Law School Outline - ContractsI Outline- Stephens

Contracts I – Fall 2002 Professor Stephens Page 1 Contracts I I. Introduction A. Stephens’ Definitions 1. Promise – A commitment to do (or not do) something in the future. 2. Promisor – One who makes a commitment to do something in exchange for consideration. In breach of contract, the PARTY THAT BREACHES is the promisor. 3. Promissee – One who gives consideration in exchange for a commitment to do something. In breach of contract, the VICTIM is the promissee. 4. Contract – An enforceable promise. 5. Consideration – that which is exchanged for a promise. 6. Performance – Keeping an enforceable promise. 7. Breach – Failure to keep an enforceable promise. 8. Rescission is the agreement by both parties to terminate a contract. 9. Duress is the wrongful threat to harm someone. 10. Economic duress is a form of duress. 11. Misrepresentation is the making of a false statement. A false representation of a fact. 12. Fraud is willfully and knowingly making a false statement. 13. Mistake is an erroneous belief. 14. Unconscionable means to be so unfair as to shock the conscious. 15. Injunction prohibits a party from doing something. 16. Writ of mandamus orders a party to do something. 17. Mandatory injunction orders a party to not do something – in essence, to perform. B. Victims of breach can recover damages. C. Contracts require 1. Offer 2. Acceptance 3. Assent/Mutuality/Meeting of the Minds 4. Consideration 5. Mutuality of Obligation 6. Definite terms – can ascertain what parties were obligated to. Damages for Breach A. Objectives of damages 1. To make injured party whole. 2. Compensatory for actual loss – Naval v. Charter Communications. 3. Not punitive (NOT PUNISHMENT of party who breaches contract). 4. No actual loss for breach = No damages. 5. Types of damages a. Restitution damages i. Restoring to the promissee the amount given to the promissor (refund). ii. Amount of benefit conferred to other party to contract. iii. Measure of damages for quasi-contract. iv. Two ways to measure II. Contracts I – Fall 2002 Professor Stephens Page 2 1). Difference in value before and after benefit conferred from perspective of recipient. 2). Quantum meruit – value of services rendered from perspective of person rendering services. b. Reliance damages i. Seeks to put in position had there been no contract (status quo ante). ii. What promissee expended in reliance on promise. iii. Measure of damages for promissory estoppel/detrimental reliance. c. Expectancy damages i. Seeks to put in position had contract been performed. ii. Expectation Damages = LOSS IN VALUE + OTHER LOSSES – COSTS AVOIDED – LOSS AVOIDED iii. Loss in value 1). Lost profits 2). Contract Price – Cover Price 3). Contract Price – Resale Price iv. Other Losses 1). Incidentals or out of pocket expenses from breach 2). Consequentials – loss, not expenses (pain and suffering, etc.) v. Costs Avoided 1). Sometimes may save costs by breach (shipping costs are example) vi. Loss Avoided 1). Amounts party received in mitigation (difference in pay of jobs after being fired and new job) 6. Injured party allowed to seek whichever type of damage they believe will compensate appropriately. 7. Sometimes all methods do not apply. B. Specific performance 1. Enforcement of terms of contract. 2. Equitable relief. a. Tells party to do or not do something. b. Must have clean hands. c. Must do equity in order to receive equity. d. Must show i. Fairness of contract. ii. Party is acting fairly. e. Courts determine equity or fairness i. Prospectively – is it fair now? ii. Retrospectively – was it fair when the contract was made? 3. Used ONLY when party cannot be made whole by awarding of monetary damages. a. Purchase of real estate is an example where specific performance would be allowed. Reason is land is individualistic, cannot compensate fully by monetary award if party wanted the land and there was breach. III. Contracts I – Fall 2002 Professor Stephens Page 3 b. Allowed when there is no adequate remedy at law. 4. Money will make a party whole when they are buying for resale. 5. Justified when goods are unique and in other proper circumstances. MUST always look at whether the party can be made whole before looking at these. a. Unique – no other item of similar nature available. b. Proper circumstances i. Inability to cover – cannot obtain from another source. ii. Impossible to determine adequate damage award. 6. Specific performance is not appropriate when there is continual and long-term policing necessary by the court. C. Lost Volume Seller 1. Party losing volume because of breach is entitled to recovery if it can be proven that additional sales could have been made at a profit Consideration as Basis for Enforcement A. Given in exchange for promise – Bargain Theory of Contracts B. Must have consideration to have enforceable contract. C. Gratuitous promise (gift) is not a contract because there is no exchange of promise for consideration. D. Types of Consideration 1. Benefit to promisor 2. Detriment to promissee a. Detriment is doing something that you do not have to do OR not doing something you have the legal right to do. b. Nephew who gave up smoking, drinking, etc. suffered a detriment, therefore, he provided consideration for the promise of $5,000. Hamer v. Sidway. c. Must have legal right to do the thing that is considered the detriment. (i.e. not detriment to give up crack cocaine). 3. Detriment can take the form of a. Action b. Inaction (forebearance) c. A promise 4. Forebearance of filing suit is valid consideration in exchange for promise – However, must reasonably believe that suit is valid (subjective) and that there is a legal basis for suit (objective). Fiege v. Boehm. E. Elements of Consideration 1. Promisor must make a promise. 2. Promissee must suffer a detriment. 3. Detriment must induce the promise. 4. Promise must induce the detriment. F. Without consideration, there is no contract. a. A promised to pay $500 on B’s birthday. B went and bought a car based on this. Is there a contract? No. There is a promise, there is a detriment, the promise did induce the detriment, BUT the detriment did NOT induce the promise. All must be present. G. Three Theories of What Constitutes Consideration H. I. J. K. Contracts I – Fall 2002 Professor Stephens Page 4 1. Peppercorn theory of consideration – Court does not look at level of consideration, ONLY that it is present. 2. Value theory of consideration – Court determines if consideration has value. 3. Gross discrepancy theory of consideration – Court looks at discrepancy between value of the promise and value of the consideration. Past performance or service is not consideration for a promise – there is no bargained for exchange. The promise did not induce the detriment. Moral Obligation as Consideration – Minority of courts hold that moral obligation is consideration and makes promise enforceable 1. Employee saves bosses life. Boss promises to pay for injuries and lifetime benefit. Contract is enforceable because Boss had a moral obligation to uphold his promise, thus forming a bargained for exchange and consideration for the promise. Webb v. McGowin. MINORITY viewpoint. 2. Some courts even hold that when a promise is made out of a moral obligation, it does not need to have consideration to be enforceable. MINORITY viewpoint. Requirement of Bargain – There must be bargaining between the parties in order for the promise (contract) to be enforceable. 1. Must look at promisors motivation. Was it to obtain promissees detriment or was it gratuitous? Why was detriment incurred? 2. Was detriment suffered as a condition of receiving a gift? If yes, the promise is not enforceable. A offers B a place to live if “she comes and sees him”. The detriment would be a condition of receiving a gift and, as such, would not be consideration in exchange for the promise. Kirksey v. Kirksey. a. If detriment was what induced the promise, the contract is enforceable. b. If detriment did not induce promise, the contract is not enforceable. i. In Kirksey, moving down to the farm was not what induced the promise to provide a place to live. 3. Employment Contracts a. Non-Competition Agreements – Some courts hold that promises made after hiring are not enforceable because there is no consideration. Other courts find consideration in the continued employment. CAB v. Ingram. i. In CAB, the court found consideration in that CAB did continue to employ Ingram and this was proper consideration in return for Ingram’s promise of non-competition. ii. This case is difficult because immediately after signing, CAB could have fired and prevented Ingram from competing per his agreement. However, the court would have invalidated this because there would be, in fact, no consideration (continued employment). Promise as Consideration 1. Promises can be consideration in exchange for another promise. 2. Must be mutuality of obligation. 3. Promise must not be illusory. a. Illusory promises are those where there is no true commitment to do something in the future. The promisor is free to keep or not keep the promise totally at their discretion. Contracts I – Fall 2002 Professor Stephens Page 5 i. A agrees to sign promissory note if B agrees to not collect until “he wants his money”. This is an illusory promise and thus is not consideration because B has total discretion on whether to keep the promise or not. Strong v. Sheffield. b. Illusory promise can be transformed into a true promise by the addition of restrictions. c. Illusory promises are not valid consideration because there is no mutuality of obligation or commitment. One party has to perform, the party making the illusory promise has an unrestricted right to perform or not perform at their discretion. d. “Satisfaction” clauses do not make promises illusory because the court implies that parties will be reasonable and act in good faith when determining satisfaction – this is the restriction that enables the court to enforce. i. Mattei v. Hopper – Court indicated that acting reasonably and in good faith constituted a restriction on the satisfaction clause of the contract to purchase property, thus the contract was enforceable. e. “Termination” clauses are not illusory if there is a limitation (ie. “Termination of contract can occur with a 30 day notice to the other party.”) 4. Generally, courts are predisposed to enforcing promises and will only find a promise illusory if a. Express provisions of contract do not contain restrictions b. Implied provisions of contract do not contain restrictions 5. Requirements and Output Contracts a. Requirements contracts are agreements to supply all requirements. b. Output contracts are agreements to buy all output c. Requires parties to act reasonably, therefore, there is some restriction on whether a party can perform or not perform. i. Eastern Airlines v. Gulf Oil. Court enforced requirements contract based on the fact that Eastern had to act reasonably to procure its requirements, thus there was a restriction on its promise to buy requirements and an enforceable contract. d. When clear, the court will further the intent of the parties, even if not expressed in contract. (Intent of Eastern was to buy reasonable requirements from Gulf at a set price and court sought to enforce the contract). 6. Courts Inclined to Enforce Promises a. When it is clear that intent of parties was to contract, the court will an enforceable contract, even where there appears to be an illusory promise or a lack of mutuality of obligation i. Implied duty to use reasonable efforts. Wood v. Lucy, Lady Duff Gordon – court found that although express terms of contract indicated that Wood would be able to perform or not perform at his discretion, the court found that there was an implied duty to use reasonable efforts, thus satisfying the restrictions to make the promise valid. Contracts I – Fall 2002 Professor Stephens Page 6 7. Implied Terms of Contracts Include a. Reasonableness b. Good Faith c. Reasonable efforts to perform contract 8. Courts will not imply a term that is inconsistent with intent of parties. Reliance as Basis for Enforcement A. Enforcement of contracts in absence of consideration 1. Quasi-contract B. Detrimental reliance is doing or not doing something based upon a promise. Also called promissory estoppel. C. Elements of Detrimental Reliance/Promissory Estoppel – No exchange, but party made a promise. 1. Promissee justifiably and detrimentally relied on promise made by promisor. 2. Promisor reasonably expected promissee to rely on promise 3. Unjust not to enforce the promise D. Under Detrimental Reliance/Promissory Estoppel Theory 1. Kirksey v. Kirksey – could recover because 1.)she justifiably and detrimentally relied on his promise, 2.)he reasonably expected her to rely on the promise, and 3.)it is unjust not to enforce promise. 2. Feinberg v. Pfeiffer – perhaps could recover, but she would have to prove to a jury that company reasonably expected her to rely on the promise. E. D&G Stout v. Bacardi 1. D&G relied on Bacardi’s promise not to stop supply to their detriment 2. Cause of action is promissory estoppel. 3. Bacardi could argue that D&G was not justified in relying on their promise not to stop supplying because they could stop at any time. In other words, the promise was illusory and D&G was not justified in relying on an illusory promise. 4. D&G could argue that they continued to apprise Bacardi of the situation and continually asked them for their commitment to supply which Bacardi gave them. 5. Bacardi could argue that, in fact, they did not break their promise at all – they stayed with D&G for an entire week. Restitution as a Basis for Enforcement A. Promise is implied in restitution cases. 1. EXPRESS promises are NOT under restitution cause of action. B. Elements of Cause of Action based on Restitution 1. Promisor is enriched by receiving a benefit. 2. Promisor is unjustly enriched by receiving the benefit without paying for it. 3. Restitution comes about from a consensual transaction in which a benefit is received by promisor and it is unjust to retain it without paying for it. C. Defenses to Restitution 1. Service was rendered gratuitously. 2. Benefit was subject of express promise (contract). 3. Service was subject of a contract. 4. No true benefit was conferred or value cannot be calculated. IV. V. VI. Contracts I – Fall 2002 Professor Stephens Page 7 D. Medical Professionals are eligible for restitution because benefit is conferred with expectation of payment & public policy would be to compensate so as not to deter immediate medical care to those who need it. 1. Cotnam v. Wisdom. Unconscious person liable for payment to surgeon who attempted to help, even though he eventually died. E. Damages under restitution 1. If alleging restitution, party gets restitution damages. 2. Value of benefit conferred from perspective of recipient. Difference is value before benefit and value after benefit. 3. Value for services provided from perspective of provider. 4. Sometimes difficult to determine change in value from the conferring of benefit. In these case, look to the value of the services rendered. 5. Courts want to give party providing the services the reasonable value as long as it does not exceed benefit conferred. F. If there is no payment expected from the party who was enriched, it is not unjust. 1. Callano v. Oakwood Park Homes. Callano expected payment from Pendergrast, not Oakwood. Therefore, it is not unjust for Oakwood to keep benefit without paying for it. Callano should request payment from Pendergrast’s estate. G. Mechanic’s Liens 1. Protect parties such as laborers, subcontractors, contractors, and the like, who make improvements on real property by giving them a lien (security interest) in that property in order to secure payment for those improvements. Assent A. Essential element of contract B. Both parties 1. Agree to same terms 2. Understand terms in same manner C. Meeting of the minds D. Ambiguity may indicate lack of assent 1. Ambiguity is interpreted most strongly against party who wrote it. 2. Latent ambiguities. E. Assent to terms of contract 1. Intent to be bound - Unstated state of mind is irrelevant – outward conduct and words MUST manifest an intent to be bound by the agreement from the perspective of a reasonable person. Two criteria to determine intent to be bound a. Objective – Conduct and words indicate intent to enter into binding agreement, AND b. Subjective – Party does not knows or should not have known that there was no intent to enter into binding agreement. i. In other words, in order for assent to occur, the parties must manifest the intent to be bound based on their conduct and words, unless a party knew or should have known that there was not an intent to be bound by the agreement. 2. Agreement and understanding of terms a. Express terms Contracts I – Fall 2002 Professor Stephens Page 8 b. Implied terms F. Lucy v. Zehmer. 1. Zehmer’s conduct and words indicated intent to be bound. 2. Lucy did not know and should not have known that Zehmer did not assent. 3. Therefore, there was assent to the terms and a binding contract was created. G. Acquiescence 1. If reasonable person under the circumstances would have objected and the party did not, the party has acquiesced to the contract. 2. Acquiescence is an indication of assent Offer A. Offer is a commitment to do or not to do something in the future communicated to another party. B. EMANUEL Definition - An offer is "the manifestation of willingness to enter into a bargain," which justifies another person in understanding that his assent can conclude the bargain. In other words, an offer is something that creates a power of acceptance. C. Offer confers power in offeree to create a contract upon acceptance. D. Offer/Promise/Commitment are synonymous. E. Offer requires 1. Commitment 2. Intent to be bound F. Offer must be communicated by offeror ONLY. G. Offer is effective upon receipt by offeree. H. Owen v. Tunison 1. Letter indicating that it was POSSIBLE to sell property for $16,000 did not constitute an offer. 2. There was no commitment to sell at that price. 3. There was no intent to be bound by the terms stated. I. Newspaper ads are not normally offers 1. Usually there is something left open for negotiation. This makes them not an offer. 2. Policy is to prevent unlimited liability of stores for specific performance of offers to sell. 3. Courts indicate that ads are an “invitation to negotiate, not an offer”. There is no intent to be bound. 4. Only when ad places limits is it considered to be an offer. In this manner, there is not unlimited liability. The limit serves to create a commitment. a. Lefkowitz v. Great Minneapolis Stores i. An offer to sell 1 black lapin stole at $139.50 to the first customer requesting it. ii. Ad did not leave any terms open. Offer was clear definite and explicit. iii. There was a limit, thus no unlimited liability. This created a commitment. J. Mistakes in offers 1. If one party makes a mistake that the other party did not know of or could not have known of until after acceptance, offeror is bound, UNLESS (must include all): VII. Contracts I – Fall 2002 Professor Stephens Page 9 a. Mistake was a material mistake b. Mistake not neglect of legal duty c. Enforcement of contract would be grossly unfair d. Offeree can be placed in status quo ante without hardship. 2. #1 Above balances enforcement of contract with fairness. 3. Elsinore v. Kastorff. Mistake met four criteria above and therefore, the offeror (Kastorff) was not bound by the terms of the construction contract. K. Irrevocable Offers 1. Option Contract or Firm Offer a. Cannot be taken back b. Has irrevocable terms c. Option can be an option to hold offer open to a specific person for a specific time period. i. Lease extension is an example. d. Promise to hold offer open must be supported by consideration i. Dickinson v. Dodds. Offer to hold open was not supported by consideration and was unenforceable. L. Offeror is master of the offer and they determine what constitutes acceptance. Acceptance A. Acceptance is agreement to the express and implied terms of an offer with an intent to be bound by those terms. B. EMANUEL Definition - An acceptance of an offer is "a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer." C. Three things occur with acceptance 1. Assent 2. Consideration 3. Mutuality of obligation D. Once acceptance occurs, there is an enforceable contract. E. Acceptance must be unconditional. F. Acceptance can be communicated ONLY by offeree. G. Acceptance is effective as determined by offeror. Can be when offeree puts acceptance in mail OR when offeror actually receives the acceptance. H. Since acceptance indicates assent, changing terms of the offer does not indicate acceptance and thus, no assent. 1. Changing terms of offer is called a “counter-offer”. I. “Mirror-Image” Rule 1. Acceptance must mirror the offer exactly. 2. Not accepting terms in mirror image indicates that there is no assent or intent to be bound. J. Fairmount Glass Works v. Crunden-Martin Woodenware 1. Crunden made an inquiry. 2. Fairmount responded with offer to sell X quantity at Y prices by Z date. No terms left open. 3. Debate centered on a. Who made the offer and therefore, who could accept or reject. i. Fairmount made offer by way of its detailed quote which left nothing open for negotiation. VIII. K. L. M. N. O. Contracts I – Fall 2002 Professor Stephens Page 10 ii. Crunden accepted the offer and then supplied specifications. b. Change of terms after offer was accepted. i. Fairmount claimed new specs changed offer and was thus, a counteroffer. ii. However, Fairmount rejected prior to arrival of new specs and specs were based on industry standard. c. Terms of contact were too indefinite i. Fairmount indicates that parties do not understand terms the same – there is no assent or meeting of the minds. ii. Trade usage defines the terms and both parties understood this trade usage. Trade usage is important in determining if parties understand the terms of the contract in the same manner. Communication of acceptance 1. Must communicate acceptance unless offeror specifies otherwise. 2. If offeror specifies acceptance by words: a. Can be expressed by words i. Agreement ii. Promise b. Can be implied by conduct or performance i. Must clearly manifest assent to terms of offer ii. White v. Corlies. Corlies wanted an agreement (by words). White gave conduct but it did not CLEARLY manifest assent to the terms of the offer. iii. When conduct occurs on someone’s property, they are presumed to know that it is going on and therefore, acceptance is communicated. Allied Steel v. Ford. 3. If offeror specifies acceptance is by conduct, CANNOT accept with words. 4. If parties agree that acceptance does not have to be communicated, it does not have to be. a. International Filter v. Conroe. Terms of contract indicated that acceptance occurred when signed at corporate headquarters. Indicated that communication of acceptance was not necessary. Suggested methods of acceptance do not preclude other methods. 1. Allied v. Ford. Ford’s suggested method of sending form back did not preclude another method such as by Allied’s conduct. Therefore, Allied would be bound by contract when they began work. Failure to Act is NOT Acceptance 1. Must be affirmative act of assent and intent to be bound. a. Exceptions i. Trade usage – what is common in the trade as to acceptance. If silence typically constitutes acceptance, it can be. ii. Course of dealings in the past – what has been done in the past – if silence was OK in past, it will suffice. Termination of the Power of Acceptance 1. Methods for Termination a. Revocation Contracts I – Fall 2002 Professor Stephens Page 11 i. Offeror can revoke offer anytime prior to acceptance, unless offer is irrevocable. ii. Effective when received by offeree. iii. Shown by indication that there is no longer an intent to be bound 1). Words – “I am revoking my offer” 2). Conduct – sold property to someone else. iv. Can be communicated by RELIABE third party. 1). Dickinson v. Dodds. Third party let person know that property was or could be sold to another. This is sufficient for revocation of offer to offeree. v. Revocation of newspaper ad 1). Revoked by comparable ad. 2). Does not have to be expressly communicated to every offeree. vi. Can revoke promise unsupported by consideration. 1). Consideration can be nominal or even peppercorn – deposit or down payment is consideration to hold offer open. vii. If a promise seeks performance, CANNOT revoke once performance starts. viii. If one relies on a promise, it becomes irrevocable to the point to prevent injustice. See Pre-contractual Liability section below. b. Lapse or Expiration of Offer i. Can expire by the terms of the offer. ii. If no limit in offer, expires after “reasonable time” depending upon circumstances involved. iii. Offers made face to face lapse at end of conversation unless expressed otherwise. c. Rejection of Offer by Offeree i. Words or conduct that indicates offer is unacceptable. ii. Rejection can become a counter-offer. iii. Effective on receipt by offeror. d. Death of Incapacity of Offeror 2. The “Mailbox Rule” a. Acceptance is not effective until communicated. b. Acceptance by mail is effective UPON mailing. c. Power to revoke offer ends when acceptance is mailed, even if acceptance has not been received. d. Offeree typically cannot reject an offer that has been already accepted (ex. Put in mailbox); however, if rejection beats acceptance to offeror, the rejection IS effective. e. Can stipulate that acceptances must be received in order to be effective since the offeror determines the terms of the offer. P. Acceptance of Offers Under UCC 1. UCC Article 2 rejects mirror image requirement of common law. 2. UCC 2-207 IX. X. Contracts I – Fall 2002 Professor Stephens Page 12 a. UCC 2-207(1) – Expression of acceptance is acceptance even when it does not mirror offer. b. UCC 2-207(2) – Additional/different terms become proposals for addition to contract. Between merchants, such terms become part of the contract, unless i. The offer limits acceptance to the terms of the offer. ii. The terms of acceptance materially alter the offer. iii. Notification of objection to the additional/different terms has been given or is given within reasonable time after notice of additional/different terms is received. c. UCC 2-207(3) – Conduct that recognizes the existence of a contract is sufficient for a contract. Contract becomes only those terms to which the parties have agreed. Supplementary terms are supplied by the UCC. 3. “Fallout Rule” – Applies to non-merchants and to merchants when offer is materially altered. Terms to which offeror does not agree fall out of contract. 4. “Knockout Rule” – Contracts between merchants become only the terms upon which the parties agree. Terms to which parties do not agree are knocked out of contract and gap fillers are used instead. Pre-Contractual Liability A. Majority Rule 1. Once an offer that seeks performance is relied upon, the offer becomes irrevocable. If offer is subsequently revoked, the offeree’s performance is excused and there is a cause of action for breach of contract. a. Must “tender” performance i. Ready to perform terms of contract ii. Willing to perform terms of contract iii. Able to perform terms of contract iv. Would have performed terms of contract if not for breach. B. Once court is satisfied that a party intended to be bound, the court will find ways to bind them to their promises. C. Intent to be bound “colors” the contract and courts find this persuasive to determine ways to bind the parties. D. Contract terms must be definite. 1. “Good Faith” is an implied term in every contract. It is definite – it means dealing honestly. 2. Once court determines that there is an intent to be bound, the court will determine what the indefinite terms actually consist of. Requirement of a Record for Enforceability – The Statute of Frauds and UCC A. Statute of Frauds specifies contracts that must be in writing and signed by party being charged (party against whom enforcement is sought). B. Signature is something that authenticates document. It is ANY symbol that indicates that a party intends to authenticate a document. C. Types of Contracts that must be in writing under Statute of Frauds 1. Executor/Administer contract - Executor or administer of estate to pay debt of decedent. 2. Surety contract - Contract to pay debt of another. a. Applies where both debtor and third party are indebted to creditor. Contracts I – Fall 2002 Professor Stephens Page 13 i. “I will pay debt of debtor” – must be in writing. ii. “If you deliver goods to X, I promise to pay for them.” This is not a promise to pay debt of another. It is an original promise and is NOT required to be in writing. iii. “If debtor owes money to creditor, if you will erase debt of another, I will pay it myself.” Not required to be in writing. b. Party acting as surety MUST tell creditor that they are paying debt of another. c. Does not require writing if a promise to pay debt of another is made and third party is independently responsible for the debt. d. “Main Purpose” Doctrine i. If main purpose is not to benefit debtor, but to benefit yourself, it does not have to be in writing to be enforceable. Plumbing contractor HYPO. 3. Marriage contract - Contract made in consideration of marriage. a. A promise to give money for marriage must be in writing. 4. Land contract – Contract for sale or transfer of interest in land. a. Any transfer (sell, easement, rent) of any interest must be in writing. b. Exception is a lease for one year or less. 5. 1-Year and over contracts – Contracts that cannot be performed within one year. a. Does not make sense. b. Time begins at moment contract is made. c. Time ends when performance is COMPLETE. d. If this is greater than one year, it has to be in writing. e. If contract is of indefinite duration, but COULD possibly be completed within a year, it does not have to be in writing. Example is a contract to rebuild WTC – could possibly be done, and thus does not have to be in writing. f. How are unilateral contracts handled? i. Completion of performance is the same moment as the contract is made. Completion of performance = acceptance. Acceptance of offer = contract. ii. Unilateral contract that seeks performance does not fall within the statute of frauds. D. UCC and Statute of Frauds 1. UCC covers sale of goods 2. UCC requires some writing containing, at minimum, the quantity term signed by person against whom enforcement is sought. 3. Applies only to sale of goods valued over $500. E. Oral Modification of Existing Written Contracts 1. If modification does not result in “new” contract, it does not have to be in writing. Parties would still be governed by written contract WITH the oral modifications. 2. Question for a jury as to whether a modification results in a new contract. F. Attorney has inherent ability to bind client even without written authorization when the subject matter is what the client has asked the attorney to perform. Contracts I – Fall 2002 Professor Stephens Page 14 G. Defenses to the Defense of Statute of Frauds 1. Part Performance – Johnson Farms v. McEnroe. Contract for sale of land was oral. McEnroe asserted that oral contract was not enforceable; however, McEnroe argued that part performance of the oral contract removed it from statute of frauds. a. Must be clear that contract is being performed i. Paying some of the purchase price ii. Making improvements iii. Taking possession 2. Promissory Estoppel – Monarco v. LoGreco a. Elements of defense i. Promissee’s justifiable and detrimental reliance on a promise. ii. Promissor’s reasonably expects promissee to rely on promise. iii. Unjust not to enforce promise. 3. Restitution/Unjust Enrichment - Monarco v. LoGreco a. Elements of defense i. Conferred benefit. ii. Unjust to obtain benefit without paying for it. 4. UCC has defenses to Statute of Frauds a. Contracts for specially manufactured goods do not have to be in writing to be enforceable. b. If there is an admission to the existence of a contract in court, the contract does not have to be in writing to be enforceable. 5. In judicial admission is a defense to statute of frauds. H. When defense to statute of frauds is permitted, the breach of contract action can stand. All damages would be available. 1. Reliance – putting party in position had there been no contract. 2. Restitution – refund of what party put in. a. Essence is UNJUST ENRICHMENT. Determine value of benefit conferred. 3. Expectancy – putting party in position had contract been performed. 4. Specific performance – available when money damages will not make a party whole. When subject matter of contract is unique, like land or other real property, specific performance is appropriate. Policing the Bargain A. Meets all elements of a contract but courts will not enforce. B. Designed to protect parties from unfairness. 1. Used as assertion of defense to breach. 2. Used as assertion of an affirmative defense to rescind contract. C. Three factors 1. Status or characteristics of parties involved. 2. Substance of bargain (looking at contract itself to determine fairness). 3. Behavior of parties during bargaining process. D. Status 1. Question is: Does party have capacity to contract? 2. Relatives bring suit for minor or mental incompetent. 3. Two things relate to capacity. XI. Contracts I – Fall 2002 Professor Stephens Page 15 a. Immaturity – Minor i. Contracts made during minority, for items other than necessaries, are voidable at minor’s option prior to reaching majority or within a reasonable time thereafter. 1). Emancipated minor is a minor who has renounced parental rights and duties. Parents are not responsible for minor’s acts. IRRELEVANT to minor’s ability to void contract. 2). Misrepresentation or fraud as to age is IRRELEVANT because party is still a minor. 3). Reasonable time depends upon circumstances. 4). Contracts made as a minor can be ratified (conduct that indicates that party is adopting terms of contract) by conduct upon reaching majority. IE making payments on a car. ii. If you deal with a minor, you do so at your peril. iii. For minor to void contract 1). Must return the goods, no matter their condition. iv. Minors are not liable in restitution. v. People who deal with minors in contracts CANNOT use promissory estoppel because it is NOT unfair to NOT enforce the contracts of minors. vi. People who deal with minors in contracts CANNOT use restitution when there is an EXPRESS promise. vii. What is a necessary? 1). Anything reasonably needed for subsistence, health, comfort, and education considering their situation in life. 2). Background, social status, etc. all go into the determination of what constitutes a necessary. 3). Necessaries are relative depending upon the circumstances of the party. 4). Look at similarly situated people to determine what is a necessary. b. Mental Infirmity or Incapacity i. Mental incompetent can only incur voidable contractual duties. ii. Voidable at option of mentally ill person. iii. Determined by tests 1). Cogitive test (a). Has person been so affected that they do not comprehend nature and consequences of transaction. (b). A problem is that it does not require the other party to know of the incompetence. (c). Another problem is that they should be able to exercise free will. They should be able to say “no”. 2). “New” Test Contracts I – Fall 2002 Professor Stephens Page 16 (a). Must be unable to act in a reasonable manner because of mental condition. (b). The other party has reason to know or should know of the mental condition. iv. Intoxication is not mental infirmity because it is self-induced. Courts would tend to enforce contracts made while intoxicated. v. Courts look not only at what experts say but also how people treat the supposed mental incompetent. vi. Ways to prove incompetence 1). Expert testimony 2). How does the “incompetent” person act during the transaction? Negotiation would tend to indicate that the person was competent. 3). How people around the “incompetent” treat the person. vii. Mental incompetent is able to rescind contract while incompetent or within a reasonable time of becoming competent, but prior to any ratification. Reasonable time is shorter than for minor. viii. More subjective than minority. ix. Mental incompetent must return property as obtained or they are liable for the difference in value. x. Mental incompetent would be liable under restitution theory. E. Substance of the Bargain (Looking at the Contract Itself) 1. Fairness a. In order to get equitable relief (specific performance or injunction) for breach of contract, one must show i. Contract terms are fair and dealings are fair (must come with “clean hands”), and 1). Relative values of consideration given must be appropriate. McKinnon v. Benedict. ii. Money would not make the party whole. b. Fairness is irrelevant when party is seeking damages as opposed to equitable relief. i. Relative values of consideration are not relevant when party seeks damages. Black Industries v. Bush. c. Substance of the bargain can be looked at for fairness from different points of view. Courts will use either method to side with party that they feel should win. i. Prospectively – from time the contract was made. Tuckwiller v. Tuckwiller. ii. Retrospectively – at time contract was sought to be enforced. McKinnon v. Benedict. 2. Contract is violation of public policy and unenforceable when a. There is a bribe. b. There is a contract for an illegal act. c. There is collusive bidding on a public contract. 3. Pre-Existing Duty Rule Contracts I – Fall 2002 Professor Stephens Page 17 a. Generally, the agreement to perform a pre-existing duty is UNENFORCEABLE because there is no consideration given. i. Alaska Packers Association v. Domenico. b. Cannot assert promissory estoppel because it would NOT be “unjust not to enforce the promise.” c. Pre-existing duty sometimes is not valid when parties actually are seen to rescind contract and agree to new terms. i. Watkins & Son v. Carrig. d. Problems arise as to when to support pre-existing duty rule and when to support rescission. i. Typically, courts will look at fundamental fairness and circumstances to determine if rescission applies. e. Restatement rejects pre-existing duty rule and says i. “A promise that modifies a pre-existing contractual duty will be enforced if it is fair, reasonable, and comes about from unintended circumstances.” F. Behavior of Parties During the Bargaining Process 1. Duress a. Definition - the wrongful threat to harm someone. b. Economic duress i. Components 1). Party threatens to withhold necessary goods unless the other party agrees to their demands. Necessary is determined by whether they are necessary to the party needing the goods. 2). Must demonstrate that party could not obtain goods from another source. Only need to go to vendors that could reasonably supply needed goods. 3). Ordinary remedy for breach of contract is inadequate. If sued for breach instead of going with demands, relationships would be harmed or would lose business. ii. If threat is to raise prices and is because of increase in raw materials and margin is not already high, this would not be unfair, and therefore, not duress. iii. Austin Instrument, Inc. v. Loral Corporation. c. Duress has element of fairness. If the threat is not wrongful, it would be allowed. d. Duress can be i. Threat to harm someone (physical, imprisonment, etc.). ii. Threat to sue someone if there is no basis for lawsuit. iii. Economic duress. 2. Concealment and Misrepresentation a. Misrepresentation is the making of a false statement of facts. b. Fraud is willfully and knowingly making a false statement. c. In order to rescind based on misrepresentation, must show i. Misrepresentation was done fraudulently. ii. The misrepresentation was material. Contracts I – Fall 2002 Professor Stephens Page 18 iii. It was a factual misrepresentation and not an opinion. 1). Look at who is making statement. Experts are more likely to state facts, not opinions. 2). The more specific a statement is, the more it tends to be a fact. 3). Formality of the statement – more formal is more likely to be fact. 4). Statement of aesthetics or value are always an opinion. 5). Opinions tend to be subjective, whereas facts tend to be able to be objectively proven. iv. The misrepresentation must have been relied upon. 1). Justifiable reliance. 2). If there is fiduciary relationship, reliance on misrepresentation is presumed. d. See generally i. Swinton v. Whitinsville Savings Bank. ii. Kannavos v. Annino. e. Misrepresentation of law i. Not usually misrepresentation because people are presumed to know the law. ii. Exceptions 1). Expert expressing opinion of law. 2). Person making misrepresentation is a person in a fiduciary relationship. 3. Duty to disclose a. There is no duty to disclose unless i. There is a partial disclosure. ii. There is a special or fiduciary relationship. iii. A false representation is made. iv. The other party is prevented from finding out the true facts. v. Seller knows that buyer is making a mistake in a basic assumption of the contract. vi. Seller has special knowledge that buyer cannot find out. 4. Mistake a. Mistake is an erroneous belief. b. Mistake as basis of rescission or defense to breach. i. Depends upon whether mistake is mutual or unilateral. ii. Mutual mistake is when both parties have an erroneous belief about assumption of the contract. iii. Mutual mistake CAN be rescinded if: 1). Mutual mistake relates to a basic assumption of the contract. 2). Mistake has a material effect on agreed consideration or consideration would be grossly unfair. 3). Party seeking enforcement is not at fault for mistake. iv. Unilateral mistake is when one side has an erroneous belief about assumption of the contract. Contracts I – Fall 2002 Professor Stephens Page 19 v. Unilateral mistake CANNOT generally be rescinded, with one exception: 1). Mistake is material. 2). Mistake is known to the other party. 3). Party alleging unilateral mistake is not responsible for the mistake. 4). Enforcement of the contract would be unconscionable. 5). Parties can be returned to status quo ante. 5. Unconscionability a. Courts refuse to enforce contracts because they are unfair on their face. b. Unconscionable means so unfair as to shock the conscious. c. To invalidate contract or provision on unconscionability, one must show: i. Contract is grossly unfair and one-sided, it is unconscionable. ii. There is an inequality in bargaining power. 1). Big guy versus little guy. 2). However, often, the consumer has the “power of the purse” that defeats this perceived inequality. iii. Party alleging unconscionability did not have a meaningful choice. 1). Party could not negotiate terms and had no choice. 2). Gross inequality in bargaining power negates meaningful choice. 3). It is presumed that there is no meaningful choice when there is a gross inequality of bargaining power. 4). If there is a gross inequality of bargaining power and the court feels that a party is being taken advantage of, court often eliminates need to prove no meaningful choice. d. Difficult to prove. e. Less likely in commercial (B2B) setting, except franchise agreements. f. Courts may refuse to enforce unconscionable provision or entire contract. g. Court may modify provision to eliminate unfairness. h. Court may find contract unconscionable solely on grounds of inadequacy of consideration when they feel party is being taken advantage of. 6. Contracts of Adhesion a. To invalidate as a contract of adhesion, one must show: i. Standardized terms. ii. Unfair terms. iii. Given on a “take it or leave it” basis and party must take it. b. Exculpatory clauses and parking stubs are examples. c. Essence includes assent. d. Courts will look at bargain to make sure i. Terms were brought to the agreeing party’s attention, ii. Terms were understood, iii. Whether the terms could be negotiated. 7. Lack of assent a. Could claim that there was a lack of assent to terms of contract. Contracts I – Fall 2002 Professor Stephens Page 20 b. Parking stub or cruise ticket as contract – person thought they were getting a receipt, not a contract. c. No agreement to terms of contract and no ability to negotiate. d. Court imposes i. Terms were not explained. ii. Terms were not pointed out. iii. Party did not know it was a contract. 8. Public policy a. Attempt to invalidate as a matter of public policy. b. Policy is to protect public at large. c. In order to invalidate, one must show: i. Terms are unfair. ii. Affects PUBLIC interest. d. Must impact public interest, not simply a few people. e. The higher number of people impacted, the less the terms have to be unfair. f. Non-compete covenants i. Requirements 1). In writing 2). Reasonable in terms of duration and distance (a). No greater than required for protection of employer (b). No undue hardship on the employee (c). Not injurious to the public 3). Part of original employment agreement 4). Reasonable to protect business interests of employer 5). Adequate consideration g. Pre-nuptial agreements i. Originally, public policy against pre-nuptial agreements. ii. Modern trend is enforcement of pre-nuptial agreements. 9. Illegal contracts a. Illegal contracts that performance of which violates a law are ALWAYS against public policy. i. Courts will not enforce ii. Courts will not provide restitution to parties to an illegal contract iii. Private actions that violate law are not immune b. Contracts for activities that facilitate illegal behavior are also unenforceable. i. In refusing to enforce contracts that facilitate illegal acts, the court will also evaluate whether there is a special interest for enforcement. ii. If no special interest or independent basis for enforcement, court will not enforce contracts that facilitate illegal activities. c. Contracts that are illegally formed are also unenforceable. d. “If party seeking to recover damages conferred a benefit, the other party knew of the illegality, and there is a lack of bargaining power, the contract will be enforced.” Contracts I – Fall 2002 Professor Stephens Page 21 e. Kinds of illegal contracts: Here are some of the kinds of contracts frequently found to be illegal and thus unenforceable: i. "Gambling" or "wagering" contracts; ii. Lending contracts that violate usury statutes; iii. The pursuit of "maintenance" and "champerty," arrangements by which one person improperly finances another’s lawsuit; and iv. The performance of services without a required license or permit. 10. Exculpatory clauses a. Types of exculpatory clauses i. Exemption from recovery ii. Limitation on recovery iii. Choice of law provision iv. Forum selection clause v. Claim-Time clause (must file claim w/in certain time) b. In general, courts do not like these types of clauses because they tend to violate public policy of holding parties accountable for their wrongs. c. Burden is on party asserting the clause to prove that the clause is fair. 11. Once convinced that contract is unfair and that there was no meaningful choice, courts will try to find for party they feel is just. 12. Generally, unfairness alone is not sufficient basis to find a contract unenforceable. 13. Unfairness must be coupled with a lack of choice (lack of free will) of the parties to be considered unenforceable. 14. Simply giving a party a choice helps to eliminate unenforceability. Offering several warranty plans is an example. 15. Courts are concerned with certain classes of people (poor and elderly) being taken advantage of in contracts with a. Exculpatory clauses b. Dragnet clauses c. Price gouging G. Modification of Contract Provisions 1. Approaches to Modification a. “All or Nothing at All” Rule – court enforces or refuses to enforce entire contract b. “Blue Pencil” Rule – Strike offensive portion of covenant. c. “Rule of Reasonableness” – courts enforce contract by modifying it to make it reasonable. i. Majority rule ii. Most closely resembles the intent of the parties.