Law School Outline - Stephens Spring- Prof Stephens

Contracts I & II Course Outline Professor Stephens Capacity to Contract (power to enter into K) Status of Parties (looking at characteristics of parties involved) - Immaturity (minor; failure to reach age of majority) - K w/ minor is voidable at option of minor before ratification - minor can rescind K that he entered into when he was a minor while he is still a minor or within reasonable time when he is no longer a minor (after reaching age of majority) - K is ratified when party is no longer a minor and an indication is made that K has been adopted - emancipated minor (parents renounce obligation) is irrelevant with respect to K enforcement - fraud is irrelevant with respect to K enforcement (still a minor) - minor can return property in any condition; the law imposes such consequences upon adults who enter into Ks w/ minors - "He who deals with a minor does so at his own peril." - minor is liable for value of necessities which are relative according to individual situation - Mental Infirmity - K w/ mentally incompetent person is voidable at option of the mentally incompetent person so long as mentally incompetency exists or after reasonable time once mental incompetency has been removed (very short period of time; court is reluctant if goods were used once no longer mentally incompetent) - two tests used to determine mental competence - cognitive test - whether person understands nature and consequences of transaction; does not require that other party knew about the incompetency - "new" test - (1) unable to act in reasonable manner because of the condition and (2) other party has reason to know of the condition - self induced mental incapacity is not governed under this rule (i.e. intoxication) - mentally incompetent person is liable for benefit conferred - must return property in essentially same condition, if not must compensate for unjust enrichment Forming a Contract 1. Offer (similar to promise, requires a commitment to do something) - offeror - person making the offer; master of the offer - determines how acceptance is to be made - offeree - person the offer is made to; can either accept as outlined exactly in the offer or reject the offer - offer must contain a commitment or an intent to be bound. - offer is effective upon receipt by offeree 1 Contracts I & II Course Outline Professor Stephens - advertisements - not an offer but "an offer to make an offer", unless offer is qualified, something to indicate only certain number of goods are available; may be effectively revoked by comparable advertisement - offer empowers offeree to create a K by his/her acceptance - Termination of an Offer 1. Lapse of Offer - offer lapses or expires within days as specified or if unlimited, within a reasonable period of time 2. Revocation - offeror may revoke offer at anytime before acceptance, no longer anything for offeree to accept - if offeror seeks acceptance by performance…3 rules (1) offeror can revoke before performance is complete (2) once offeree begins performance, K is created, thus offeror can no longer revoke the offer (majority rule) - law does not require "useless act", if offeror revokes once performance has begun, cause of action for breach is at the time offer is revoked; offeree must show that he is ready, willing and able to perform and would have performed but for breach tendering performance (3) once offeree relies on offer by beginning performance, offer is irrevocable to the extent necessary to prevent injustice; however, offeree is unable to recover until performance is complete (Restatement) - revocation must be communicated to the offeree either through words or conduct but does not have to be communicated by the offeror; sufficient if communicated by offeror or any reliable person (idea is that offeree knows that offeror does not intend to be bound) - revocation occurs when offeror makes any act inconsistent with offer; words or conduct that indicate the offeror does not intend to be bound - revocation is effective when received by the offeree - exception to revocation - irrevocable offer / firm offer / option K (promise to hold specific offer open to specific person for specific period of time, must be supported by consideration to be enforceable) - if a firm offer is made by merchant in writing, enforceable even if unsupported by consideration 3. Death or Incapacity of Offeror - offer is terminated upon offeror's death or incapacitation 4. Rejection by Offeree - terminates the offer - words or conduct that indicate that the offer is unacceptable - counter-offer = rejection + offer - effective upon receipt by offeror note: "Mailbox Rule" - if acceptance is by letter, acceptance is effective upon mailing 2 Contracts I & II Course Outline Professor Stephens - power to revoke an offer ends once acceptance is mailed by offeree, even if not yet received by offeror - rejection can be made after acceptance, if rejection reaches offeror before acceptance - places burden on offeror to make actual receipt of offeree's acceptance a condition of acceptance 2. Acceptance - promise to comply with terms of offer; assent to terms of the offer - acceptance of an offer creates a K because consideration, assent, and mutuality of obligation are created (all of which are elements of acceptance). - Mirror Image Rule - for true acceptance, the acceptance must mirror the offer in every respect (total assent to the offer) - counter-offer is not acceptance because it changes the terms of the original offer - becomes commitment to be bound under new terms - acceptance must be communicated unless offeror provides otherwise; an overt manifestation of acceptance must exist - if offeror seeks acceptance by promise, may accept by words or conduct but it must be clear that conduct manifests assent / acceptance / intent to be bound - acceptance must be unconditional; ultimate step for creating K - acceptance must be identical to offer - acceptance must be an expression of commitment and assent - if offeror seeks acceptance by performance (conduct), must accept by performance (conduct); clear, unequivocal manifestation of assent and commitment by conduct - if an implied term suggests that silence will be acceptance, then silence is acceptance, otherwise, there must be some affirmative act which manifests an intent to be bound note: offer for goods under Article 2-207 - acceptance doesn't have to mirror offer, sufficient if it is an expression of acceptance even if terms are changed unless acceptance is expressly made conditional on assent to altered terms (fall out rule – offer becomes K; knock out rule – K becomes only those terms to which both parties agree) 3. Assent / Mutuality / Meeting of the Minds - manifestation by parties' words or conduct that they intend to be bound to agreement - both parties understand and agree to the same terms - two standards: objective unless subjective - objective - whether "reasonable person" would intend to be bound - subjective - individual circumstances of case; whether one of the parties either knew or should have known that the other party did not intend to be bound - doctrine of acquiescence - whether parties' objected when a reasonable person would have objected; failure to object indicates assent - any ambiguities are to be interpreted most strongly against party who wrote K; otherwise, no assent (if terms can’t be construed against party who wrote K) - latent (hidden) ambiguities v. patent (obvious) ambiguities 3 Contracts I & II Course Outline Professor Stephens 4. Consideration - promise not supported by consideration is gratuitous - moral obligations are not supported by consideration (except in a minority of jurisdictions where someone risks their life to save someone else from harm) - past consideration is not legal consideration because there is no exchange - fairness of consideration is irrelevant unless seeking equitable relief - in order for promise to be enforceable, there must be an exchange 1. promise must be made 2. promisee must suffer a detriment (legal right to do or not do something) 3. detriment must induce the promise 4. promise must induce the detriment - pre-existing duty rule - if one party already has a pre-existing duty to do something, an offer to pay more is not supported by consideration; unless both parties mutually agree to rescind old K and create new K; consider… - whether one party has taken advantage of other party - promise to pay additional amount for pre-existing duty is consideration if caused by unforeseen consequences and the modification is fair (Restmt) - courts look at fundamental fairness, justice and reasonableness to determine when pre-existing duty rule supercedes rescission 5. Mutuality of Obligation - both sides must have an obligation to do something - illusory promise - unrestricted right to perform or not to perform or right to terminate K for no reason (no true commitment) - any restriction is not an illusory promise 6. Definiteness - obligation of parties must be definite - must be able to ascertain what each parties' obligations are - an agreement to agree is not enforceable because terms are indefinite - parties can not assent to terms that are indefinite - once court determines intent to be bound, will determine what parties intended to be bound by - what was intended by indefinite term? reasonable term; because the parties intended to be bound, they must have intended that the terms be definite note: courts have predisposition to enforcing promises - if the parties' intent to be bound is evident, the court will find a way to enforce the promise - expressed terms in this contract - implied terms in this contract (if it is clear that the parties intended the obligation to exist; will not imply terms that would be inconsistent with terms in the K) Other Methods for Enforcing Promises 4 Contracts I & II Course Outline Professor Stephens - contracts is about enforcing promises; if all elements are not met, may enforce on quasi contractual grounds - enforcement of promises in absence of consideration - consideration is irrelevant for quasi contractual cause of action 1. Promissory Estoppel (Detrimental Reliance) - justifiable and detrimental reliance by promisee on promise made by promisor - until reliance, promise is unenforceable - if action would have occurred anyway, no reliance regardless of detriment - promisee's reliance must be justified - reasonable expectation of reliance by promissor - unjust not to enforce promise under the circumstances of the case 2. Restitution (also a remedy for breach) - based on implied promise, in the absence of K - benefit conferred with expectation of payment - unjust enrichment (essence of restitution) - defense - no expectation of payment - gratuitous benefit; enriched, but not unjustly; values can not be calculated Contract Defenses - used as defense to breach of K action - may be affirmatively raised as a reason to rescind - 3 factors when policing the bargain: 1. status of the parties (characteristics of parties involved) 2. behavior of the parties (during the bargaining process) 3. substance of the bargain (looking at K in terms of fairness) 1. lack of capacity - immaturity - mental infirmity 2. Statute of Frauds - certain Ks must be in writing and must be signed by party against whom enforcement is being sought 1. Suretyship K - collateral promise - 3rd party guarantees the debt of another, receives no benefit, and is not liable until debtor defaults - original promise - does not require writing to be enforceable - if debtor's debt is wiped out as a result of 3rd party promise, not within the statute of frauds, becomes debt of 3rd party - if 3rd party is independently liable for the debt (i.e. partner promising to pay debt of partnership), not within statute of frauds - main purpose doctrine - exception to statute of frauds 5 Contracts I & II Course Outline Professor Stephens - whether 3rd party intended to become primarily liable for debt, in effect making it his original obligation, rather than to become a surety for debtor - whether there was consideration for the promise - whether consideration was primarily for 3rd party's benefit - creditor must be aware of the 3rd party's intent to pay debt 2. One-Year K - K that can not be performed within one year - one year period begins when K is made (acceptance) - one year period ends at time performance is complete - if it is possible that K could be completed within a year, not within the statute even though as a practical matter, may not be possible; if theoretically possible, not within statute of frauds - lifetime K that is terminable is within statute of frauds because if terminated, performance is not complete - dying will excuse performance; if performance is excused, it is completed, no other performance is necessary - if performance can be excused within one year, not within statute of frauds 3. Marriage K - promise made in consideration for marriage 4. Executor / Administrator K - promise to pay debt of deceased 5. K to transfer any interest in land - exception: lease of one year or less - if not in writing, above Ks are unenforceable even if supported by consideration - unilateral K that seeks performance is not within statute of frauds because performance is complete at the same time offer is accepted (lawn mowing K) - whether a K modification must be in writing depends on whether modification modifies original K or creates new K (new K must be in writing to satisfy statute of frauds) - under UCC 2 -201, in order to satisfy statute of frauds: - K for sale of goods of $500 or more must be in some writing to be enforceable - quantity is the only required term Defenses to the Statute of Frauds - part performance - must be clear that person is performing that K - with respect to land… - paying K price - taking possession of K property - making improvements to K property - promissory estoppel - restitution - under UCC 2-201, specially manufactured goods do not fall within Statute of Frauds - admission in court that K exists, removes K from Statute of Frauds 3. unconscionability - K may be rescinded solely because it is unfair - K is unconscionably unfair and one sided - inequality of bargaining power - absence of meaningful choice - unconscionable based on price alone 6 Contracts I & II Course Outline Professor Stephens - courts concerned with certain people (poor, elderly, illiterate) being taken advantage of (exploitation of someone's weakness for own personal gain) - absence of meaningful choice is presumed 4. public policy - protecting public against harm - exculpatory clause - use to limit liability of one of parties - complete bar from recovery - limitation on amount of recovery - choice of law provision - forum selection clause - claim time clause (limits time to file claim) - will be enforced unless: - affects members of the public; or - must affect enough members of public - the more unfair the term, the less number of people will have to be affected by it to satisfy "public interest" - deemed wholly unfair by the court - illegal K - performance of K requires violation of statute (never enforced) - K facilitates violation of statute (unenforceable unless special independent reason exists in favor of enforcing) - K formed by an illegal act; no restitution unless: (1) the party seeking recovery conferred a benefit on the other party who was unjustly enriched; and (2) the unjustly enriched party was culpable, had superior bargaining power and knowledge of the illegality - public policy in favor of enforcing laws; more important to facilitate the following of laws than to allow illegal Ks between private parties - covenant not to compete - generally unenforceable as against public policy unless… - must be written - must be part of an employment K - necessary to protect business interest of employer - based on reasonable consideration (in light of employer's business) - reasonable in terms of time and space - no greater than necessary to protect employer - no undue hardship on employee - not injurious to the public 5. contract of adhesion - standardized, grossly unfair terms - "take it or leave it" and had to "take it" (no other choice) - essence of Adhesion K - no assent - whether particular terms were brought to party's attention - whether party understood terms - whether party had option to negotiate 7 Contracts I & II Course Outline Professor Stephens 6. no assent - did not agree to terms because didn't know it was a K (i.e. receipt) - avoid by bringing K terms to the other party's attention - whether particular terms were brought to party's attention - whether party understood terms - whether party had option to negotiate 7. duress - wrongful threat to harm physically or financially - economic duress - threat to withhold necessary goods - inability to obtain goods from another source - breach of K remedy is inadequate 8. misrepresentation - misrepresentation of fact: - must involve a past or existing fact - must be material and fraudulent (willful intent to deceive) - reasonable reliance - must show that entered into K because of misrepresentation (if parties are in position of trust, reliance is presumed because of nature of relationship) - misrepresentation of opinion: - superior knowledge may turn opinion into fact - an expert giving an opinion in his field of expertise may be basis or misrepresentation - if special relationship exists, opinion may be fact which provides basis for misrepresentation - facts v. opinions: - the more specific a statement, more likely it is to be fact; the more general a statement, more likely it is to be opinion - whether statement is made by an expert or a layperson - formality of statement - if written, more likely to be fact; if oral, more likely to be an opinion - statements of aesthetics and statements of value are opinions - can lie about opinion w/out being liable for misrepresentation - not liable for misrepresentation of the law because everyone is presumed to know the law; except: when misrepresentation is made by a lawyer based on the law of that state, or when made by person in position of trust 9. mutual mistake - both parties have an erroneous belief about the same fact - mistake goes to basic assumption of K - relates to essence of K - mistake has material effect on the agreed consideration; would be grossly unfair if K is enforced - party seeking rescission did not bear risk of mistake (not of his own fault) 8 Contracts I & II Course Outline Professor Stephens 10. unilateral mistake erroneous belief by one party; generally can not rescind on grounds of unilateral mistake, except: - where mistake is known to other party - party alleging mistake is not responsible for mistake - enforcement would be unconscionable 11. duty to disclose - if partial disclosure is given, obligated to give full disclosure - false misrepresentation is made - special relationship exists between parties (fiduciary) - other party is prevented from finding the truth (unable to find truth) - know that other party is making a mistake about a basic assumption of K - when one party has special knowledge that is not readily available to the other party note: courts have three options once K is found to be unfair 1. all or nothing rule - refusal to enforce entire provision 2. blue pencil rule - strike offensive part of provision, enforce remaining terms 3. rule of reasonableness - modify K to make it fair (consistent with public policy); allows intent of parties to be enforced; majority rule Remedies for Breach - desire to make innocent party whole by compensating for loss - fairness as to substance of bargain is irrelevant if seeking money damages 1. restitution damages - refund of purchase price, getting deposit back - the value of the benefit conferred, amount by which recipient was unjustly enriched - two ways to measure 1st - value of benefit conferred from perspective of recipient 2nd - "quantum meruit" - value of services rendered from perspective of person who rendered services - value of services rendered can not exceed value of benefit conferred - party rendering services will be paid up to amount of benefit conferred regardless of who breached the K; court will not allow either party to retain benefit w/out paying for it - value of services rendered will be awarded regardless of whether the party seeking recovery would have lost money had the K been performed - unjust to retain benefit without payment unless provider never expected payment - without facts to the contrary, value of services rendered is presumed to be equal to value of benefit conferred 2. reliance damages - amount expended because of reliance; how much promisee spent because he thought there was a K; seeks to return innocent party to situation had there been no K ("status quo anti") 3. expectancy damages = loss in value + other losses - costs avoided - loss avoided 9 Contracts I & II Course Outline Professor Stephens - loss in value - determines what party should have received - lost profits - what should have been received minus what would have been paid out; overhead is already factored in the equation - cover price / K price differential (buyer) - K price / resale price differential (seller) - other losses - incidental (additional out of pocket expense because of breach) and consequential (losses resulting from breach – i.e. damaged reputation; pain and suffering) damages - costs avoided - costs saved because of breach (i.e. shipping expense) - loss avoided - amounts innocent party received in mitigation of breach - seeks to put innocent party in the position would have been in had the K been performed 4. specific performance - equitable relief will not be granted unless K is fair - granted when money won't make innocent party whole - no adequate remedy at law - no way to calculate damages - granted when goods are unique and under "other proper circumstances" (i.e. inability to cover, can't get goods elsewhere) - loss of profit will not result in specific performance because money can make injured party whole (i.e. when goods are being purchased for resale) - "to get equity, must do equity" - for equitable relief to be granted, must show that K is fair and not oppressive and that you are acting fairly - look at K retrospectively - at time enforcement is sought - look at K prospectively - at time K is made (court will apply standard that is necessary to have party who should win, win) - injunction - prohibits party from doing something - writ of mandamus - forces party to do something - mandatory injunction - requires party to stop doing something but in order to not do something, must do something (in essence, requires performance) Limitations on Damages 1. avoidability - party can not recover a loss that could have been avoided by taking no further action - party can not take affirmative action that increases damages - duty to mitigate exists when all terms of new offer are comparable (goods, employment, K provisions, duties, location) - no duty to mitigate exists if there is undue risk, undue burden, or undue humiliation (subjective standard with respect to humiliation) - duty to mitigate if and only if damages can be mitigated in comparable manner as required under the orignal K - “comparable” is determined by an objective standard (otherwise no one would have to mitigate under subjective standard) - Doctrine of Avoidable Consequences 10 Contracts I & II Course Outline Professor Stephens - required to do what is reasonable to avoid any loss caused by a breach - required to avoid consequences of a breach by doing what is reasonable - two components: 1) don’t take further action which would increase damages 2) mitigate damages - non breaching party is entitled to benefit of bargain unless cost of repair is grossly disproportionate to the difference in value (court wants to avoid economic waste) - normal measure of damages – amount needed to cure defect except when K relates to matters of personal taste or aesthetics, non breaching party is entitled to exact performance - bad faith / willful intent is irrelevant because K law is not punitive - courts follow two principles: - wrongdoers are not to be punished by having to pay more b/c of bad faith/intent - something is wasteful when value spent is not equal to value conferred 2. foreseeabitlity - must be foreseeable that breach will result in damages - two ways in which damages are foreseeable: 1) some damages naturally flow from breach which are foreseeable and recoverable (general damages) 2) special circumstances which do not normally flow from breach are not foreseeable unless the circumstances were made known to the breaching party prior to the formation of the K (special damages) - four elements of foreseeability: 1) damages must reasonably flow from breach 2) if damages don’t reasonably flow from breach, the breaching party must have been made aware that special damages would result from breach (not necessary to identify all items of damage or any damage, communication of special circumstances is sufficient) 3) damages which flow from breach don’t have to be certain but probable 4) evaluated under an objective standard – would reasonable person expected damages to flow from breach? - contractual purpose of foreseeability requirement – to limit liability of breaching party of unforeseen damages – only what could have been foreseen by reasonable person - court will look at nature, purpose, and circumstances surrounding the K - court will also consider whether special damages were within contemplation of parties 3. certainty - in order to recover damages, they must be proven with reasonable degree of certainty - damages are to be proven by testimony and documents, weighed by trier of fact - must ask witnesses whether their opinions are made with reasonable degree of certainty (lost profits as damages requires expert testimony) 4. liquidated damages 11 Contracts I & II Course Outline Professor Stephens - some parties agree to liquidate damages at time K is made rather than having to go through other limitation tests - specifies what damages will be in event of breach - will only be enforced if compensatory; court will not enforce if punitive regardless of whether parties agreed to it because penalties are inconsistent with K law - in determining whether a K provision is a liquidated damages clause or a penalty, the court looks at three factors: 1) estimate must bear reasonable relationship to anticipated harm and./or actual loss 2) whether liquidated damages was reasonable pre-estimate of the loss at the time K was entered into (compare actual harm) 3) damages must have been difficult or impossible to estimate at time K was made (if not difficult to assess, no need to have liquidated damages clause) - if above three elements are not met, a penalty would be imposed (K law not punitive) - estimate must be essentially equivalent to actual loss, not equal but close - liquidated damage provisions are highly scrutinized and often not enforced - court will enforce liquidated damage provision if estimate is grossly lower than actual harm but not if estimate is grossly higher than actual harm - courts look at essence of term (just because a provision is labeled “penalty” does not make a penalty - if liquidated damages provision is enforceable, damages will be limited to amount stipulated in K - if liquidated damages provision is rendered unenforceable, may still recover K damages just not the stipulated amount - courts must balance two things: 1) actual loss; and 2) loss proposed by provision Contract Construction and Interpretation - parol evidence rule - relates to all oral and written evidence - under this rule, all preliminary and contemporaneous negotiations between the parties merge into the final K - K become final agreement between parties unless there is fraud or mistake - applies to all preliminary matters prior to forming the K (all evidence/matters outside the K; extrinsic/external evidence) - written K supercedes everything that occurred earlier - does not apply to matters subsequent to K formation - rule of integration – everything is integrated into final written K - rule only relates to Ks that are final and complete - rule does not apply when terms are left out or some explanation is needed - implied terms are not extrinsic to the K (they are included in the K) 12 Contracts I & II Course Outline Professor Stephens - purpose of rule: aids court in interpretation of parties’ intent (enforcing intent of the parties is the goal of K law) - parol evidence may be used… 1) to explain contradictory agreement but not to modify the K 2) to fill in gaps when K is not fully integrated 3) to show fraud or mutual mistake which would allow for reformation of K (suggests that no K was ever formed because there was no assent) 4) to clarify an ambiguity in the K - used to ascertain what parties meant by term - term susceptible to more than one interpretation - court will apply broad interpretation over narrow interpretation unless party asserting narrow interpretation can provide proof of the narrow interpretation - parol evidence is not allowed to create an ambiguity, only to clarify - plain meaning / plain language rule – if looking at K and language / meaning is clear, there are no ambiguities, thus no extrinsic evidence is allowed - latent ambiguity – hidden, underlying ambiguous term; parol evidence may be used to determine if there is a latent ambiguity in the K; evidence does not resolve term, must use subjective theory of interpretation; if parties understand K differently, there is no assent, thus no K - implied terms are used in K interpretation - court may imply terms based on intent of parties when… - there is a gap - when explanation is needed - court will not imply a term when… - no gap - unnecessary to effectuate intent - when not within contemplation of parties - conflicts or is inconsistent with express K terms - impractical to implement - implied terms in all contracts 1. good faith (honesty) 2. reasonableness 3. best and reasonable efforts (implied under general K law as well as UCC) 4. course of dealings 5. course of performance – shows party’s intent; has higher weight than trade usage because indicates intent 6. trade usage / industry practice (custom) – only relevant if at least one party to the K is a member of the trade; other party must regularly deal in that trade or know or should know of the trade usage 7. fair dealing 8. right to terminate 1) reasonable time after K is entered into (depends on facts and circumstances of each case) 13 Contracts I & II Course Outline Professor Stephens 2) must give reasonable notice 3) terminate with or without reason - hierarchy of implied terms – to the extent trade usage conflicts with course of dealing, course of dealing controls; to extent course of dealings conflicts with course of performance, course of performance controls - starting point is always the K – what did parties intend? - any implied term may be overcome by express terms to the contrary - if K is discretionary or subjective, party must act in good faith, must show honest basis for exercising discretion (to prove subjective good faith, use witnesses other than contracting party) Performance and Breach Elements of Breach - in order to recover for breach of K, must show… 1 - valid K 2 - breach 3 - innocent party was ready, willing, and able to perform and that you actually tendered performance - show that you would have performed but for the breach - must tender performance unless it is excused (i.e. when futile) 4 - damages Five Types of Condtions: 1. condition precedent (dependent conditions) - one party's non performance excuses the other's performance - condition must occur before performance is required - K doesn't become effective until condition precedent is met (without condition precedent, no true assent) - must be exactly complied with or performance is excused - must be expressed in the K; court can find condition precedent when not expressed in K as long as condition is stated in the K (doesn't have to say "condition precedent") - K elements are not conditions precedent but duties of K - court will prefer an interpretation which imposes a duty rather than a condition in the event the K language is unclear - difference between condition and duty is important in determining what remedy is available; if condition is not met, performance is excused; if K duty is not met, can recover for breach - if satisfaction is condition precedent, reasonableness and good faith are required except when involving personal aesthetics or taste, only good faith is required, must be honestly dissatisfied but do not have to be reasonable 14 Contracts I & II Course Outline Professor Stephens - conditions precedent can not be implied but courts can interpret language to apply a condition precedent through parties' intent (depends on whether, based on K language, the parties intended for the K to contain a condition precedent) - doctrine of waiver - when parties don't act consistently with K terms, terms are waived and K becomes acts of parties; when condition precedent is ignored through acts of parties, considered to be waived 2. condition subsequent - a subsequent event which acts to discharge duty that has already arisen - duty is discharged by happening of a subsequent event - most common example - insurance K 3. independent condition - require both parties to perform regardless of other party's performance - most common example - landlord's duty to repair / tenant's duty to pay rent 4. mutual (concurrent) conditions - each party's performance is a condition of other party's performance - when one party tenders performance and other party refuses, performing party may recover from other party for non performance - party is not in default until other party performs his/her obligation under the K 5. constructive condition precedent - condition precedent implied by law - condition not expressed in K but justice requires and had the parties thought about if would have included it as a condition precedent - does not have to be exactly complied with; substantial performance is sufficient - substantial performance is achieved when essence of K has been performed; when essential purpose of K is achieved (no mathematical formula; must look at individual K to determine the essence of K and whether it has been performed) - when K is silent, work is constructive condition to payment - once K has been substantially performed, can recover full K price less damages caused by breach (diminished value rule - if cost to repair / replace is disproportionately greater than increased value, injured party can recover difference in value - courts won't promote economic waste, nor will breaching party be punished) - when K is not substantially performed, restitution is available independent of K; when valuable services are rendered which confer a benefit to another, entitled to recover value of services rendered to extent benefit was conferred note: when there is a major / material (total) breach by one party, there is no substantial performance, thus, the other party is not obligated to perform and the breaching party can not recover; when K is substantially performed, only a minor / immaterial (partial) breach, thus breaching party is entitled to recover - 4 factors in determining whether breach is material or immaterial… 1. time breach occurred 15 Contracts I & II Course Outline Professor Stephens 2. extent to which K has been performed at time of breach 3. extent to which parties received benefit of bargain 4. behavior of breaching party - whether breach was willful Divisibility (another theory of recovery) - entire K - K that requires the entire "thing" to be done (i.e. house) - divisible K - K which can be reasonably divided into two or more parts and with respect to each part, party can recover to the extent each party received benefit of that bargain - when any part of divisible K is performed, other party must perform - for each divisible K, must look at what is divisible note: to determine whether a condition is independent or dependent, courts look at three factors… 1. course of performance 2. intent of parties as evidenced by K language 3. common sense Hindrance and Prevention - implied term in every K - to extent reasonable and practical, parties have an affirmative duty to cooperate to further the other party's performance - can not act affirmatively to prevent or hinder other party's performance; and - must act affirmatively to enable other party's performance - the fact that one party makes the other party's performance more burdensome does not excuse performance unless the party acted intentionally to interfere w/ performance - courts will look at why party acted the way it did when it interferes with other party's performance (i.e. whether it was to intentionally prevent performance) - if 3rd party interferes with K, C/A in tort under intentional interference with contractual relations; allows for punitive damages to punish / deter the wrongdoer) note: party is not limited to reason originally asserted in alleging breach of K unless other party has relied on that reason - estoppel - a party is not estopped unless there is reliance (party changed their position to their detriment) - estoppel requires that you changed your position in reliance of other party's statement - estoppel is where one party says something and the other party does something in reliance of that statement - waiver - voluntary relinquishment of a known legal right - does not require reliance 16 Contracts I & II Course Outline Professor Stephens - where party says something & is later barred from saying anything else - election - once a reason is chosen, election is made and party is stuck with it - choice between two or more inconsistent options or rights - must choose one or the other; may be two inconsistent causes of action or two inconsistent remedies - uncommon today since FRCP allows for alternative pleadings and defenses Prospective Nonperformance - nonperformance in the future - anticipatory repudiation - occurs when party announces in advance that it will not be able to perform a future obligation - not yet a breach because performance isn't yet due - merely announcing that it will breach when time for performance is due - must be a definite, clear, absolute, unambiguous, and unequivocal statement that party will not or can not perform a future obligation of the K; can not be indirect, vague, or oblique - if party announces in advance that they will not perform, other party can sue for breach at that time even though breach hasn't yet occurred - policy rationale… - otherwise party could not mitigate damages until performance is due - two options with respect to anticipatory repudiation: 1 - do nothing - wait until K is to be performed, then sue for breach 2 - sue immediately for breach (a.k.a. anticipatory repudiation) - under either option, performance is suspended - do not have to show that you were ready, willing, and able to perform, nor do you have to tender performance to recover under anticipatory repudiation - when party anticpatorily repudiates, party is saying that it will not perform this K; if one conditions one's performance on K being changed or new terms being added, constitutes anticipatory repudiation because clearly saying that party will not perform this K - under UCC Article 2-609, if a party has a reasonable basis to feel insecure about other party's future performance, party has right to demand adequate assurance that other party will perform; party is allowed to suspend performance until it receives that assurance; if assurance is not received within 30 days, party can treat as failure to respond as other party's anticipatory repudiation - reasonable grounds for insecurity is a question of fact to be decided based on commercially reasonable standards - adequate assurance is a question of fact to be determines by jury using reasonable commercial standards note: K must be covered by UCC or there must be K provision in order for failure to respond to demand for adequate assurance to constitute repudiation; court will apply 2-609 to non UCC Ks when long term commercial K is involved where you can't anticipate everything that might happen which would lead to insecurity 17 Contracts I & II Course Outline Professor Stephens - damages under anticipatory repudiation is market price / K price differential at a reasonable time after learning of repudiation - why? allows balancing of all parties' interests (buyer has chance to cover; seller has chance to retract repudiation); discourages speculation; encourages mitigation - party can retract repudiation at anytime before change in position by other party in reliance of the repudiation or at anytime before other party treats K as breached - if repudiation is properly retracted, treated as though it never occurred Basic Assumptions - mutual mistake - both parties made mistake about basic assumption of K (equates to no assent); belief does not have to be reasonable provided both parties believe it - performance is not excused by unforeseen circumstances, hardship, or difficulty absent a mutual mistake - when performance is excused, there is no obligation to perform, thus failure to perform is not a breach, thus not liable for damages - performance is excused… - impossibility 1 - act of God (i.e. force of nature) 2 - performance is illegal 3 - performance is prevented by other party 4 - absolutely impossible under any circumstance 5 - when performance depends on existence of particular person or thing and that person or thing perishes - person perishes upon death or incapacitation - thing perishes when it is destroyed or goes out of business - perishing can not be of either party's fault - key is that parties contemplated continued existence of person or thing in forming the K - when person or thing perishes, doesn't matter that party may not have been able to perform provided there was no breach at time thing or person perished (performance is excused, period!) 6 - commercial impracticable (allows K to be rescinded, then bring restitution C/A to recover benefit conferred) 1 - something unexpected occurs 2 - risk of unexpected occurrence was not allocated to either party under K, custom, or otherwise 3 - occurrence of unexpected event renders performance commercially impracticable (not impossible but unreasonably and excessively expensive - to be determined by looking at K price as a whole) 18 Contracts I & II Course Outline Professor Stephens - note: impossibility to perform can not apply when only requirement under performance is to pay money (assert frustration of purpose instead) - whether the impossibility is foreseeable may serve as a defense to the defense of impossibility; party asserting impossibility must show that the "event" was not foreseeable to him - generally, breach is foreseeable (depending on facts & circumstances) - foreseeable that party will not perform unless obligated to do so under K - not foreseeable that a business will go out of business - frustration of purpose - performance is possible but value has been diminished 1 - unforeseen event occurs that substantially frustrates parties' principal purpose (purpose must be known to both parties) 2 - party asserting frustration of purpose is not at fault 3 - non occurrence of event was basic assumption of K (unforeseeable) 4 - risk was not allocated to party asserting frustration of purpose - UCC 2-615 provides defense of "excuse by failure of presupposed conditions" (basically a combination of 3 separate defenses under general K law impossibility, commercial impracticability, and frustration of purpose) 1 - contingency occurs 2 - that contingency made performance impracticable (must be more than hardship or unprofitable; must be "unjust" to enforce K; similar to unreasonably and excessively expensive requirement; question of fact) 3 - non-occurrence of that event was a basic assumption of K (another way of saying it was unforeseeable) note: when hybrid K is involved, courts look at whether K is predominantly for goods or services to determine whether K is covered under UCC - escape clause - provision in K that excuses performance based on the happening of a specified event - force majeure clause - defense based on K language which 1) allocates risk to other party if something occurs outside of parties' control, and 2) eliminates the need to show something was unforeseeable - if event occurs beyond your control that prevents performance, performance is excused Third Party Beneficiaries - exception to general rule that in order to sue for breach, must be party to K - in some cases, person intended to be benefited by K can sue promisor of K to recover as third party beneficiary - 3PB law is necessary to allow someone other than contracting party to sue for breach 19 Contracts I & II Course Outline Professor Stephens - types of third party beneficiaries under general K law… 1 - donee beneficiary - when purpose of promisee in obtaining promise from promisor is to confer a benefit on a third party (caution: may be gratuitous promise; must show adequate consideration to enforce) 2 - creditor beneficiary - when purpose of promisee in obtaining promise from promisor is to discharge a duty promisee owes a third party note: intent / knowledge of promisor is irrelevant under general K law - types of third party beneficiaries under the Restatement… 1 - intended beneficiary - unless otherwise agreed between promisor and promisee, to be an intended beneficiary… 1 - must be the intention of the parties that 3rd party benefit, and 2 - benefit to 3rd party will either… - satisfy an obligation owed to 3rd party, or - convey a gift to 3rd party note: promisee must have specific intent to benefit 3rd party, however, it is sufficient for promisor to know of the benefit; knowledge imputes intent; promisor's intent is presumed when promisor knows that promisee's intent is to benefit the 3rd party (if you know something will happen, it is difficult to say you didn't intend for it to happen) 2 - incidental beneficiary is anyone other than an intended beneficiary and can not recover for breach of K - 3PB law is procedural, not substantive - does not change the merits of the case - third party must show that valid K exists (must have adequate consideration) - C/A allows third party to stand in shoes of promisee; has same rights as promisee - promisor can be sued by promisee and/or third party beneficiary - promisor being sued by third party beneficiary may assert any defense against the third party that could be asserted against the promisee - with respect to attorney / client relationship, if attorney knows of client's intent, courts will impute client's intent to attorney; knowledge imputes intent; attorneys are held to reasonable attorney standard - 3PB rights do not vest before 3PB has notice, thus can be modified, altered, or extinguished unless… 1 - K prohibits it 2 - 3PB has notice…evidenced by… - filing suit (against promisee or promisor) - change position in justifiable reliance on promise - 3rd party assents - policy - parties should have freedom of K; 3rd party should not be able to control contracting parties' ability to modify their K 20 Contracts I & II Course Outline Professor Stephens Assignment and Delegation note: when an entire K is assigned, both K rights and duties are transferred - assignment - not a K but a transfer of a K right (thus does not require consideration) - assignor - contracting party who transfers a K right to another - assignee - party to whom K right is transferred - generally, the right to receive money owed to another - K rights are freely assignable with or without the consent of the other contracting party; however, duty, burden, performance or risk of other party can not be increased - three components of valid assignment… 1 - assignor's intent is to relinquish its right to assignee 2 - assignor can not retain any control over the assigned right 3 - assignor can have no power to revoke the assignment - partial assignment of rights will be valid provided obligor's duty is not changed - once assignor transfers K rights, assignor's rights are extinguished - once notice is received by obligor, obligor can no longer pay assignor, must pay assignee - after notice has been received, if obligor pays assignor, does so at own peril because obligor is still obligated to pay assignee - assignee may sue obligor directly - rights transferred are based on assignment; look at K to determine what rights were assigned - K rights are not assignable when other contracting party's rights will be adversely effected; one party can not change the rights of another party without their consent - covenant not to assign expressed in K eliminates a party’s right to assign but not the power to assign – when assignment is made in violation of K covenant, does not render assignment invalid – assignor can be held liable for breach - in order to eliminate all power to assign, must say “an assignment will render this agreement void” or “assignee will have no rights under an assignment” - merely an indication that K is not assignable will not render K void upon assignment, must show clear intent to eliminate all power to assign - delegation - not a K but a transfer of a K duty or obligation - delegator - contracting party who transfers K duty to another - delegatee / obligee - party to whom K duty has been transferred - delegation of K duty does not discharge duty of delegator unless all original contracting parties agree to extinguish obligation; otherwise, delegator remains liable for performance even after the delegation - when duty is delegated, party performing duty is entitled to payment for work completed – not entitled to payment for what was done prior to the delegation 21 Contracts I & II Course Outline Professor Stephens - original contracting party is only obligated to pay delegatee for work which is done after the delegation - certain duties can not be delegated… - personal duty - duties which require original contracting party's personal skill, unique talent, artistic ability, or discretion - must be something in K which makes it apparent that particular person is what was contracted for - i.e. "Chipper Jones' duty to play baseball can not be delegated to Mr. Williams." - employment Ks are considered to be personal service Ks - personal service Ks generally involve individuals, not business entities - duty can not be delegated when… - would change obligor's duty (does not have to be a material change – any change would render duty undelegable) - would increase obligor's burden or risk - would impair obligor's chance of obtaining return performance - would reduce the value of obligor's return performance - law restricts the assignability of specific right involved - K expressly prohibits it with a clear indication that K will be void upon delegation note: if transaction involves both goods and non goods, courts will use dominant factor test – if dominant factor is sale of goods, UCC Article 2 controls 22