitations is that reacknowledg-
ment by the debtor of a debt discharged in bankruptcy serves to reinstate its
legal life despite the discharge.

When a person owes more than that person can pay, should the law step in
to help, or leave that person to fend for himself or herself? This is a matter
of public policy. Should one creditor be allowed to receive payment for that
creditors entire debt at the expense of other creditors?
    These questions, as you may understand, have plagued society for many,
many centuries. Thus, it is not surprising that the United States Constitution
includes a provision giving Congress the power to establish “uniform laws on
the subject of bankruptcies throughout the United States”. Recall from your
history courses that debt was the greatest single cause of imprisonment at
the time of the American Revolution. The inability to pay ones debt was a
prison offense. The concept of forgiving a debtors obligations and allowing
the debtor to begin again with a clean slate is somewhat a recent innovation
in the law. Bankruptcy proceedings for the propose of paying off creditors
are not new, but it is only recently that the debtor could receive a discharge
of the debtors obligations in a bankruptcy action.
    Three federal bankruptcy laws were initially passed and repealed, after
very short lives. A major Bankruptcy Act was passed in 1898, and 80 years
later it was replaced by the Bankruptcy Reform Act of 1978, which is the
present law. This law has two main purposes: (1) to pay off to the greatest
reasonable extent the obligations of the debtor to the debtors creditors, either
by selling off the assets of the debtor or by continuing the operation of a
business or by devoting a portion of wages for that purpose; (2) to discharge
an honest debtor from future liability on those obligations.
    The legal machinery enacted to carry out these functions is quite lengthy
and complicated, and to be honest goes well beyond the scope of this partic-
ular course. If you are ever faced with a bankruptcy-type situation, it will
13.8. ANTICIPATORY BREACH                                                 215

be more than wise to seek the services of one skilled in bankruptcy law to
initially give your advice, and second, to ensure appropriate action based
upon that advice.
    In the realm of patent law, a patent license usually includes a provision
that the license will be cancelled upon the bankruptcy of the licensee. How-
ever, when the licensee declares bankruptcy, the bankruptcy court asserts
a strong jurisdiction over all the assets of the bankrupt licensee. Instead
of canceling the license agreement, that license may be sold or transferred
to a creditor or to someone else who pays valuable consideration for that
license. Thus, when entering into a license agreement under a patent, the
patent owner must realize that in the case of bankruptcy of the licensee,
that license may be purchased by the licensors largest competitor. This has
become a major problem lately in the law, and patent attorneys are seeking
various ways to handle that situation. Because of the relatively strong powers
of the bankruptcy court, it is difficult to include a clause in a contract that
would prevent that license agreement from being sold to a creditor or other
bidder in a bankruptcy proceeding who happens to be a major competitor
of the licensor.
216                                          CHAPTER 13. CONTRACTS

13.9      Assignment
Answer each question in one, two or three paragraphs at the most.

  1. Black, an engineer, agrees to act as an expert witness for White in a
     patent lawsuit. In return, White agrees to pay Black a $50,000.00 fee
     plus expenses for his expert witness services, including an examina-
     tion of the patent in suit, the alleged infringing device, and additional
     “prior art” material. Black is also to prepare a written report of his
     conclusions regarding patent infringement.
      Is the contract lawful or not? Explain your conclusion. Assume Black,
      in the above example, agrees to receive $50,000.00 if White wins, but
      only his expense if White loses. Does this change your answer? Explain
      your conclusion.

  2. Grey orally agrees with White to construct a garage on Whites prop-
     erty for $5,000.00. The garage is satisfactorily completed by Grey, but
     White refuses to pay, alleging the garage is an addition to real property,
     and must be in writing to be enforceable, pursuant to the Statute of
     Frauds. Can Grey collect? Explain your answer.

  3. Read the case of Diversified Environments v. Olivetti, at pages 145-149
     of the text. How could Diversified have prevented its computer disaster
     while still obtaining a computer system that worked?

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