Ch 18 _ 19 - Contracts in Writing and Third-Party Rights

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Ch 18 _ 19 - Contracts in Writing and Third-Party Rights Powered By Docstoc
					      Chapters 18 & 19
Contracts in Writing & Third-Party Rights
On January 2, Wabash Construction Company, a general contractor, executed a
written contract with Anderson Brick, Inc., a subcontractor. The contract relates to a
major “strip mall” building project in Morgantown, and Wabash faces a deadline of
October 31 in its contract with The Mackie Consortium, L.L.C., the owners of the new
mall. In the agreement between Wabash and Anderson, the parties stipulate that “time
is of the essence” in terms of performance of the bricklaying work, and that the
deadline for Anderson’s completion of the bricklaying work is July 15. There is also a
“liquidated damages” clause in the contract between Wabash and Anderson,
indicating that if the work is not completed by July 15, Anderson will pay $2,000 in
damages for every day the bricklaying is not completed beyond July 15.

Anderson does not complete the bricklaying work by July 15. In fact, the project is not
finished until August 30, and Wabash now claims liquidated damages from Anderson in
the amount of $92,000 (representing 46 days beyond the July 15 deadline, multiplied
by $2,000 per day.) Anderson refuses to pay the $92,000, and Wabash sues.

At trial, Anderson’s attorney seeks to introduce the following evidence: 1) the
testimony of Henry Anderson, Anderson’s owner, who is willing to testify under oath that
at the time of the signing of the contract, Wabash’s general manager, Fred Stein, said
“Pay no attention to the July 15 deadline in the contract; if you need more time, all you
have to do is ask;” and 2) a crumpled index card, purportedly in Fred Stein’s
handwriting, indicating “no ‘hard and fast’ deadline on Anderson brick work.”

Should the trial court judge admit the foregoing evidence?

        Statute of Frauds
o Rule of state law requiring certain types of
  contract to be in writing in order to be

Purpose of Statute of Frauds
o Ease contractual negotiations by
  requiring sufficient, reliable evidence
  to prove existence and specific terms
  of contract

o Prevent unreliable, oral evidence
  from interfering with contractual

o Prevent parties from entering into
  contracts with which they do not

Contracts Covered by Statute of Frauds
     o Certain types of contracts must be signed
       by the party against whom enforcement is
       sought to be enforceable.
     o To be enforceable, the following types of
       contracts must be in writing and signed:
       o Contracts that cannot be performed within one
         year from the date of their making
       o Promises made in consideration of marriage
         (Prenuptial agreements)
       o Secondary Obligations: Contracts to pay the
         debt/default of another party
       o Real estate contracts
       o Contracts for the sale of goods valued at $500 or

Exceptions to Statute of Frauds Writing
  o Admission: Statement made in court, under
    oath, or at some state during a legal
    proceeding in which defendant admits that
    oral contract existed (even though contract
    was originally required to be in writing)
  o Partial Performance: Action of both parties
    demonstrate existence of contract
  o Promissory Estoppel: Legal enforcement of
    otherwise unenforceable contract, due to
    party’s detrimental reliance on contract
  o Miscellaneous exceptions recognized by
    Uniform Commercial Code (UCC):
    Examples—Oral contracts between
    merchants, oral contracts for customized
    (“specially manufactured”) goods

Statute of Frauds Writing Requirements
    o Common Law--Written contract must clearly indicate:
       o Parties to contract
       o Subject matter/purpose of agreement
       o Consideration given by both parties
       o Significant terms (Price, quantity, etc.)
       o Signature of party plaintiff seeks to hold responsible
         under contract (i.e., signature of defendant)

    o Uniform Commercial Code (UCC)—Written contract for sale
      of goods must include:
       o Quantity of goods
       o Signature of defendant

     Parol Evidence Rule
o Common law rule stating that oral
  evidence of agreement made before
  or contemporaneously with written
  agreement is inadmissible when
  parties intended to have written
  agreement be complete and final
  version of agreement
o Purpose: Lends stability, predictability
  and integrity to written contracts

Exceptions to Parol Evidence Rule
  o Contracts that are subsequently
  o Contracts conditioned on orally
    agreed-upon terms
  o Contracts that are not final, as they
    are part written and part oral
  o Contracts with ambiguous terms
  o Incomplete contracts
  o Contracts with obvious typographical
  o Voidable or void contracts
  o Evidence of prior dealings or usage of

    Integrated Contracts
o Merger Clause: Written contracts
  within statute of frauds intended to be
  complete and final representation of
  parties’ agreement

o General Rule: Integrated contracts
  prevent admissibility of parol

Statute of Frauds & Parol Evidence Rule
    o Parol evidence rule says written
      contract cannot be contradicted by
      evidence of any prior agreement or
      contemporaneous oral agreement;
      PER’s exceptions include ambiguity,
      course of dealing, mistake, validity of
      contract in dispute
    o PER is substantive rule of contract
       o What constitutes a legally binding
       o How do we know what the agreement is?

Electronic Contract/Signature
o Under certain conditions, both federal
  and state laws permit contracts to be
  formed electronically and allow
  electronic signatures to satisfy statute
  of frauds’ “writing” and “signature”
o Examples – 15 U.S.C. § 7001 et seq.;
  California Civil Code § 1633.1 et seq.

              Third-Party Rights Hypothetical
o Barbara Hastings has no children of her own, but she does have a beloved
  niece named Ellen Laughridge. Attentive to the future financial needs of Ellen,
  Barbara secures a $500,000 life insurance contract from Chameleon
  Insurance Company, listing Ellen as the sole beneficiary. Barbara has every
  intention to inform Ellen of her new life insurance policy, but “life gets in the
  way,” and she neglects to do so.
   Hastings dies on January 15, 2005. As part of her estate distribution, Ellen
   receives a chest-of-drawers from her dear aunt. On August 29, 2007, while
   rearranging her clothing in the chest-of-drawers, Ellen comes upon a secret
   compartment. In the secret compartment is an original copy of the life
   insurance contract. Ellen is overjoyed to see her name listed as beneficiary,
   and she contacts Chameleon Insurance Company immediately.
   Upon review of the policy, Chameleon denies coverage. Chameleon’s
   claims representative points to Section 15(b) of the policy, which specifically
   requires notification of the insured’s death no later than one year after death.
   It has been over two years and seven months since Barbara Hastings died.
   Will Ellen recover the $500,000 in insurance proceeds? Is it ethical for an
   insurance company to deny a claim on the basis of a “technicality?”

o Obligor: Contractual party who owes
  duty to other party in privity of contract
   o Party who agreed to do something for the
     other party
o Obligee: Contractual party owed duty
  from other party in privity of contract
   o Party who agreed to receive something from
     the other party
o Assignment: Transfer of rights under a
  contract to a third party
   o Assignor: Party to contract who transfers
     his/her rights to a third party
   o Assignee: Party (not in privity of contract)
     who receives transfer of rights to a contract

       Third Party Rights
o Only the Parties to a contract have
  rights and liabilities under the
o Exceptions:
  o Assignment or Delegation.
  o Third party beneficiary contract.


Transfer of rights in a bilateral contract to
  3rd party.

   Obligee/         Original Contract Formed          Obligor


                                     Duties Owed
                                   After Assignment


o Rights cannot be assigned:
  o If the assignment is contrary to statute.
     o Prohibited by law/public policy
  o When a contract is personal in nature.
  o Assignment materially changes rights or duties of
     o Rights would increase obligor’s risks/duties
  o If the contract stipulates the right cannot be
o Valid notice must be given to all parties.

o Delegation: Transfer of duty under a
  contract to a third party

o Delegator: Party to a contract who
  transfers his/her duty to a third party

o Delegatee: Party (not in privity of
  contract) who receives transfer of
  duty to a contract

     Third-Party Beneficiary Contracts
o Intended Beneficiary: Third party to contract whom contracting
  parties intended to benefit directly from contract. Intended
  beneficiaries can sue to enforce contract obligations
o Promisor: Party to contract who made promise that benefits third
o Promisee: Party to contract who owes something to promisor in
  exchange for promise made to third-party beneficiary
o Creditor beneficiary. Third party who benefits from contract in
  which promisor agrees to pay promisee’s debt
o Donee beneficiary: Third party who benefits from contract in which
  promisor agrees to give a gift to third party
o Vesting: Maturing of rights, such that a party can legally act on the
o Incidental Beneficiary: Third party who unintentionally gains benefit
  from contract between other parties. Contracting parties do not
  intend to benefit incidental beneficiary. Incidental beneficiaries
  cannot sue to enforce contract obligations


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