Benno Contract Outline II

XI. Consideration – In general means something of value that the parties are exchanging. Some value being exchanged in a “bargain for” transaction. A. Elements 1. The promisee (typically the offeree or the obligee) must suffer a legal detriment (or someone suffers detriment on behalf of the promise) ; 2. The detriment must induce the promise; 3. The promise must induce the detriment. i. Legal Detriment – Where the promisee is doing something that they are not legally required to do, or refrain from doing something that they are legally privileged to do. Detriment can be from 3 rd party. B. Quantum Meriut – Even if you do not have a contract with someone you can still get what you deserve. C. Gift v. Contract 1. Pure gift is not enforceable 2. When what seems like a gift is validated by small detriment, $1 for instance, the second element comes into question. Up to jury to decide if there was valid consideration. D. Surrender of valid claim as detriment 1. Majority and modern view – Need (1) a good faith belief, subjectively, that this was a valid claim and (2) a reasonable basis for support at the time. 2. Traditional minority -- The surrender of a claim that ends up being invalid could never be consideration in the first place. 3. Another modern view – Either a subjective good faith belief; OR a reasonable basis for support 4. Small minority – Only that the claimant had a good faith belief E. Option Contracts 1. Typically offers looking toward a bilateral contract are revocable unless they are supported by consideration. “I will give you $10 now and that will hold for me the option of buying your computer for $500 for one week.” F. General Rules 1. Past consideration is no consideration at all. 2. If something (consideration) was recited as being paid but was not i. Majority says this is a sham, no detriment was paid so there is not detriment. ii. Minority view is that a liability is created or there is a good faith promise to pay so it will be valid. G. Pre-Existing Duty Rule 1. Traditional View – (Prevent Shake Down) The pre-existing duty rule will prevent modifications of an existing contract if there is no new consideration. i. Pre-existing duty can also be a legal duty, like police officer and reward for capture of felon. ii. Some jurisdictions say you can simultaneously rescind a contract and create a new one, while other jurisdictions say you have to have some gap between rescinding a contract and creating a new one. 2. Modern Restatement View – A contract can be modified under the following conditions: 1 i. The modification took place before the original contract was fully performed ii. The underlying circumstances were unanticipated by both parties iii. The modifications were fair and equitable iv. The modifications were voluntarily agreed to 2a. UCC – You can modify as long as you meet the test of good faith. 3. 3rd Party – When C pays for A and B to follow through on contract i. If C pays to both then it is ok because A and B can mutually agree to rescind the contract so there is detriment and valid consideration. ii. If C pays to one, then courts don’t view this as the classic shake down scenario and sometimes say while A or B may not be suffering new detriment, C is gaining some benefit (piece of mind or security). 4. Forging a good unilateral contract out of a bad bilateral contract i. a bad bilateral contract due to lack of mutuality of obligation or preexisting duty; and ii. the promisee must suffer a detriment at the hands of a unilateral contract. H. Accord and Satisfaction – Pre-existing duty to pay money. If the person who owes money offers less it is called an accord and if the other person accepts it is called satisfaction. 1. Liquidated Debts (Amount is not in controversy) – The old pre-existing duty rule applies here. An offer to pay less and an acceptance by the other party is not valid because there is no consideration. i. Exception – Rental or Installment payments, if the landlord gives a receipt saying payment in full then it is view as a gift. 2. Unliquidated Debts (Amount is disputed) – Here is where the rules of accord and satisfaction come in to play. Each is giving up detriment because they are getting less than what they thought they should get, or paying more than what they thought they should pay. i. Accord – It must be clear to a reasonable person that the obligee is making a payment as “payment in full.” ii. Satisfaction – A cashing of the check is considered acceptance of the accord. Even if the person cashing writes “rights reserved, etc.” it doesn’t matter. Actions speak louder than words. 3. UCC § 1-207(1) – Consistent with above view with some exceptions. i. Do creditors reserve rights even if the check says payment in full? Only if creditor is dealing with high volume of sales and receive a form check saying payment in full. I. Duress and statutory changes 1. U.C.C. § 2-209(1) – an agreement to modify a contract within this article needs no consideration as long as it is in good faith. Elements of good faith are: i. Whether the parties conduct is consistent with reasonable commercial standards of fair dealing in the trade. ii. Whether the parties were in fact motivated to seek modification by an honest desire to compensate for commercial exigencies. 2 2. When there is a threat in an attempt to modify, the threat leads to the presumption of bad faith. This presumption can be overcome with evidence. 3. Economic Duress – If you make a contract under duress, you can void the contract later on. To claim duress in a contract modification situation, the defendant must threaten to breach the original contract and: i. P must show there is no alternative ii. The ordinary remedy for a breach of contract is not adequate. J. Mutuality of Obligation 1. Traditionally this means that both parties must be bound or neither parties must be bound. A better term is mutuality of consideration. In a strictly bi-lateral contract situation each party must furnish some type of consideration to the other or the contract is void. i. Void – Not valid ii. Voidable – Can be voided by the party being harmed (Fraud, Duress, Person lacking capacity) iii. Unenforceable – SOL has passed, Statute of Frauds violated. 2. Currently courts do not like to find a lack of mutuality of obligation. Courts will find that where a party may seem like they are not obligated they will actually have to make a good-faith effort. 3. Conditional Promise – Courts find that the promise is illusory only if the condition is in the total control of the party. 4. Right to Terminate i. Explicitly without notice: a. If a party has a right to terminate without notice then the promise is illusory and the contract is not valid. ii. With a set period of notice: b. If a party must give notice then the contract is valid because the party is promising to do something at least for the notice period. ii. “With Notice” but no time set: a. Common Law says this is invalid b. Modern Trend says must use a reasonable amount of time for notice and contract is valid. iii. UCC a. termination by one party requires a reasonable time. An agreement dispensing with the notification requirement is invalid. 5. Output or Requirement Contract (all the output of a seller, or all the requirements of a buyer) i. Historically (not the case anymore) these contracts were void because they lack mutuality of obligation (consideration) because seller is not required to have any output and vice versa for the buyer’s situation. ii. Modern Trend and UCC 2-306(1) – Governed by good faith unless the actual output or requirement is unreasonably HIGH as compared to estimates or reasonable expectations. 6. Exclusive deal 3 i. UCC 2-306(2) says a lawful agreement for an exclusive deal says that both parties must use their best effort to either supply the goods or promote the goods. XII. Moral Obligation and Consideration A. Services not requested, then promise made in response for the act performed. 1. Normally this promise is not supported by consideration because the actions were not induced by the promise or the detriment. 2. Restatement view (minority view and modern trend) – A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the effect it is necessary to prevent injustice. The promise it not binding if the promisor is making the promise as a gift. It will also not be enforceable to the extent that its value is not proportional to the benefit. 3. Courts do this more often when the person gets hurt. B. Services requested but the amount not clear. Then promise is made in excess of what the market value of the services are. 1. Usually (now minority) you get Quantum Meruit – The amount you deserve. 2. The majority says that those people are the best to value it so we will just take their valuation. Promissory Estoppel A. A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promise and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. B. Typically a substitute for valid consideration C. Common Elements between restatement 1 and 2 1. .Promise by the promisor 2. Foreseeable reliance on the promise by the promisee 3. The promisee must actually rely on the promise to his or her detriment 4. Injustice can be avoided only by enforcement of the promise D. Can be gift situation or gratuitous bailment (promise to take care of my dog), or subcontract. Gratuitous bailment is promising to do a favor for someone (I’m going to do this so you do not have to). 1. Misfeasance vs. Nonfeasance a. Historical approach is to distinguish between them and say responsible only in cases of misfeasance b. Modern trend is not to make a distinction c. Typically comes into play where one promises to get the insurance for someone else E. Charitable Donations 1. Problem is with the reliance part (charity does not rely on your donation) 2. Restatement 2 nd says marriage settlement or charitable subscription or donation is binding without regard to proof of reliance 3. Split in jurisdictions, those not using restatement 2 nd then we still need to prove reliance. F. Damages 4 1. 1st restatement: use it as a substitute of consideration and thus enforce the contract in full. 2. 2nd restatement: remedy would be tailored as justice requires. Parole Evidence A. First must have a final writing B. Can never have parole evidence that contradicts the final writing C. If final writing is determined to be total integration then no parole evidence D. If final writing is determined to be partial integration then parole ev. allowed E. Total or Partial Integration? 1. Williston’s Approach a. Rule 1 – If there is a merger clause (clause indicating the contract is a total agreement) then that is conclusive unless: 1) Fraud; 2) Mistake; 3) Obvious that writing is incomplete b. Rule 2 – In absence of merger clause, look to “4 corners” writing itself and assume total integration. If obviously incomplete then it is partial. c. Rule 3 – When writing seems to be compete, then look at alleged additional terms and can only be allowed in if those terms were such that a reasonable person would enter into a separate agreement with regard to those terms. 2. Corbin’s Approach (minority view) a. Merger clause not conclusive, but just a factor to consider b. Trier of fact should seek to determine the actual intent of the parties by allowing a liberal admission of evidence 3. UCC Approach a. Merger clause is strong evidence of total integration, some courts put more weight on the merger clause if it is not boiler plate b. If no merger clause then assume partial integration unless find differently, use factors: i. Course of dealing (prior dealing) ii. Usage of trade (industry practices) iii. Course of Performance (how current contract is being perf.) c. Some courts allow contradiction 4. Collateral Contract Approach a. Old minority view, if it the parole evidence is so closely related to the final writing then it would be thought of to have been covered in the final writing, so the final writing is considered a total integration. If the parole evidence is not so closely related, instead it is collateral, then the final writing is a partial agreement. 5. Restatement 2 nd a. Not a popular approach, basically says always a partial integration except in some extreme situations 6. 4 Corners rule a. If the writing is complete on its face then total integration b. If not complete on face then use parole evidence Interpretation 5 A. What is the meaning of the actual words of the contract? B. Plain Meaning Rule (widely used) 1. Look within the 4 corners, if looks plain and unambiguous on its face then must be interpreted without the aid of extrinsic evidence 2. If any ambiguities, then use extrinsic evidence to determine meaning 3. Extrinsic evidence can be used to explain technical or obscure terms C. Williston’s Approach 1. If there is an integration (final writing, either total or partial), then the standard of interpretation is the meaning that would be attached to the writing by a reasonably intelligent person acquainted with all operative usage and knowing all of the circumstances prior and contemporaneous with the making of the integration. a. This rule excludes statements or communications during the negotiations or testimony as to subjective intent. Basically look to the writing and use reasonable judgment. 2. If there is an integration but still ambiguity, then use the following rules for nonintegration 3. When there is not an integration (oral contracts) a proposed terms to be used in the contract will have the meaning that you should reasonably expect the other party to give the proposed term. (Objective Theory) a. Court can consider extrinsic evidence about what the parties said to each other in the process of negotiating regarding the meaning of the term b. Court can not consider testimony about subjective intent c. If a material term is ambiguous and the subjective intent of the one or more parties indicates that the parties had different understanding about the meaning of the term, then there is a contract based on the meaning of the blameless party if there is one. d. If both parties are equally guilty then there is no contract D. Corbin’s Approach (modern trend but not yet majority) 1. All relevant evidence can be heard by the judge. This can include what the parties said during negotiations or testimony as to subjective intent. 2. The judge then decides if there is ambiguity. The judge determines whether the asserted meaning (by one of the parties) is one to which the language is reasonably susceptible. 3. If judge determines there is no ambiguity, then that is it, no extrinsic evidence will be heard by jury. 4. If judge determines there is ambiguity then the extrinsic evidence will be heard by trier of fact. E. UCC Approach 1. Similar to rules of PER 2. Basically always use extrinsic evidence, even about subjective intent 3. Also use usage of trade, course of dealing, and course of performance 4. Some jurisdictions using this approach say this evidence can even be used to contradict the contract Capacity of Parties A. Minors (called infants) 6 1. Basic rule – A contract that is entered into by an infant is voidable, historically they were void but now they are voidable, at the option of the minor. a. Exceptions – There are some exceptions, if a minor has parented a child and they have made a contract regarding the parenting of the child, those contracts are usually enforceable. There are also some statutes that by law minors are allowed to contract into (insurance laws, banking laws/credit cards, educational loans, military enlistment laws). 2. Minor can disaffirm the contract at any point until it is ratified. Typically with a contract for real property the minor can not disaffirm until after age 18. Once disaffirmed, that is irrevocable. 3. Minor as defendant (stops paying and other party sues) a. The general rule is that the minor must return the item if they still have it, they are not liable for anything else. There are a couple of exceptions – if it is an item and you can trace the item to something, then that has to go back to the other party. There is also an exception for necessaries, if money is extended for food, clothing, shelter, or education then the minor is generally liable for the value of those necessaries. Split of whether the loan must be for necessities or be actually used for necessities. 4. Minor as plaintiff (buys something and wants money back) a. The traditional rule is very similar to the above rule, if the minor still has the thing then they have to return it but not obligated for anything else. The modern rule (and now the huge majority) is Pettit v. Liston. They are going to be liable for restitution and for the wear and tear up to the amount they have initially paid. If it looks like the minor was taken advantage of then he will not be liable for anything and will be able to completely disaffirm the contract. The same deal applies with necessaries as well, minor is liable for the full value. 5. Ratification a. Minor can not ratify while they are still minor b. Once reach age of majority they can simply do nothing and allow a reasonable amount of time to pass. c. They can make an express ratification d. They can ratify by conduct (continuing of accepting of services or continuing payment for a period of time) B. Incompetency 1. Historically – whether the mind was so affected as to render him wholly and absolutely incompetent to comprehend and understand the nature of the transaction. a. Historically the other party does not need to know. High threshold for incompetency, one party must not know what is going on with respect to the transactions. In reality the other party should know. 2. Modern Trend – If you are unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of your condition. 3. How to disaffirm? a. Incompetent can do it himself b. Guardian can do it 7 c. Some courts say if the contract is fair, and the other person had no knowledge as to the mental capacity, then the contract can not be disaffirmed without restitution 4. Restitution? a. If a reasonable person would see that the other party is incompetent (they don’t understand what is going on, they can’t understand the responsibilities), then there is generally no restitution required. Just like a minor, if they have the item they give it back, but otherwise no restitution. b. If the other party did not know or should not have known, then restitution is required????????????????? c. If contract for necessities then restitution is required. 5. Ratification? a. Not ratify while still incompetent b. If the person regains their competency they can ratify it either explicitly or implicitly with actions. Once a contract is ratified then the contract becomes irrevocable 6. Adjudication a. Some courts say if one is adjudicated incompetent then the contract is just void (very small minority almost gone, historical approach). b. Other courts say the contract is voidable and no restitution ever required c. Majority just treat it the same as above C. Intoxication 1. Historically voluntary intoxication was just a too bad situation 2. Now basically treated like incompetent, but must be intoxicated to the point of not understanding what is going on Duress – voidable A. Elements 1. Some threat or act that is wrongful 2. Must show that it was because of the threat that the party entered into the contract. Did the party feel that they were free to overcome this wrongful act. If they do not feel free then we have met this requirement. B. Ratify – can only be ratified after the duress has been removed 1. Express 2. By conduct – do nothing and allow reasonable time to pass, accept the benefits C. Economic Duress 1. Threat of breach of contract and 2. Threatened party could not obtain goods from another source 3. Ordinary remedy would not be adequate Undue Influence (voidable) – improper or unfair persuasion A. Elements a. . Must be some susceptibility in the party being influenced. (emotionally, physically, psychologically weaker) b. Must be evidence of the opportunity to exercise inappropriate influence 8 c. Must be some sort of action exercised by this person (typically some act that initiates another to enter into a contract) d. Must be evidence that the situation is unnaturally unfair. B. Almost all of these cases have a person in position to exert undue influence. Some relationship where there is some confidence, some fiduciary relationship (attny/client, doctor/patient, pastor/person, employer/employee). C. If there is a confidential relationship or relationship of dominance, the burden will typically be on the dominant party to prove that everything was fair D. Factors to consider: 1. discussion of a transaction in an unusual place 2. the insistent demand that the business be finished at once 3. an extreme emphasis on adverse results if there is a delay 4. multiple persuaders 5. absence of 3rd party advisors for the susceptible party Misrepresentation (Fraud) and non-disclosure (voidable) A. Misrepresentation of fact 1. Intentional misrepresentation of fact a. Need not be material b. Subjective standard is used, if part was influenced by the misrepresentation then it is deemed enough 2. Unintentional misrepresentation of fact a. Must be a material misrepresentation b. Objective standard used, would a reasonable person have been influenced by the misrepresentation c. If the misrepresenting party knows the other party is influenced by the fact then the objective standard is said to have been met 3. Party must have been deceived by the misrepresentation 4. Party must have relied on the misrepresentation B. Misrepresentation of Opinion 1. Generally not enough to avoid a contract, mere puffery 2. Exceptions to no avoidance rule a. Relationships of trust or confidence b. Experts or those with superior knowledge c. 3 rd party posing as a disinterested party (but who, in fact, is not) d. Clearly outrageous opinions C. Misrepresentation of Law 1. Treated the same as misrepresentation of opinion D. Non-Disclosure 1. Generally no duty to disclose facts; exceptions a. Statutory requirements to disclose b. Concealment or deliberate action to conceal c. Partial disclosure where it is misleading d. Representations made in good faith but representing party learns that it is false e. Knowledge that the other party is operating under mistake in fact 2. Sometimes Non-Disclosure is tantamount to misrepresentation 9 a. Transactions involving i. Suretyship ii. Insurance iii. Partnership iv. Joint Ventures b. Relationships such as i. Fiduciary ii. Confidential relationships 3. Fraud in Factum – Sneaky swap of contracts, K deemed void. Mistake 1. Generally must be a mistake in fact, not a mistake in judgment 2. Watch out for conscious ignorance 3. Mutual Mistake Restatement 1) When there is a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made. 2) The mistake must have a material effect. 3) Unless the party bears the risk. a) the risk is allocated to him by agreement of the parties b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient (conscious ignorance) c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so 4. Unilateral Mistake a. Traditionally for a unilateral mistake to give rise to a voidable contract, the other party must have known, or should have known that the mistaken party was acting under a mistaken pretense. This is very tantamount to misrepresentation. b. Modern Trend – it includes the rules for mutual mistake traditional but adds: Restatement – You can also avoid where the three requirements are met 1 – Basic Assumption, 2 – Material, 3 – Risk, AND the effect of the mistake is that the enforcement of the K would be unconscionable or the other party knows you are operating under mistake and you can return the parties back to where they were before the contract. REFORMATION A. Reforming the contract may be an option where a contract is otherwise voidable, this is an equitable remedy rather than a remedy by law. This means to rewrite the contract to the way it was supposed to be, it is not making a new contract. B. Not a common remedy C. Most often this where writing does not represent the actual contract UNCONSCIONABILITY AND DUTY TO READ A. So bad that it is shocking to the conscious of the court B. The court can void the contract, the court can excise the unconscionable part, or they can reform the unconscionable part. C. Substantive unconscionability – great disparity in prices that is shocking 10 D. Procedural unconscionability – contract was procured by some unconscionable means, or there is an extreme lack of sophistication by one party E. Contracts of adhesion can fall in procedural unconscionability 1. Only are voidable when they are grossly unfair F. You have a duty to read contracts 1. Sometimes excused when there is a mutual mistake in the way contract is read 2. Sometimes excused when things are hard to read (illegible or placed in hidden area) PERFORMANCE OF CONTRACTS CONDITIONS A. Conditions are either met or not met. Passage of time is not a condition. B. Condition Precedent – A condition that must occur in order to give rise to an absolute duty to perform. C. Condition Subsequent – A condition that when met, will relieve an already existing duty to perform. C1. A duty flowing from a promise is said to be absolute if performance is immediately due of if only a mere passage of time is necessary before the performance is due. D. An express condition precedent will be strictly enforced. i. Exception if the condition is against public policy or unconscionable. E. Simultaneous Death Statute – Most insurance provisions provide that the beneficiary gets the insurance if the insured dies prior. These statues basically say that the assumption in a simultaneous death is that the beneficiary does not get the money. It is assumed, unless otherwise proven, that you died first. CONDITIONS v. PROMISES A. If a condition precedent is not met then there is no obligation to perform. No one is in breach. There can also be a condition precedent to the formation of a contract at all. B. If a promise is breached then we must ask if the breach was material. If not material then the other party must perform and sue for damages. If material then the other party does not need to perform and can still sue for damages. C. How to determine? 1. If unclear courts are more likely to construe as promise. 2. When determining if a condition or promise courts will often construe a contract in the light least favorable to the drafter of the contract. 3. From contractors to subs, pay when paid is usually interpreted as a promise, unless very clear that it is a condition precedent. Risk taken by general contractor 3a. Insurance cases – Typically failure to pay part of premium is considered a promise, will not discharge duty of insurance company. 4. First restatement says if the non-actor places the promise/condition in the contract then it will be construed as a condition. You must call me upon shipment. The guy does not call that will be a condition that was not met. This rule was abandoned after the first restatement it is now a factor to consider only. D. Effect on parole evidence 1. An exception to the parole evidence rule is that generally evidence can be brought in to show the existence of a condition precedent as long as the condition is not contradictory to the contract. 11 2. Can always bring in evidence to show the existence of a condition precedent to the formation of a contract because that goes to the question of whether the contract existed in the first place. E. Implied-in-fact condition – This is treated like a expressed condition because logically must occur before the party can perform. A promised to paint B’s house, B promised to supply the paint and pay $100. Supplying of paint is implied –in-fact condition. F. Constructive Conditions (implied in law) are like promises. They must be performed substantially to give rise to the others duty to perform. At common law all promises in a contract were independent of each other. If one party was to build a house and the other was to pay for it, the party paying could not sue until he paid, even if the other party never did anything. Each promise was independent. Modernly courts have created constructive conditions. 1. General rule – Performance that requires a lengthy period of time must occur before performance that takes a short period of time. 1a. Factors to consider in determining if the breach of promise or constructive condition was material: i. The extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated. ii. The extent to which the injured party may be adequately compensated in damages for lack of complete performance. iii. The extent to which the party failing to perform has already partly performed or made preparations for performance. iv. The greater or less hardship on the party failing to perform in terminating the contract. v. The willful, negligent or innocent behavior of the party failing to perform. vi. The greater or less uncertainty that the party failing to perform will perform the remainder of the contract. 2. If there is a material breach you can suspend performance and you must give notice to the other party and a reasonable time to cure. i. If cured then you must perform your duties but can still sue for damages. ii. If not cured then it becomes a total breach and you can stop performance and sue for damages. 3. Constructive Conditions under the UCC i. Perfect Tender Rule – (If a date is in the contract, time of the essence is assumed) The Seller must provide exactly what was contracted for otherwise the buyer can reject the items. If rejected generally the Seller has a chance to cure only before the time for performance has expired by giving notice of intention to cure and by curing. If the Seller was reasonable in tendering something different that what the contract called for, the Seller has more time (reasonable) to cure by giving notice of intention and curing. ii. If the buyer does not reject immediately, he has a reasonable time to reject, but must provide notice and an opportunity to cure. iii. This is the same with a breach in warranty, generally you must provide timely notice of such breach or your recovery is barred. iv. Is filing a lawsuit notice? Varies by state. Notice can generally be oral or written. 12 G. Concurrent Condition – Simultaneous performance – This will be conditioned on the other party’s willingness and ability to perform. H. Delay in performance – First look to see if there is a “time is of the essence” clause. If not and it seems like time is not a clear expressed condition precedent then a reasonable delay will be considered substantial performance. Unreasonable delay is considered a material breach. QUASI CONTRACTUAL RECOVERY A. Majority jurisdictions and common law do not recognize quasi-contractual recovery. B. Minority and modern trend basically says if one party has performed less than substantially, thus breached, they are entitled to restitution for any benefit conferred by way of part performance in excess of the loss that they have caused. C. The modern trend usually limits this type of recovery to cases where the breach is not willful. D. UCC – If a buyer pays a portion but does not pay the rest and we have a material breach, then: Buyer gets back his money, minus the lesser of 20% of the value of total performance or $500, minus any damages they have caused by their breach. This is the default UCC rule but people can contract around this. SEVERABILITY OF CONTRACTS Sometimes if there is a large contract it can be divided into several small contracts. Generally construction contracts are not severable. Just because there are progress payments does not mean a contract is severable. Look to party’s intent, but really look to see had the parties thought about it as reasonable people would they generally accept that the contract could be divisible. Common law says employment contracts are typically divisible by month or payment period. This is not taking into account employment law which dominates now. WRONGFUL PREVENTION AND NON-COOPERATION There are some situations where the fulfillment of a promise of a condition will be excused. A. Excuse of conditions 1. A condition may be excused by prevention or hindrance of it occurrence through a breach of the duty of good faith and fair dealings in its performance and its enforcement. 2. Nephew had a contract to care for his uncle. The uncle pointed a gun a nephew and told him to get lost. Condition that nephew take care of uncle before getting paid was excused. 3. If the condition is in your control, you must make a good faith, reasonable effort to fulfill the condition. 4. Condition that a sale must go through before commission can be paid to broker. If the seller interferes with the sale by not clearing minor defects (implied duty to clear minor defects) then the condition will be excused and commission must be paid even though sale never happened. 5. Time is of the essence can be a condition, but if the other party holds up performance then the condition will be excused and a reasonable time will fill in. B. Breach of implied promise of good faith and fair dealing – This will excuse the condition 1. In exclusivity deals there is usually an implied promise to maximize profits. 13 WAIVER OF CONDITIONS – Indication by the party in whose favor the condition runs that he will not insist on the occurrence of the condition A. Waiver of a condition prior to the contract being formed (during negotiations) i. Typically there is a condition being negotiated and then decided to be omitted from the contract but the contract was already pre-written (not formed, just written) with the condition in it. The courts take 3 views on this. 1. Traditional courts will just use the standard parole evidence rule regarding bringing in outside evidence to show the condition was waived. 2. More modern courts say promissory estoppel is an exception to the parole evidence rule. If the party can show that they relied on the waiver of the condition then that evidence will be allowed in. 3. Other courts simply say that waiver of condition prior to the formation of a contract is an exception to the parole evidence rule in general. B. Waiver of a condition after the contract is formed but before the condition has failed (not occurred). Splits into two parts depending on the importance of the condition. i. Condition being waived is material 1. The condition is part of the basic agreed upon exchange. 2. If so, then consideration or a consideration substitute (promissory estoppel) must be present for the waiver to be enforced. See old contract modification info. ii. Condition being waived is immaterial 1. Most courts do not require additional consideration in these cases. 2. The condition may be re-imposed by the waiving party as long as there has been no detrimental reliance on the waiver. 3. Common immaterial conditions are those relating to: a. Time of performance (time is of the essence) b. Manner of performance c. Giving notice iii. UCC 1. Generally does not require consideration for contract modifications. 2. Can re-instate the waiver unless unjust in light of reliance. 3. Has the perfect tender rule, if a date is set then time of the essence assumed. iv. Repeated waivers 1. Repeated waivers do not automatically waive a similar future condition unless there is proven detrimental future reliance. a. Late payments – If there are repeated late payments that are accepted by payee, then the payor can detrimentally rely on the fact that the payee is not concerned with timeliness. The payee can reinstate the condition of timeliness if he gives proper notice. 2. No waiver clause “no waiver of a breach of any term or condition shall be a waiver of any other subsequent breach of any term or condition. Some courts enforce this strictly, other go with the detrimental reliance exception. C. Waiver of a condition after failure of the condition (Election) i. Such waivers are generally considered binding without consideration. ii. The party in whose favor the condition runs has the option to cancel the contract or waive the condition. 14 iii. Once waived, the condition can not be re-imposed or the contract can not be canceled but the waiving party. He can still sue for damages under breach of contract. D. General Rule – Party making request for condition is the one receiving benefit. He is the one who can waive the condition in all of these previous situations. If he does waive the condition the other party has no right to use the failure of condition as an excuse not to perform. RELIEF FROM FORFEITURE There are situations of exception, not the norm. A. 1st restatement – A condition may be excused without other reason if its requirement: 1. will involve extreme forfeiture or penalty; and 2. its existence or occurrence forms no essential part of the exchange for the promisor’s performance nd B. 2 restatement – To the extent where the non occurrence of a condition would cause disproportionate forfeiture, the court will be able to excuse the condition unless its occurrence was a material part of the exchange C. The court can also find that there is no duty to read the contract. D. Money down with option to purchase by certain time. If the party makes a commitment to purchase but does not meet the time look to see how extreme the forfeiture is. 5..4% of purchase price is not enough usually. SATISFACTION A. Satisfaction of contracting party. 1. Generally courts use an objective standard when the contract is for something that can be measured. (Mechanical, Fitness, Utility, Marketability, Building cases) 2. Generally courts will use a subjective standard when the contract involves taste or personal judgment. Can be completely unreasonable as long as good faith. B. Satisfaction of 3rd party 1. Majority rule is that you use a good faith subjective standard of the 3 rd party “expert.” This 3rd party must be acting independently. Generally if the 3 rd party is grossly erroneous then the courts will imply bad faith. 2. Minority rule (Nolan Rule) says the 3rd party can not be unreasonable (objective standard). PROSPECTIVE FAILURE AND BREACH BY REPUDIATION A. Clear that the other party will fail to perform 1. Must be very clear, does not need to be actual words. 2. If clear then you can sue before there are actual damages, but must make a reasonable effort to mitigate damages. B. Unclear that the other party will fail, but some doubts 1. If vague then the party can suspend performance and request assurances, if assurances are not given then party can stop and sue 2. If the other party is insolvent, or files for bankruptcy, it falls in this category. C. UCC 1. When there is reasonable grounds that one party may not perform, then the other party may demand in writing assurances, and he may suspend his performance until he receives 15 assurances. After receiving a justified demand for assurance, the other party has a reasonable time, not to exceed 30 days, to respond or it will be considered a repudiation. 2. After repudiating, you can retract your repudiation as long as you give notice and the other party has not detrimentally relied. This is for UCC or regular. 3RD PARTY BENEFICIARIES A. Old common law did not allow these, because no privity. B. 1st Restatement 1. Valid 3rd party beneficiaries with contractual rights to enforce i. Creditor 3rd PB – the promisee uses the contract pay, in part of in full, a debt or obligation owed (or thought to have been owed) to 3rd PB by the promisee. Some jurisdictions say this is only true when it is actually owed ii. Donee 3 rd PB – the promisee wishes to provide a gift to the third party beneficiary by means of the contract. 2. Invalid 3rd party beneficiaries had no rights of enforcement i. Incidental beneficiaries were anyone other than creditor or donee. C. 2 nd Restatement 1. Intended 3rd PB – The promisee intended for this 3 rd party to be benefited. The primary intent was to benefit the 3rd party. A will situation creates intended Bs. i. To whom does the benefit or performance run? ii. Would it be reasonable for the 3 rd party to rely on the contract? Some courts say the 3rd party must have actually relied. 2. Incidental 3rd PB D. Mortgages 1. If a party takes subject to a mortgage they are not accepting responsibility and the lender is not an intended 3 rd PB. 2. If a party assumes a mortgage they are taking personal responsibility and the lender is an intended 3rd PB. 3. What if chain of assumptions and subject tos? Modern trend is to look only at the current party’s actions. Other jurisdictions say the whole chain must be assumptions. E. Public Works 1. Generally the public is not going to be a qualified 3 rd PB because the scope would be too broad. 2. If the contract specifically provides for some liability by either limiting scope of recovery (number of people) or scope of liability then public can be qualified. F. Who can Sue whom? 1. In creditor situations the creditor can go after either party to the contract. Generally can sue both as well, but only get one recovery. 2. Novation – Once you have gone after one party, you give up the right to go after the other party. There is no automatic novation. 3. The promisee can also sue the promisor i. Creditor situations the promisee can sue to recover the amount owed + damages for the breach. ii. Donee a. Majority says promisee can sue, usually for specific performance 16 b. Small Minority Traditional view says promisee can not sue in these cases G. Vesting – Until vested the contracting parties can change 3 rd PB’s rights under the contract 1. 1st Restatement i. Donee’s 3rd party rights vest right away ii. Creditor’s 3rd party rights vest when they rely on it or sue* 2. 2nd Restatement i. 3rd party’s rights vest when:* a. They sue b. They materially change their position in justifiable reliance c. They manifest assent to the promise * If the 3 rd PB does any of these things before learning of a modification or termination then his rights have vested. 3. Parties can contract out of defaults, they can say they have the continuing right to modify (meaning rights never vest) or they can say rights vest right away. H. Defenses 1. The promisor can use any defense against the 3 rd PB that he would be able to sue against the promisee. 2. What about defenses the promisee could use against the 3 rd PB? i. If the promisor assumes the note and agrees to pay the note regardless on what the promisee would actually owe on it, then they can not use these defenses. ii. If the promisor agrees to pay whatever the promisee is obligated to pay, then he can use those defenses. We need limiting language here, straight assumptions will usually not qualify in this category. STATUTE OF FRAUDS A. Basically says certain types of contracts must be in proper writing. This will prevent fraud and also give people time to think about what they are doing. 1. a promise by an executor or administrator to answer damages out of the estate they are handling 2. surety ship provisions, indemnity provisions, or guaranteeing provisions 3. an agreement made in consideration of marriage (this is no longer in the statute of frauds) Pre-marital agreements are not within the statute of frauds but most states have other statutes that require pre-marital agreements to be in writing 4. any contract for the sale of land or interest in land 5. any contract that is not to be performed within one year of the making of the contract B. UCC requires contracts for the sale of goods more than $500 to be in writing. As well as investment securities and other intangible assets. C. The one year provision (#5 on the list) 1. Any contract that can not be completed within one year from the formation of such contract must be in writing. 2. The term of the contract must be clear, contracts for an indefinite period are not subject to the statute of frauds. 3. Contracts that are stated to last more than one year but can be terminated within a year as per terms of the contract. 17 i. Majority view (CA) says these contracts are not subject to the SOF because they can be terminated and fulfill the contract within a year. ii. Minority view is that the termination date does not govern the contract so these contracts are subject to the statute of frauds. 4. Contracts not to compete – If the provision of the contract is not to compete for over a year then the general majority rule is that these contracts are not subject to the SOF because the guy can die and thus fulfill the contract. Minority says the guy must not compete for over a year so subject to SOF (death not an issue). D. The Memorandum – Contract must be in writing, signed by the party to be charged 1. The memorandum must generally have a. Parties b. Description of the subject matter of the contract c. Must have the essential terms and conditions of all of the promises in the contract and by whom to whom the promises are made. 2. Uniform Electronic Transfers Act – Basically says electronic transmissions will constitute a valid writing/memorandum 3. What if we have a bunch of writings? a. If every one of the documents are signed and it is clear they are referring to the same thing, then there is no problem. b. What if some are signed and other are not? i. If the unsigned documents are physically attached to the signed documents when the person signed then that is ok. ii. If the unsigned documents clearly refer to the other signed documents then that is ok. iii. Another view is that the documents simply must refer to the same subject matter or transaction to be sufficient. In these cases we will allow extrinsic evidence to allow the connection to be made. Extrinsic evidence will also be allowed in to help determine what the writing meant. But you can not use extrinsic evidence to gap fill essential terms that are missing. 4. The memo is valid at the moment it is signed, no delivery needed. 5. What qualifies as a signature – It can be typed, stamped, initialed, etc. Basically is the instrument being authenticated, can we tell that this person is accepting, adopting, assenting to this writing. It also counts if someone directs another to sign on their behalf. In this particular case the court found it to be a valid signing, other courts would find it not to be a valid signing. Here is says XYZ undertakes to perform , and the defendant is XYZ so that was the signature. The majority says the signing can be anywhere, the minority says the signature must be at the end of the document. E. Relief from the SOF A. Full Performance a. Majority – If one party fully performs their duties under a contract (oral or written), the other party will not be able to raise the statute of frauds as a defense. b. Minority – Accepts that rule but says that full performance must occur within a year. c. Very small minority says any full performance will not override SOF. B. Part Performance 18 a. Generally part performance by itself is not going to be enough to create a full enforceable contract within the statue of frauds. May get quantum meruit but only if reasonable, and then we get into promissory estoppel. C. Promissory Estoppel a. Small minority does not use promissory estoppel as an exception to the SOF. b. Majority will use promissory estopple as an exception to the SOF but will grant equitable relief. c. California and some states go so far as to use promissory estoppel to completely wipe out the one year provision and enforce the entire contract. ASSIGNMENT AND DELAGATION A. At common law parties were not allowed to assign benefits or delegate duties without permission. B. For an assignment, the assignor must make a present transfer of a contract interest to the assignee. C. The assignor loses all rights as to the assigned benefit. The assignee steps into the assignor’s shoes as to such benefit or right. D. Most rights are assignable; not assignable if: 1. The assignment would (1) Materially change the duty of the obligor. 2. Materially increase the burden or risk imposed on the obligor (This is dealt with in insurance a lot. You can just say to your insurance company, hey don’t insure me now I am assigning the benefit of this insurance to Chi) 3. Materially impair the obligor’s chances of obtaining return performance or materially reduce its value to the obligor. 4. If there is a non-assignment clause in the contract (must be specific as to what can or can’t be assigned) 5. If the assignment would be against public policy or statute. D1. UCC says assignment allowed unless: 1. The assignment would materially change the duty of the other party 2. The assignment would increase materially the burden or risk imposed by him by his contract 3. The assignment would impair materially his chance of obtaining return performance. E. Assignments for consideration are irrevocable F. Donative assignments are revocable and are automatically revoked under the following circumstances: 1. At death of the assignor 2. If reassigned by the assignor 3. If the assignor revokes by giving notice to the assignee or the obligor G. Donative assignments are make irrevocable upon delivery of some instrument symbolizing delivery of the gift (usually a writing). A written notice of the assignment that is delivered will suffice. 1. Promissory estoppel may also come into play with donative assignments H. Most duties can be delegated unless: 1. The contract is for personal services where there is some skill involved. Where the performance by the delegatee would vary materially from the performance of the delegator. 19 i. If the personal services are more mechanical or general in nature then they can be delegated. This is especially true when dealing with a corporation. 2. Unless the party has a substantial interest in having his original promisor perform or control the acts required by the contract. 3. If the delegation would be against public policy or statute. I. UCC says delegation allowed unless the other party has a substantial interest in having the original party perform the duty. J. Note when a company buys another they take over contracts. This is an assignment of benefits and delegation of duties, this is sometimes loosely referred to as an assignment of the contract. REMEDIES 20