Law School Outline - Final Outline for Exam Contracts

CONTRACTS OUTLINE FALL – 2004 APPROACH TO EXAM QUESTIONS 1) Is there a Valid Offer? a. b. Intent – objective manifestation of present intent to contract (Attn: State of mind & Prelim negotiations) Content – essential terms of the agreement i. Yes – Parties, Subject Matter, Time of Performance, Price ii. No – Interpretation, Imply a Reasonable Term (Gap Fillers) Communication – intent to communicate the offer to the offeree Specific Termination - Expired on Specified Date or Event? Other Termination i. Reasonable Time Expiration? ii. Illegality? iii. Either party die/incapacitated? Rejection or Counteroffer? Revocation? i. Exception - Option K? 1. consideration 2. reliance 3. firm offers (sale of goods, written offer, signed by offeror merchant) Mailbox Rule i. commercially reasonably manner (dispatch), not (receipt), option (receipt) Rejection/Counteroffer i. Common Law – Mirror Image 1. Additional/varying terms create counteroffer 2. Unless Exceptions ii. Goods – UCC §2-207 1. Must have Intended to be a Non-Conditional Acceptance = valid K 2. Different Terms – 3 ways to handle (First-Shot, Additional Analysis, ―Knockout‖ Rule) 3. Additional Terms a. If non-merchant – terms are mere proposals & only accepted if explicitly agreed b. If both merchants – No K if… i. Language Expressly Limits ii. Additional terms are Material (economic impact of profit/loss, risk allocation, impair some remedy) iii. Objection in Reasonable Time 4. Conduct – if yes, K of agreed writings & UCC gap fillers for disagreement 5. Oral – different (not part of K; either offeror or UCC), additional (same analysis) Unilateral K’s – Bias towards Bilateral K‘s; Reliance in Partial Performance Issues c. a. b. 2) At time of Acceptance, was the Offer still Outstanding? c. d. 3) Was there a Defective Acceptance? a. b. c. 4) Consideration Issues a. Was there… i. 1) bargain-for-exchange, of… ii. 2) legal detriment (i.e. ―But for‖ this bargain not legally obligated to perform or forebear) No Consideration b/c… i. Illusory Promises (lack of mutuality) 1. Exceptions – full performance of K or implied term (best-efforts or exclusivity in requirements contracts) ii. Pre-Existing Duty Rule 1. Exceptions (change in duty, unforeseen problems, dispute/settle, UCC modification) iii. Condition of a Gift? – bare recital of consideration to make gratuitous promise binding (no benefit to promisor) Failure of Consideration? – valid K but material breach b/c consideration failed Inadequacy of Consideration? – valid K (unless fiduciary relationship) Reliance & Promissory Estoppel Claims i. Requires: 1) promise 2) reasonable reliance 3) induces such reliance 4) injustice avoid by enforce Restitution i. Implied in Fact: no acceptance but understanding of intention for compensation ii. Implied in Law :1) benefit conferred 2) knowledge/acceptance/emergency 3) inequitable 1. Exceptions: Officious, Gratuitous, Not-Measurable iii. Promissory Restitution & Material Benefit Rule (Moral Obligation & Worries of Enforcement) b. c. d. a. b. 5) Substitute for Consideration? 6) Statute of Frauds i. K w/in SOF? – K for Land, K for Goods +$500, & K of +1yr ii. Was there Memorandum? – 1) identification of subject matter, 2) indicates K btw parties, 3) specifying essential terms, 4) signed by party to-be-charged (voidable if not sufficient memorandum) iii. Exception? – goods paid for/accepted, specialty goods, lack of mutuality, admission, equal-dignity, reliance 7) Interpretation of K Terms a. b. c. d. Objective (text) v. Subjective Approach (―know or had reason to know‖ of diff. interpretation) Course of Performance, Course of Dealing, & Trade Usage (order of importance) Omitted Terms (UCC Gap Fillers to avoid nonexistence of K) Implied Terms (Good Faith , Reasonable Notice of Termination) Facts must be – 1) agreement 2) written expression 3) litigation re: term/understanding not in writing Issues i. Integrated Writing? (full or partial re: full expression) ii. Parol Evidence? (must be prior to writing) iii. Impact on Writing? (contradict/vary/add v. explanation/defining) Classic (4 corners) v. Modern Approach (explain patent & latent ambiguity) Exceptions 8) Parol Evidence a. b. c. d. 9) Status Defenses a. b. a. b. c. a. b. a. b. c. d. e. f. Minority – voidable (exception re: necessaries; misrepresentation = restitution relief of mkt value) Incapacity – voidable (exception re: necessaries; but knowledge of incapacity?) Duress – 1) threat 2) inducing manifest of assent 3) no reasonable alternative; economic duress Undue Influence – 1) undue susceptibility 2) excessive pressure Misrepresentation – fraud of inducement (voidable); fraud in factum (void); nondisclosure Unconscionability – procedural (process) & substantive (content) unconscionability; possible remedies to avoid voiding K Public Policy – deny enforcement to discourage behavior Mutual Mistake – 1) of both parties 2) re: basic assumption w/ material effect 3) voidable unless party assumed risk Unilateral Mistake – mutual mistake factors & either unconscionable/knowledge by other party Impossibility – illegality, death/disability of promisor, & supervening destruction Impracticality – 1) event makes perf. imprac. 2) after K re: basic assump 3) not caused by party 4) no assump of risk Frustration of Purpose – substantial frustration & impracticality factors Modification – pre-existing duty rule & exceptions; SOF issues; NOM clauses; NW clauses, settlement through modification (liquid v. nonliquid dmg‘s) 10) Behavioral Defenses 11) Substantive Defenses 12) Justifications of Nonperformance 13) Conditions a. b. Express (explicit) v. Constructive (implied) v. Promissory (good faith effort) v. Satisfaction (obj v. sub.) Exceptions to Enforcement – Forfeiture, Adverse Interp, Wavier, Estoppel Material v. Not Material i. Common Law - look at factors & exp conditions – if not substantial performance and cost-of-completion ii. UCC & Goods – Perfect Performance If Material – Partial or Total – can it be remedied w/in reasonable time for which compensation Anticipatory Repudiation – definite statement of breach allows suit before time of performance; Retracted Exceptions Demand for Adequate Assurance – in writing based on reasonable circumstances/doubts 14) Breach a. b. c. d. 15) Remedies a. Expectation i. Duty to Mitigate ii. PE as substitute for consideration to create valid K iii. Damages must pass Foreseeable (or notice given), Certainty (new bus rule), & Causation Test Reliance Restitution Equitable Remedies i. Substantial Performance ii. Injunction b. c. d. 16) 3rd Party Beneficiaries a. Status (intended v. incidental) i. Is 3rd intended beneficiary (2 elements – direct undertaking by promisor to 3rd , intention of the promisee) ii. If Yes, have his rights vested (assent, reliance, or litigation; prevents recession or modification) iii. What Defenses may the promisor raise? Counterclaims to diminish recovery; Set-offs not allowed iv. What rights, if any, accrue to the promisee? Specific performance, reliance dmg‘s, or restitution dmg‘s b. Assignment & Delegation Sample Intro’s to Sections Contractual Bargained-For Exchange D‘s promise is enforceable as a bargained-for exchange only if supported by consideration, which would consist of some promise or performance sought by X in exchange for his promise and given by P in exchange for that promise. D's offer recited as "consideration" for his promise… Such "past consideration" cannot serve as consideration for a present promise, as D could not be making his promise in order to induce the provision of such services, and P could not have given those services in order to receive the benefits of a promise that had not yet been made. Because D's promise was conditioned on X…, that may well have been something that D sought in exchange for her promise and that could provide contractual consideration. [Because of the familial relationship and the obvious gifting motives involved, though, D's promise might also be considered a conditional gift promise and not a bargained-for exchange. This inference is strengthened by the nature of the condition itself. A logical condition to a gift of X would be that P actually…] Even if D, in making his promise, was bargaining for P to…, this will supply consideration only if the promise actually influenced P‘s to… A bargain is generally considered lacking if a promisee renders a performance without any knowledge of the promise, as the promisee cannot be giving the performance in exchange for the promise. The bargained-for performance in this instance …an offeree who learns of the offer after having already rendered part of the requested performance can accept the offer by completing the requested performance. An offer that is binding as an option contract, however, is irrevocable and is not terminated by... When an offer invites acceptance by performance only, an option contract with respect to that offer is created when the offeree commences performance, and if the offeree completes performance as invited in the offer the underlying contract is created. Thus, if D‘s offer sought acceptance by performance only, P‘s commencement of performance by... created a binding option contract with respect to D‘s offer, permitting P to accept by completing the requested performance. Promissory Estoppel As an alternative to a contractual bargained-for exchange, P could also seek to enforce D‘s promise based on his reliance on the promise, through a promissory estoppel theory. This theory is available where a promisor should reasonably expect a promise to induce reliance of a definite and substantial character, the promise does induce such reliance, and injustice can be avoided only by enforcement of the promise. Because D‘s promise was a conditional one, he could certainly reasonably expect P to rely on that promise through efforts to fulfill the condition, and thus, the condition of X points to a definite form of reliance that D could expect as a result of his promise. The most problematic aspect of a promissory estoppel recovery in this case is the requirement that the promise must actually have induced P to... The inducement standard for a promissory estoppel recovery presents a much higher threshold than that used for detecting the presence of a bargained-for exchange. Inducement in the context of promissory estoppel is more akin to a "but for" causation standard, which would be met only if D would not have done Y if P had not promised her X. Because P made his initial decision do Y without any knowledge of D‘s promise, it might be difficult for P to establish that D‘s promise induced the claimed reliance under the promissory estoppel standard for inducement. Moral Obligation P might also attempt to enforce D‘s promise through a so-called "moral obligation" or promissory restitution theory, followed in some courts, under principles similar to those set forth in section 86 of the Restatement (Second) of Contracts. That provision would recognize the enforceability of a promise made in recognition of a benefit previously received by the promisor from the promisee, to the extent necessary to prevent injustice. As D's promise was made in explicit recognition of P‘s previous service, this promise is potentially enforceable under such a theory… Without the subsequent promise, P‘s services might give rise to an action in restitution for the value of the benefit conferred on D. Since this benefit was conferred in the family context, though, such an action would have to overcome a strong presumption that these services were rendered gratuitously. D's subsequent promise in recognition of these services, however, would essentially reverse the presumption of gratuitousness, I. OBJECTIVE THEORY OF INTENT A. Objective theory of contracts: Contract law follows the objective theory of contracts. That is, a party‘s intent is deemed to be what a reasonable person in the position of the other party would think that the first party‘s objective manifestation of intent meant. For instance, in deciding whether A intended to make an offer to B, the issue is whether A‘s conduct reasonably indicated to one in B‘s position that A was making an offer. Example: A says to B, ―I‘ll sell you my house for $1,000.‖ If one in B‘s position would reasonably have believed that A was serious, A will be held to have made an enforceable offer, even if subjectively A was only joking. B. Agreements made in jest: Occasionally, the maker of a promise will claim that it was not made with serious intent – it was only a joke, and the other party either knew that, or at least reasonably should have. Example: two people, in the midst of playful banter, make a deal to switch cars – one a Honda and the other a Ferrari. Example: a tongue-in-cheek soda ad offers a Harrier jet if someone sends in 7 million points. C. Legal enforceability: The parties‘ intention regarding whether a contract is to be legally enforceable will normally be effective. Thus if both parties intend and desire that their ―agreement‖ not be legally enforceable, it will not be. Conversely, if both desire that it be legally enforceable, it will be even if the parties mistakenly believe that it is not. 1. Presumptions: Where the evidence is ambiguous about whether the parties intended to be bound, the court will follow these rules: (1) In a “business” context, the court will presume that the parties intended their agreement to be legally the enforceable; (2) but in a social or domestic situation, the presumption will be that offer legal relations were not intended. Example: Husband promises to pay a monthly allowance to Wife, with whom he is living amicably. In the absence of evidence otherwise, this agreement will be presumed not to be intended as legally binding, since it arises in a domestic situation. Example: A invites his friend B to dinner in his home, and B accepts. There is no K. If A promised B a fee for attending and entertaining guests, and B did so, there would be a K to pay a fee (a) Duty to read: Generally, parties are obligated to know the terms of the agreement they are signing, and cannot avoid their obligations under the agreement due to a failure to read it. Park 100 (38) (b) Ordinary care and diligence: While a person relying on another‘s representations must use ordinary care and diligence to guard against fraud, the requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore an intentional fraud practiced on the unwary. D. Intent to put in writing later: If two parties agree (either orally or in a brief writing) on all points, but decide that they will subsequently put their entire agreement into a more formal written document later, the preliminary agreement may or may not be binding. In general, the parties‘ intention controls. Example: If the parties intend to be bound right away based on their oral agreement, they will be bound even though they expressly provide for a later formal written document.) 1. Where no intent manifested: Where the evidence of intent is ambiguous, the court will generally treat a contract as existing as soon as the mutual assent is reached, even if no formal document is ever drawn up later. But for very large deals (e.g., billion dollar acquisitions), the court will probably find no intent to be bound until the formal document is signed. E. Restatement sections: §21 (Intention to be Legally Bound) II. CONSIDERATION – PRIMARY BASIS FOR ENFORCING THE CONTRACT A. Definition of consideration: As a general rule, a contract will not be enforceable unless it is supported by ―consideration.‖ A promise is supported by consideration if two elements are satisfied: 1. Sufficient underlying promise: The promisee gives up something of value, or circumscribes his liberty in some way (i.e., he suffers a ―legal detriment‖); and 2. Bargained-for-Exchange: The promise is given as part of a ―bargain‖; that is, the promisor makes his promise in exchange for the promisee‘s giving of value or circumscription of liberty. B. Uses of doctrine: The requirement of consideration renders unenforceable two main types of transactions: 1. Donative promises: Promises to make gifts (which do not satisfy the ―bargain‖ element); and 2. No legal detriment to the promisor: Business situations in which one party has not really promised to do something or given anything up, even though he may appear to have done so (the ―detriment‖ element is missing here). C. Does the underlying promise constitute sufficient consideration? 1. Generally: For consideration to be present, the promisee must suffer a ―detriment.‖ That is, she must do something she does not have to do, or refrain from doing something that she has a right to do. Example: After P has already retired from working for D, D promises P a lifetime pension, for which P need not do anything. At common law, this promise would probably be unenforceable, because P has not suffered any detriment in return for it.) (a) Non-economic detriment: Even a non-economic detriment will suffice. (Example: If A promises B $5,000 in return for B‘s abstaining from alcohol and tobacco, B‘s refraining will be a ―detriment‖ that will serve as consideration for A‘s promise. Thus A‘s promise will be enforceable.) 2. Adequacy not considered: The court will not inquire into the ―adequacy‖ of the consideration. As long as the promisee suffers some detriment, no matter how small, the court will not find consideration lacking merely because what the promisee gave up was of much less value than what he received. Example: D is desperate for funds during WWII, and promises to pay P $2,000 after the war in return for $25 now. Held, there is consideration for D‘s promise, so P may collect. Mere ―inadequacy of consideration‖ is no defense. Batsakis v. Demotsis. (a) Lack of bargain: But remember that extreme disparity in value between what the promisee gives up and receives may suggest that there is not in fact a ―bargain,‖ in which case there will be no consideration even though the detriment requirement is satisfied. 3. Other situations to look out for: (a) Illusory promise: A promise, even if bargained for, will not serve as consideration for a promise in return if it is ―illusory‖ – if it makes performance entirely optional with promisor. Does not restrict the freedom of the promisor nor confers consideration to the promisee; these contracts can sometimes be enforced. See Implied Terms section. Example: Manufacturer not bound by promise to continue distributorship operation b/c distributor free to terminate at any time. (b) Mutuality of obligation: Both parties must be bound or neither is bound; not widely use nor is it necessary under Restatements. Example: gasoline company could not enforce agreement for operation of pump on food store‘s premises where company had the right to remove the pump at any time. (c) Preexisting duty rule: If a party does or promises to do what he is already legally obligated to do, or if he forbears or promises to forbear from doing something which he is not legally entitled to do, he has not incurred a ―detriment‖ for purposes of consideration. This is the pre-existing duty rule. See Modification section. D. Was the contractual promise the product of a bargain? 1. Promises to make gifts: A promise to make a gift is generally unenforceable, because it lacks the ―bargain‖ element of consideration. Unenforceable gratuitous promises usually arises in family settings. Example: A says to B, his daughter, ―When you turn 21 in four years, I will give you a car worth $10,000.‖ The four years pass, A refuses to perform, and B sues for breach of contract. B will lose, because there was no consideration for A‘s promise. In particular, A‘s promise was not ―bargained for.‖ (a) Existence of condition: Even if the person promising to make a gift requires the promisee to meet certain conditions in order to receive the gift, there will still be no consideration (and the promise will thus be unenforceable) if the meeting of the conditions is not really ―bargained for‖ by the promisor. Example: A promises his widowed sister-in-law B a place to live ―if you will come down and see me.‖ In response, B travels to see A, thereby incurring expenses. Even though B has suffered a ―detriment‖ (the expenses), the ―bargain‖ element is lacking - A was not promising B a place to live because he wanted to see her, but was merely imposing a necessary precondition for her to get the gift. Therefore, his promise is unenforceable for lack of consideration. Kirksey v. Kirksey. (1) Typical “conditions” that are not bargained for: (i) Analogize to sham consideration, i.e., the proportional value of the thing sought v. the value of the thing given. Example: ―If you raise your hand, I will give you $1,000.‖ (ii) Also consider timing. When will you do something? If just a timing/administrative issue, then not substantive. Example: ―If you see me after class, I will give you $1,000.‖ (b) Purpose must be to induce action in exchange: Unless the promisor‘s purpose is to induce in exchange either a promise or performance, the promisor is not bargaining, and nothing that is given in return can be consideration. Example: A promises to make a gift of $10 to B. In reliance on the promise B buys a book from C and promises to pay C $10 for it. There is no consideration for A‘s promise. Recovery would have to be an action in reliance. (1) Occurrence of condition is of benefit to promisor: But if the promisor imposes a condition, and the occurrence of this condition is of benefit to him, then the bargain element probably will be present. Did the promisor decide to make the promise in the first place in order to get something return? Example: A promises his nephew B $5,000 if B will refrain from smoking, drinking and gambling until age 21. B so abstains. Here, A‘s promise was ―bargained for‖ (and thus supported by consideration), because A was attempting to obtain something he regarded as desirable. Hamer v. Sidway. (i) Altruistic pleasure not sufficient: But the fact that one who promises to make a gift expects to derive altruistic pleasure, or love and affection, from making the gift is not sufficient to constitute a ―bargain.‖ (c) Executed gifts: It is only the promise to make a gift, not the actual making of a gift, that is unenforceable for lack of consideration. Once the promisor makes the gift, he cannot rescind it for lack of consideration. 2. Sham and nominal consideration: Even though a deal looks on its face as if it is supported by consideration, the court may conclude that the purported consideration is sham or nominal, and is thus not consideration at all. (a) Nominal amount: where the values apparently exchanged are so disparate that it is hard to conceive that the less valuable detriment is truly an inducement for the more valuable promise, a court may employ the qualification of the general rule against measuring equivalence, and may find the consideration to be so small as to be nominal – merely a bogus devise used by the parties in an attempt to validate a gift promise. Thus where the ―consideration‖ that has been paid is so small as to be nominal, the court may conclude as a factual matter that there is no real ―bargain‖ present at all. If so, the promise will not be enforced, due to lack of consideration. Example: A says to B, his son, ―In consideration for $1 paid and received, I promise to give you a car worth $10,000 four years from now.‖ Even if the $1 is actually paid, the court will probably conclude that A did not ―bargain‖ for the $1, and that there is thus no consideration; A‘s promise will therefore be unenforceable. (1) “Adequacy” irrelevant: But if the consideration is big enough to suggest that there was a bargain, the fact that it is ―inadequate‖ is irrelevant. (i) Look at proportionality (ii) Remember, inadequate consideration may be a sign of duress, undue influence, mistake, etc. (b) Payment not in fact made: If a non-trivial payment is recited, but the payment was not in fact made, most courts will take this as evidence that no bargain was present. Always, the question is whether there was in fact a bargain, and payment or non-payment is merely non-dispositive evidence of whether there was a bargain. 3. Promisee unaware or action not taken in response: Generally, the promisee must be aware of the promise, for the act performed by him to be consideration for the promise. This means that if a reward is promised for a certain act, and the act is performed without the actor‘s being aware of the reward, he cannot recover. 4. “Past consideration” no good: If the promise is made in return for detriment previously suffered by the promisee, there is no bargain, and thus no consideration. Put another way, the promisor could not have sought to induce the induce the promisee‘s action because the promisee had already taken action. Thus promises to pay a pre-existing debt, and promises to pay for services already received, usually lack the ―bargain‖ element (may be binding under restitution but not consideration). E. Restatement sections: 1. §71 (Requirement of Exchange; Types of Exchange) 2. §79 (Adequacy of Consideration; Mutuality of Obligation) 3. §81 (Consideration as Motive or Inducing Cause) III. RELIANCE / PROMISSORY ESTOPPEL – A SUBSTITUTE FOR CONSIDERATION A. General approach: Promises which foreseeably induce reliance on the part of the promisee will often be enforceable without consideration, under the doctrine of promissory estoppel (―P.E.‖). Rest.2d, §90‘s definition of the doctrine is as follows: ―A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.‖ Example: A promises to pay for B‘s college education if B will attend school full time. A intends this to be a gift. B gives up a good job and enrolls in college, incurring a liability of $5,000 for the first year. A then refuses to pay the bill. Under the doctrine of P.E., B would be able to recover at least the value of the lost job and first-year tuition from A, even though A‘s promise was a promise to make a gift and was thus not supported by consideration. 1. There must have been a promise: The promise need not contain all the elements of an offer, but it must be clear and definite. Example: In Ricketts, the grandfather‘s note read ―I promise to pay.‖ The note is clearly a promise Example: A statement by a supplier that ―you can rest assured we will have an unending supply of remnants‖ was characterized not as a promise to the buyer but as a ―mere expression of opinion or prediction concerning the future availability of remnants.‖ 2. The promisor must have had reason to expect reliance on the promise. (a) The standard for testing expectation is the objective theory. (b) The simplest case is that of a conditional gratuitous promise, for it is clearly reasonable for the promisor to expect that the promisee will take action on which the promise is conditioned. Example: In Kirksey, the promisor should reasonably have expected his sister-in-law to ―come down and see me,‖ and in Katz, the promisor should reasonably have expected the employee to retire. (c) Even if the promise is not conditional, it may be reasonable to for the promisor to expect reliance. Example: The grandfather in Ricketts should have reasonably expected his granddaughter to quit work in reliance on his promise of $2,000. (d) Be careful, the word ―if‖ can indicate a condition of the promise not a BFE. How do you determine whether condition or consideration? (1) Analogize to sham consideration, i.e., the proportional value of the thing sought v. the value of the thing given. (2) Also consider timing. When will you do something? If just a timing/administrative issue, then not substantive. 3. The promise must have induced such reliance. (a) The reliance itself must have been reasonable Example: in Ricketts if, after the grandfather had expressed the hope that his granddaughter would stop working, she had relied by buying a gold watch or by adopting a lavish standard of living, it would be difficult to show he should reasonably have expected this sort of reliance (b) Since the reliance must have been induced by the promise, it cannot consist of action or forbearance that would have occurred in any event. Example: If, in Ricketts, the granddaughter had already made a firm decision to quit work, her action would not have been induced by the promise. Example: If, in Katz, the employee had already made a firm decision to retire, the employee‘s action would not have been induced by the promise. (c) One exception to this rule are charitable subscriptions, which are enforceable without proof of reliance (public policy). Not widely followed. 4. The circumstances must have been such that injustice can be avoided only by enforcement of the promise. (a) The injustice referred to is often called ―detrimental reliance.‖ Detrimental reliance is usually the actual expenditure made in reliance on the promise. As in Katz, a change of position will often be sufficient to invoke P.E. even in the absence of actual expenditures Example: A newly promoted supervisor denied his pension was able to plead that the additional responsibilities of his new position led to more stress, which is a form of detrimental reliance. (b) Amount of recovery: Where P.E. is used, the damages awarded are generally limited to those necessary to ―prevent injustice.‖ Usually, this will mean that the plaintiff receives reliance damages, rather than the greater expectation measure. In other words, P is placed in the position he would have been in had the promise never been made. Example: If A promises B a franchise, and B quits his job in reliance, the court will probably award B the value of the lost job, not the greater sum equalling profits that B would have made from the franchise. B. Possible applications: 1. Promise to make a gift: The P.E. doctrine is most often applied to enforce promises to make gifts, where the promisee relies on the gift to his detriment. (a) Intra-family promises: The doctrine may be applied where the promise is made by one member of a family to another. Example: Mother promises to pay for Son‘s college education, and Son quits his job. Probably the court will award just the damages Son suffers from losing the job, not the full cost of a college education. 2. Charitable subscriptions: A written promise to make a charitable contribution will generally be binding without consideration, under the P.E. doctrine. Here, the doctrine is watered down: usually the charity does not need to show detrimental reliance. (But oral promises to make charitable contributions usually will not be enforceable unless the charity relies on the promise to its detriment.) This doctrine is not widely followed. 3. Commercial context: (a) Offers by sub-contractors: Where a sub-contractor makes a bid to a general contractor, and the latter uses the bid in computing his own master bid on the job, the P.E. doctrine is often used to make the subbid temporarily irrevocable. (b) Promise of job: If an employer promises an at-will job to an employee, and then revokes the promise before the employee shows up for work, RE. may apply. Example: A offers a job to B, terminable by either at any time. B quits his established job. Before B shows up for work, A cancels the job offer. A court might hold that even though B could have been fired at any time once he showed up, B should be able to collect the value of the job he quit from A, under a P.E. theory. (c) Employee benefit or pension cases: If A promises B to pay him an annuity during B‘s life. B thereupon resigns a profitable employment, as A expected that he might. B receives the annuity for some years, in the meantime becoming disqualified from again obtaining good employment. A‘s promise is binding. C. Restatement section: §90 (Promise Reasonably Inducing Action or Forbearance) IV. RESTITUTION / UNJUST ENRICHMENT – A SUBSTITUTE FOR CONSIDERATION A. General rule: The general restitutionary principle is that one who receives services, with the knowledge that the person reasonably furnishing them reasonably expects to be paid, will be liable for the reasonable value of these services B. Restitution in the absence of a promise: Recovery for benefits conferred on another where the other party never expressly promised to pay for those benefits 1. Implied-in-fact contract: In the absence of circumstances indicating otherwise, it is inferred that a person who requests another to perform services for him or to transfer property to him thereby bargains for it. This is a true contract which often hinges on whether or not a party receiving the benefit of the services requests it (intent is implied). See §107 for complete requirements. Example: A is in an car accident and is bleeding in the street. He flags down B and asks to be taken to the hospital. A is liable in restitution to B. 2. Implied-in-law contract: In situations where the services performed without the consent of the person receiving them, the party seeking restitution must in effect negate the possibility that the services were performed ―officiously,‖ that is, thrust upon the recipient without any reason for believing that the person would have wanted them or would have expected to pay for them (a) Emergency services rendered: Restitution is provided for one providing emergency services is a situation where serious bodily harm or pain will otherwise result, provided the P acted ―unofficiously‖ and with intent to charge therefore. See §116 for complete requirements. Example: A is seriously hurt in an accident. Becoming hysterical with pain, he fights his rescuers and refuses to permit anyone to touch him. Over his protests, B, a surgeon, renders first aid services in stopping a hemorrhage which soon would have caused A‘s death. B is entitled to compensation from A. (b) Preservation of goods: Restitution is provided where he P has acted to preserve things belonging to the recipient, provided the P acted ―unofficiously‖ and with intent to charge therefore. See §117 for complete requirements. Example: In a storm, A‘s boat is cast adrift on a river and is being broken by the current. B engages the assistance of others and after several hours‘ work removes the boat to a place of safety from which A, with knowledge of the facts, subsequently takes it. Assuming B‘s intent to charge for his services and expenses, he is entitled to restitution from A. 3. Denial of recovery: Even if a benefit has been conferred, a court may deny recovery on three grounds. (a) Officiousness: Interference in the affairs of others that is not justified under the circumstances Example: A carpenter, seeing a house vacant and in need of repairs, makes repairs that would cost $1,000, in the belief that the owner is willing to pay for them. When the owner refuses to pay, the carpenter sues the owner for $1,000. The carpenter will lose on the ground that the repairs were made officiously. Example: Suppose that the owner‘s neighbor called the carpenter, and the carpenter makes an honest mistake and repairs the owner‘s house instead, while the owner – aware of the mistake – makes no protest. The carpenter may be allowed restitution. (1) Volunteer: There is no precise line between an ―officious intermeddler‖ and a ―volunteer.‖ It is plain, however, that life stands on a different footing than does property. Example: Suppose that a physician, seeing an injured and unconscious pedestrian, furnishes medical services worth $1,000 in the belief that the injured pedestrian will be willing to pay for them on regaining consciousness. The injured pedestrian, however, refuses to pay, and the physician sues for $1,000, claiming restitution for the benefit conferred. The courts will not deem the physician an ―officious intermeddler‖ or a ―volunteer.‖ Example: If instead of a physician, it was a passing motorist, the courts would deem that the medical services conferred was gratuitous. (b) Gratuitous: Recovery in restitution will be denied if the benefit was conferred ―gratuitously,‖ that is, without expectation for compensation (1) Execution of a gift: Once having made a gift, one may not change one‘s and demand restitution. (2) Presumption of gratuitousness: If one‘s life or property is imperiled by impending disaster and another renders assistance in the emergency, the law presumes that the services were intended to be gratuitous. (i) Exception: The presumption of gratuitousness may be rebutted if the services are excessively burdensome to the person rendering them, as when the continue for days or weeks. (ii) Exception: The presumption of gratuitousness does not apply if the person rendering the services does so in business or professional capacity, as in the case of a physician or hospital. (c) Measurability: If the benefits were not conferred officiously or gratuitously, the claimant must show that the benefit is ―measurable.‖ (1) Reasonable value of services provided, how much would it have cost to pay someone else for these services. (2) The net enrichment standard, how much was the benefiting party‘s wealth enhanced. (3) Use whichever is easier to calculate. Relatively few claims fail on this measure. 4. Intra-family claims: Usually involves cases in which one family member has cared for an aged parent or relative and then asserts a restitutionary claim against the estate of the deceased parent or relative. Underlying such claims may be family tensions resulting from feelings that the family member providing services has made a personal sacrifice while the others (often siblings of the claimant) have not done their fair share in caring for the aged parent. (a) General rule: The rule followed in deciding such claims is that services rendered by family members to each other are presumed to be gratuitous, services rendered between individuals who are not members of the same family are presumed to be for compensation. Whether the parties are part of the same family depends on the facts and circumstances rather than simply kinship. (1) Proposed test to rebut the presumption of gratuity: Where an adult or emancipated child, by prearrangement with a parent, gives up an established home and moves into the home of the parent, not for the purposes of reestablishing a family relationship, but for the purpose of rendering services of an extraordinarily burdensome nature, over a long period of time, the presumption of gratuity need not apply. (b) Exceptions: Even if the presumption that the services were rendered gratuitously applies, the presumption can be overcome, but courts differ on what the party seeking recovery must establish. In one example, the presumption was overcome when an adult daughter left her home three times for extended periods to move 100 miles to care for ailing parents. Other courts may require a stronger showing to allow recovery between family members. Some courts have held that the one who renders services may recover only if she proves an express contract. Other courts will allow recovery based on either an express or implied contract but will demand proof by ―clear and convincing evidence,‖ a standard that is more demanding than the normal civil standard of the ―preponderance of the evidence.‖ 5. Restatement sections: (a) §107 (Effect of Existence of Bargain upon Right of Restitution) (b) §116 (Preservation of Another‘s Life or Health) (c) §117 (Preservation of Another‘s Things or Credit) C. Promissory Restitution: Describes cases where the recipient of services does make a express promise to pay for benefits conferred, but only after the benefits are received. 1. Moral obligation: A moral obligation is sufficient consideration to support an express promise when there was some preexisting obligation. (a) Debts barred by time: Restatement §82(2), a promise to pay a debt barred by the statute of limitations can be expressed or implied from the conduct of the obligor. Situations in which an implied promise to pay may be found: voluntary acknowledgment of the debt, part payment of principal or interest on the debt, delivery of a note reflecting the debt, and transfer to the creditor of security for the debt. See §82(2) for complete requirements. (1) If a promise to pay only part of the debt or is conditional, it is enforceable to that extent. (2) Today, statute dictates the enforceability of these promises. (b) Debts discharged in bankruptcy: Promises to pay debts previously discharged in bankruptcy, if express, are also legally enforceable. The promise must be express. See §83 for complete requirements. (1) If a promise to pay only part of the debt or is conditional, it is enforceable to that extent. (2) Today, statute dictates the enforceability of these promises. (c) Obligations of minors: Contracts made by a minor prior to the time the minor reaches the legal age of majority (now 18) are unenforceable unless the are for ―necessaries,‖ goods and services needed by the minor. After reaching the age of majority a minor becomes legally liable on any contracts made during minority that the minor elects to ―affirm.‖ A minor may affirm a contract either expressly or by failure to ―disaffirm‖ the contract within a reasonable time after reaching the age of majority. See §85 and section on Minority’s Capacity to Contract and voidable contracts. 2. Does the “material benefit” rule apply?: The material benefit rule (also known as the promissory restitution principle) holds that if a person receives a material benefit from another, other than gratuitously, a subsequent promise to compensate the person for rendering such benefit is enforceable. Not widely followed. See §86 for complete requirements. (a) Emergency services and necessaries: The law of restitution in the absence of promise severely limits recovery for necessaries furnished to a person under disability and for emergency services. A subsequent promise in such a case may remove doubt as to the reality of the benefit and as to its value, and may negate any danger of imposition or false claim. A positive showing that payment was expected is not then required; an intention to make a gift must be shown to defeat restitution. Example: A saves B‘s life in an emergency and is totally and permanently disabled in so doing. One month later B promises to pay A $ 15 every two weeks for the rest of A‘s life, and B makes the payments for 8 years until he dies. The promise is binding. (b) Promise to correct a mistake: One who makes a mistake in the conferring of a benefit is commonly entitled to restitution regardless of any promise. But restitution is often denied to avoid prejudice to the recipient of the benefit. Thus restitution of the value of services or of improvements to land or chattels may require a payment which the recipient cannot afford. Where a subsequent promise shows that the usual protection is not needed in the particular case, restitution is granted to the extent promised. Example: A is employed by B to repair a vacant house. By mistake A repairs the house next door, which belongs to C. A subsequent promise by C to pay A the value of the repairs is binding. (c) Gifts: Moral obligations based solely on gratitude or sentiment are insufficient of themselves to support a subsequent promise. Example: A gives emergency care to B‘s adult son while the son is sick and without funds far from home. B subsequently promises to reimburse A for his expenses. The promise is not binding. (1) Third parties: In the above example, the Restatement suggests another reason why B‘s promise was unenforceable is because it was not made ―in recognition of a benefit previously received by the promisor,‖ but rather in recognition of a benefit received by the son. (d) Disproportionate value: If enforcement of the promise would be disproportionate to the reasonable value of the benefit received, enforcement may be limited to that value. Example: A, a married woman of sixty, has rendered household services without compensation over a period of years for B, a man of eighty living alone and having no close relatives. B has a net worth of three million dollars and has often assured A that she will be well paid for her services, whose reasonable value is not in excess of $ 6,000. B executes and delivers to A a written promise to pay A $ 25,000 ―to be taken from my estate.‖ The promise is binding. Let‘s say B‘s promise is made orally and is to leave A his entire estate. A cannot recover more than the reasonable value of her services. (e) Benefit conferred pursuant to contract: A promise to pay an additional sum for benefit received under a preexisting bargain is not enforceable. 3. Restatement sections: (a) §82 (Promise to Pay Indebtedness; Effect of the Statute of Limitations) (b) §83 (Promise to Pay Indebtedness Discharged in Bankruptcy) (c) §85 (Promise to Perform a Voidable Duty) (d) §86 (Promise for Benefit Received) V. WAS THERE A VALID OFFER? A. Generally: An offer is a direct, complete proposal that a contract be entered into, providing for an exchange of defined performances. Put another way, it must be a complete proposal requiring no further action on the part of the offeror. An offer must create the power of acceptance in the offeree. B. Factors to consider in deciding if there was a valid offer: 1. What was there an desire to enter into the contract? (a) Objective theory of contracts: Contract law follows the objective theory of contracts. That is, a party‘s intent is deemed to be what a reasonable person in the position of the other party would think that the first party‘s objective manifestation of intent meant. For instance, in deciding whether A intended to make an offer to B, the issue is whether A‘s conduct reasonably indicated to one in B‘s position that A was making an offer. Certain types of offer suggest that there was no intent to make an offer: Example: A says to B, ―I‘ll sell you my house for $1,000.‖ If one in B‘s position would reasonably have believed that A was serious, A will be held to have made an enforceable offer, even if subjectively A was only joking. (1) Offer made in jest: An offer which the offeree knows or should know is made in jest is not a valid offer. Thus even if it is ―accepted,‖ no contract is created. (2) Preliminary negotiations: If a party who desires to contract solicits bids, this solicitation is not an offer, and cannot be accepted. Instead, it merely serves as a basis for preliminary negotiations or an invitation to offer. See §26. Example: A says, ―I would like to sell my house for at least $100,000.‖ This is almost certainly a solicitation of bids, rather than an offer, so B cannot ―accept‖ by saying, ―Here‘s my check for $100,000.‖ (3) Advertisements: Most advertisements appearing in newspapers, store windows, etc., are not offers to sell. This is because they do not contain sufficient words of commitment to sell. Example: A circular stating, ―Men‘s jackets, $26 each,‖ would not be an offer to sell jackets at that price, because it is too vague regarding quantity, duration, etc. (i) Exception for specific terms: But if the advertisement contains specific words of commitment, especially a promise to sell a particular number of units, then it may be an offer. Example: ―100 men‘s jackets at $26 apiece, first come first served starting Saturday,‖ is so specific that it probably is an offer. (ii) Exception for words of commitment: Look for words of commitment – these suggest an offer. Example: ―Send three box tops plus $1.95 for your free cotton T-shirt,‖ is an offer even though it is also an advertisement; this is because the advertiser is committing himself to take certain action in response to the consumer‘s action. (iii) Consumer protection statute: Some statutes may allow a court to construe an ad as an offer. Look out for a question with a unilateral mistake in an ads; rescission would be available. (b) Language used in the communication: The use of terms of art, such as ―offer,‖ ―quote,‖ ―proposal,‖ ―acceptance,‖ ―promise,‖ may be helpful but are not dispositive if the context indicates they were not used in the legal sense. (c) Context in which the contract was formed: Where the evidence is ambiguous about whether the parties intended to be bound, the court will follow these rules: (1) In a “business” context, the court will presume that the parties intended their agreement to be legally the enforceable; (2) but in a social or domestic situation, the presumption will be that offer of legal relations were not intended. Example: Husband promises to pay a monthly allowance to Wife, with whom he is living amicably. In the absence of evidence otherwise, this agreement will be presumed not to be intended as legally binding, since it arises in a domestic situation. Example: A invites his friend B to dinner in his home, and B accepts. There is no contract. If A promised B a fee for attending and entertaining guests, and B did so, there would be a contract to pay a fee. (d) Oral or informal written agreement: If two parties agree (either orally or in a brief writing) on all points, but decide that they will subsequently put their entire agreement into a more formal written document later, the preliminary agreement may or may not be binding. In general, the parties‘ intention controls. (e) Size and complexity of transaction: Where the evidence of intent is ambiguous, the court will generally treat a contract as existing as soon as the mutual assent is reached, even if no formal document is ever drawn up later. But for very large deals (e.g., billion dollar acquisitions), the court will probably find no intent to be bound until the formal document is signed. 2. Are the terms of the contract reasonably certain? (a) Effect of omission or uncertainty of terms: Even if the requisite intent is there to make an offer, a contract cannot be formed unless the terms of the contract are reasonably certain. The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance. (1) Failure to specify quantity: A proposal is not an offer if there is a failure to limit quantity unless a range is specified in the contract or a customary one exists in the industry (e.g., toothpicks). (2) Failure to limit recipients: A proposal is not an offer if there is a failure to limit recipients, unless the proposal eliminates that risk by stating that stating that it is ―subject to prior sale‖ (b) Court may fill in the blanks: If the actions of the parties show conclusively that they have intended to conclude a binding agreement, even though one or more terms are missing or are left to be agreed upon, the courts will endeavor, if possible, to attach a sufficiently definite meaning to the bargain. (1) Relationship between the parties: If the proposal incorporates many terms from prior communications or if have a long history of dealings, an offer may be found. (2) Custom: If the proposal if for a commodity or there are well defined industry standards and trade usage, an offer may be found. (3) Uncertain time of performance: Valid contracts are often made which do not specify the time for performance. Where the contract calls for a single performance such as the rendering of a service or the delivery of goods, the time for performance is a “reasonable time.” (4) Real estate: Generally, contracts for land are typically done with due care and deliberation and are set forth in more specific detail than those for goods or services. Must also conform to statute of frauds. 3. Was the offer communicated to the offeree? (a) Must reach offeree: An offer is not effective until it reaches the offeree. (b) Awareness: The offeree must have knowledge of the offer at the time of the purported acceptance. If a reward is offered for a particular act, a person who does the act without knowing about the reward cannot claim it. Example: Assume that X places a reward offer in the newspaper. Y performs the requested act without knowledge of the offer. There is no BFE and no contract. C. Is the offer controlled by common law or the UCC? 1. Contracts that fall under the UCC: A contract for the sale of goods is usually controlled by the UCC. See UCC §2-104. (a) Definition of merchant: ―Merchant‖ means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill. 2. Mixed services contract: How do we determine whether goods or services predominate in a mixed services contract? Three factor Coakley test: (a) Language of the contract: Is the contract for services or goods/part? If the goods/parts are costly, are they incidental to the purpose of the contract? (b) Nature of the business of the supplier: Does the supplier typically offer services or does it offer goods? (c) Intrinsic worth of the materials: What is the value of the materials versus the value of the service in the contract? VI. WAS THERE A VALID ACCEPTANCE? A. Did the offeror create the power of acceptance in the other party?: An offer may be accepted only by a person in whom the offeror intended to create a power of acceptance. B. Does the offer specify the method of acceptance?: The offeror is ―the master of the offer‖ and can specify the manner of acceptance. 1. Acceptance by promise or bilateral contract: If acceptance is invited by promise, the result is a bilateral contract. The offeree can only accept with a return promise. The offeror is not bound until he obtains the offeree‘s commitment to undertake the performance. There are three general requirements for an acceptance by promise: (a) Must express commitment: A mere acknowledgment of receipt of the offer or an expression of interest in it is not enough. (b) Must be unconditional: Since the acceptance is the ultimate step in making a contract, the commitment cannot be conditional on some final step by the offeror. Nor can the commitment be conditional on some decision by the offeree. (1) Exception: It has been held, however, that a promise that is to take effect automatically at some later time if a stated event has not occurred is effective as an acceptance at that time if the event has not occurred. However, either party is free to withdraw before then. (c) Must not vary the terms of the offer: Under traditional contract doctrine, the offeror as master of the offer enjoys freedom from contract except on the terms of the offer. There are some exception so see OFFER VARYING FROM ACCEPTANCE section below. 2. Acceptance by performance or unilateral contract: If acceptance is invited by promise, the result is a unilateral contract. An offer for a unilateral contract is accepted by full performance of the requested act. (a) Commencement or tender of performance: Under §45, the beginning of performance or the tender of part performance of what is requested may both indicate assent and furnish consideration for an option contract. (b) Preparation to perform: Mere preparation to perform, however, is not acceptance, although in some cases preparation may make the offeror's promise binding under §87(2). C. Does the offer invite either promise or performance? 1. Ambiguous offer: If the offer does not make clear whether acceptance is to occur through a promise or performance, the offeree may accept by either a promise or performance. See §32 and UCC §2-206. 2. Preference for a promise: Typically, the offeror seeks a commitment in the form of a promise in advance of the performance. Traditional contract doctrine (R(1) §31) and the UCC recognize this preference for a promise by resolving doubts in favor of the interpretation that an offer invites acceptance by promise rather than performance. However, if the nature of the offeree‘s performance is speculative, then the promisor may be seeking performance. Example: Offer does not clearly prescribe performance as the exclusive mode of acceptance. The offeror delivers an offer to the offeree on Monday stating, ―I offer to sell you Blackacre for $2 million in cash.‖ Clearly, it is a term of the proposed contract that the buyer‘s performance – the delivery of his consideration under the contract – must take place on Friday at 2 P.M. at the seller‘s office. However, the offer does not clearly restrict the acceptance to the payment of money on Friday at 2 P.M. Therefore, if the offeree is anxious to close the deal immediately and to bind the offeror before Friday at 2 P.M., he could write to the offeror on Monday, stating ―I accept.‖ A contract immediately comes into existence on dispatch of the letter. A bilateral contract is formed by which the offeree has accepted by making a promise on Monday to perform as required on Friday, and the offeror‘s offer immediately becomes a promise to convey the property at some future (unspecified but reasonable) time. Example: Offer does not clearly prescribe promise as the exclusive mode of acceptance. The owner of Blackacre wishes to clear some dead tress off the property to make it more attractive for sale, so she writes to a tree remover, ―I need the two dead firs removed from my property as soon as possible and will pay $200 for the job. Please let me know this week if you wish to perform this work.‖ Instead of replying, the offeree comes out the next day and removes the dead trees. The performance is an effective acceptance, creating a unilateral contract under which the owner has promised to pay $200. Although the offer contemplated a promissory acceptance, we can conclude that the offeror was indifferent to whether the acceptance was by act or promise because the offer made it clear that removal as soon as possible was desired. Example: A different conclusion would be reached if the offer is for some future performance by the offeree, and it is not reasonable to believe that the offeror intended the offer to remain open for that long a time. If the owner in the previous example had written in December, requesting the service in February, we can assume that she did not reasonably intend to be kept on a string until February and needed an earlier acceptance by promise. D. Did the offeree accept by silence?: Generally, an offer cannot be accepted by silence. But there are a few exceptions under §69 (satisfaction of any one can constitute acceptance): 1. Benefit of services: An offeree who silently receives the benefit of services (but not goods) will be held to have accepted a contract for them if he: (1) had a reasonable opportunity to reject them; and (2) knew or should have known that the provider of the services expected to be compensated. 2. Reason to understand: Silence can constitute acceptance if the offeror has given the offeree reason to understand that silence will constitute acceptance, and the offeree subjectively intends to be bound. 3. Prior conduct: The prior course of dealing may make it reasonable for the offeree‘s silence to be construed as consent. Example: Each time in the past, Seller responds to purchase orders from Buyer either by shipping, or by saying, ―We don‘t have the item.‖ If Seller now remains silent in the face of an order by Buyer for a particular item, Seller‘s silence will constitute an acceptance of the order. 4. Acceptance by dominion: Where the offeree receives goods, and keeps them, this exercise of ―dominion‖ is likely to be held to be an acceptance. VII. IF CONTROLLED BY COMMON LAW, DOES ACCEPTANCE VARY FROM OFFER? A. Does the acceptance comply with the “mirror image” rule?: Under the common law, the offeree‘s response operates as an acceptance only if it is the precise mirror image of the offer. See §58. Example: A writes to B, ―I‘ll sell you my house for $100,000, closing to take place April 1.‖ B writes back, ―That‘s fine; let‘s close April 2, however.‖ At common law, B‘s response is not an acceptance because it diverges slightly from the offer, so there is no contract. 1. Effect of a qualified acceptance: A reply to an offer which purports to accept it but is conditional on the offeror's assent to terms additional to or different from those offered is not an acceptance but is a counteroffer. See §59. 2. Counteroffer terminates power of acceptance: An offeree's power of acceptance is terminated by his making of a counteroffer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree. See § 39(2). 3. Counteroffer creates power of acceptance in original offeror: A counteroffer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer. A counteroffer must be capable of being accepted. See § 39(1). 4. “Last shot” rule: Under this rule, a party impliedly assented to and thereby accepted a counteroffer by conduct indicating a lack of objection to it. See §19(1). Favors offerees/sellers over offerors/buyers, because offerees/sellers tend to send the last form. A court will also look to see if the original offeror accepted the services and paid the price as stated in the counteroffer. Classical approach. B. Does the acceptance fall under one of the following exceptions? 1. Proposals for modification: An acceptance which requests a change or addition to the terms of the offer is not thereby invalidated unless the acceptance is made to depend on an assent to the changed or added terms. The additional or different terms are then to be construed as proposals for modification of the contract. See §61, §59, comment a. 2. Other exceptions to the “mirror image” rule: Under these scenarios, the offeree‘s power of acceptance is probably not terminated and should not be considered rejections. (a) If the acceptance simply attempts to make something explicit that was implicit in the offer, i.e., it was something that is always done in this type of transaction. Example: The owner of ―Blackacre‖ offers to sell the property to a prospective buyer for $2 million. The offeree responds, ―I accept your offer, subject to you proof of clear title, payment to be placed in escrow and made to you against transfer of the deed.‖ Although the offer is silent on these points, common usage and accepted legal practice implies these terms in a contract for the sale of land. They were part of the offer in absence of land excluding them. (b) The acceptance merely suggests a new term without insisting its inclusion, e.g., ―I am considering you offer. Before I decide, let me know if you‘d be willing to include X as well.‖ (c) If the acceptance is ―grumbling‖ or ―grudging,‖ e.g., ―As I really need X, I reluctantly agree to your excessive price.‖ (d) The offer is a binding option contract under 87(1). Even if offeree counteroffers with contract with additional or different term, it is not a rejection of the original offer until the option expires. (e) If the offer explicitly states it will stay open not withstanding the rejection. The offeror is the ―master of his offer‖ and can define acceptance in the way in which he chooses. (f) The acceptance reserves the right to keep the offer under advisement, e.g., ―That‘s interesting and I‘ll think about it, but if you want to wrap things up now I‘ll give you price X.‖ Now there are two offers on the table, the original offer and the counteroffer. (g) A mere inquiry, e.g., ―Will you accept X instead of Z?‖ This reply is ambiguous and should be argued both ways. VIII. IF CONTROLLED BY UCC, DOES ACCEPTANCE VARY FROM OFFER? A. Does the acceptance conform with UCC §2-207(1)?: A definite expression of acceptance or a written confirmation, sent within a reasonable time, operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. 1. YES: There is a valid acceptance and a contract has been formed. Proceed to UCC §2-207(2) to analyze the impact of the additional or different terms. 2. NO: If the response is not a definite expression of acceptance (e.g., change in the basic assumptions of the contract), or if the offer has lapsed (not seasonable) or if it expressly states that acceptance is conditional on assent to its new terms, then it is a rejection or counteroffer. Three things can happen from here: (a) No acceptance or performance: No contract. (b) Clear manifestation of acceptance by original offeror: Valid contract on offeree‘s terms. (c) No clear acceptance, but mutual performance (contract by parties’ conduct): UCC §2-207(3) provides that ―conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract.‖ Proceed under UCC §2-207(3). Example: Buyer‘s purchase order is for 100 widgets at $5 each. Seller‘s acknowledgement form is for 200 widgets at $7 each. Buyer does not say anything in response to the acknowledgement form. Seller ships the 200 widgets, and Buyer keeps them. Even though the exchange of documents did not create a contract, the parties‘ conduct gave rise to a contract by performance. B. If the acceptance contains “additional” terms, consider the following under UCC §2-207(2): An additional term is one that does not exist in the original offer but does exist in the acceptance/counteroffer. 1. Is one of the parties a non-merchant?: If one of the parties is not a merchant under UCC §2-104, the additional terms ―are to be construed as proposals for addition to the contract‖ and admitted only upon express assent. 2. Are both parties merchants?: If both parties are merchants, additional terms become part of the contract unless one of the following is true: (a) Language of the original offer says otherwise: The offer expressly limits acceptance to the terms of the offer. (b) The addition terms are “material”: The additional term will not become part of the contract if it “materially alters” it. Examples of material alterations which would result in surprise or hardship if incorporated without express awareness by the other party are:: (1) A disclaimer of a standard warranty. (2) An indemnity clause. (3) Possibly arbitration clause, (4) Possibly forum selection clause or choice-of-law clause. (c) Objection: Notification of objection to the additional terms has already been given or is given within a reasonable time after notice of them is received. C. If the acceptance contains “different” terms, consider the following under UCC §2-207(2): A term is ―different‖ if it varies or contradicts something provide for in the offer (e.g., offer says unlimited warranty and acceptance/counteroffer says no warranty). 1. Three ways to hand conflicting terms in documents: If an issue is covered one way in the offering document and another (conflicting) way in the acceptance, there are three separate ways to handle this: (a) “First shot rule”: All the offeree‘s (seller‘s) different terms fall out and are disregarded. Literal read of §2-207(2). (b) Treat the same as “additional” terms: Assume ―different‖ was inadvertently left out. Apply UCC §2207(2). Also, it can be difficult to say what is a ―different‖ term and an ―additional‖ term. (c) “Knock out” rule: Many courts apply the “knock out” rule. That is, the conflicting clauses ―knock each other out‖ of the contract, so that neither enters the contract. Instead, a UCC “gap-filler” provision is used if one is relevant; otherwise, the common law controls. Example: Buyer‘s purchase order states that disputes will be litigated in New York state court. Seller‘s acknowledgement form states that disputes will be arbitrated. Most courts would apply the ―knock out‖ rule, whereby neither the ―New York courts‖ nor ―arbitration‖ clauses would take effect. Instead, the common law - allowing an ordinary civil suit to be brought in any state that has jurisdiction - would apply. 2. Acceptance/counteroffer is silent: If an issue is handled in the first document (the offer), but not in the second (the acceptance), the acceptance will be treated as covering all terms of the offer, not just those on which the writings agree. Therefore, any such term in the original offer becomes part of the contract. Example: Buyer‘s purchase order says that disputes will be arbitrated; Seller‘s acknowledgement is silent on the issue of arbitration. The Seller‘s form will be found to be an acceptance, and disputes will be arbitrated. D. If the writings did not form a contract, did the parties perform as if one existed?: Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. UCC §2-207(3). Keep in mind SOF issues. 1. Circumstance under which UCC §2-207(3) applies: This provision applies to cases where no contract results from the writings because the offeree has expressly made acceptance conditional on assent to different or additional terms. The offeree has not succeeded in forming a contract under its own terms only avoiding a contract of the offeror‘s terms. 2. Conduct which recognizes a contract: In many cases, as where goods are shipped, accepted and paid for before any dispute arises, there is no question whether a contract has been made. 3. Terms of the resulting contract: The terms of the particular contract consist of those terms on which the writings of the parties agree, together with any relevant UCC “gap-filler” provision. E. Were there written confirmations sent by both parties after an oral contract was made?: The terms of the contract are those: 1. on which the parties originally agreed; 2. if multiple confirmations, those on which the confirmations agree; 3. if there is only one confirmation or if there are additional terms in the confirmation(s) do UCC §2-207(2) analysis, AND 4. different or conflicting terms do not become part of the contract b/c: the First Shot Rule (offeror‘s terms stay; if silent UCC ―gap filler‖), the Knockout-Rule (terms replaced by a UCC “gap-filler” provision if one is relevant), or the Add’l Analysis (§2-207(2) – contradictory terms are mutual objections; not part of K). IX. HAS THE POWER OF ACCEPTANCE BEEN TERMINATED? A. Generally: The offeree‘s power of acceptance be terminated in five main ways: (1) rejection by the offeree; (2) counter-offer by offeree; (3) lapse of time; (4) revocation by the offeror; and (5) death or incapacity the offeror or offeree. See §36. B. Was the offer rejected by the offeree?: Unless falling under one of the exceptions under III, B on page [ ] of this outline, if the offeree rejects the offer, his power of acceptance will be terminated. See also §38. C. Did the offeree make a counteroffer?: If the offeree makes a counteroffer, his power to accept the original offer is terminated just as if he had rejected the offer. Check to see any the exceptions in III, B of this outline apply. If contract is governed by the UCC, there may a ―battle of the forms.‖ See also §39. Example: On July 1, A offers to sell B 100 widgets at $5 each, the offer to be left open indefinitely. On July 2, B responds, ―I‘ll buy 50 at $4.‖ A declines. On July 3, the market price of widgets skyrockets. On July 4, B tells A, ―I‘ll accept your July 1 offer.‖ No contract is formed, because B‘s power of acceptance was terminated as soon as B made her counteroffer on July 2. Example: On facts of above example, if B said on July 2, ―I‘ll buy 50 from you right now for $4; otherwise, I‘d like to keep considering your original offer,‖ A‘s offer would have remained in force. D. Did the time to accept the offer lapse?: The offeror, as ―master of his offer,‖ can set a time limit for acceptance. At the end of this time limit, the offeree‘s power of acceptance automatically terminates. See §41. 1. No time limit stated: If the offeror does not set a time limit for acceptance, the power of acceptance terminates at the end of a reasonable time period. 2. Face-to-face conversation: If the parties are bargaining face-to-face or over the phone, the power of acceptance continues only during the conversation, unless there is evidence of a contrary intent. 3. Delay in offer: Delay of offer in transit does not extend the time during which the offeree can accept if the offeree knows or has reason to know, as from the postmark or the date of the delay. But if the delay is due to the fault of the offeror or the means of transmission adopted by the offeror, and the offeree neither knows nor has reason to know of it, the time within which the offeree can accept is extended by the delay. E. Was the offer revoked?: The offeror is free to revoke his offer at any time before it is accepted (except in the case of option contracts). See §42. 1. Effective upon receipt: A revocation by the offeror does not become effective until it is received by the offeree. Example: On June 15, A mails an offer to B. On July 1, A mails a revocation to B. On July 3, B has a letter of acceptance hand delivered to A. On July 5, A‘s revocation is received by B. B‘s acceptance is valid, because A‘s revocation did not take effect until its receipt by B, which was later than the July 3 date on which B‘s acceptance took effect. 2. Lost revocation is ineffective: If the letter or telegram revoking the offer is lost through misdelivery, the revocation never becomes effective. 3. Indirect communication of revocation: An offeree‘s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect. See §43. F. Was there death or incapacity of offeror or offeree?: If either the offeror or offeree dies or loses the legal capacity to enter into the contract, the power to accept is terminated. This is so even if the offeree does not learn of the offeror‘s death or incapacity until after he has dispatched the ―acceptance.‖ Example: On July 1, A sends an offer. On July 2, A dies. On July 3, B telegraphs her ―acceptance.‖ On July 4, B learns of A‘s death. There is no contract. X. LIMITING THE OFFEROR’S POWER OF REVOCATION A. Generally: The ordinary offer is revocable at the will of the offeror. (This is true even if it states something like, ―This offer will remain open for two weeks.‖) However, there are some exceptions to this general rule of revocability: B. Was there an option contract created under §87(1)?: A signed option contract that recites a purported consideration will be irrevocable, even if the consideration was never paid. The exchange must on fair terms and take place within a reasonable time. See §87(1). 1. Effect of rejection, counteroffer or death: An option contract supported by consideration is not terminated by the offeree‘s rejection or counteroffer or by either parties‘ death or incapacity. See §37. 2. Bare recital of or nominal consideration: If option contract is supported by nominal consideration or merely a bare recital of consideration, the courts are split as to enforcement. (a) Contractors: In general contracting situations, nominal consideration will be sufficient. If not consideration look to see if there was reliance per §87(2). (b) Level of sophistication: If the contract involved large corporations then nominal will sufficient. (c) Sale of real property: The seller of the house is buying a potential buyer. That could be the consideration for keeping the contract open for a reasonable time. C. Was there a “firm offer” under the UCC?: The UCC allows formation of an irrevocable offer even if no recital of the payment of consideration is made. By §2-205, an offer to buy or sell goods is irrevocable if it: (1) is by a merchant (i.e., one dealing professionally in the kind of goods in question); (2) is in a signed writing; and (3) gives explicit assurance that the offer will be held open. Such an offer is irrevocable even though it is without consideration or even a recital of consideration. Example: Jeweler gives Consumer a signed document stating, ―For the next 120 days, I agree to buy your two-carat diamond antique engagement ring for $4,000.‖ Even though Consumer has not paid consideration for the irrevocability, and even though there is no recital of consideration in the signed offer, Jeweler‘s offer is in fact irrevocable for 120 days, because it is by a merchant (Jeweler professionally sells or buys goods of the kind in question), is in a signed writing, and explicitly assures that the offer will be held open. 1. Duration of irrevocability: If not time is state, the offer is open for a reasonable time. However, no offer can be made irrevocable for any longer than three months, unless consideration is given. 2. Forms supplied by offeree: If the firm offer is on a form drafted by the offeree, it is irrevocable only if the particular ―firm offer‖ clause is separately signed by the offeror. D. If the offer invited performance only (unilateral contract), was there part performance or a tender by the offeree?: Where the offer is for a unilateral contract, the beginning or tendering of performance by the offeree makes the offer temporarily irrevocable and an option contract is formed. As long as the offeree continues diligently to perform, the offer remains irrevocable until he has finished. See §45. Example: A says to B, ―I‘ll pay you $1,000 if you cross the Brooklyn Bridge anytime in the next three hours.‖ Before B starts to cross the bridge, A may revoke. But once B starts to cross the bridge, A‘s offer becomes temporarily irrevocable. If B crosses the bridge within three hours, a contract is formed and A owes B the money. If B starts to cross, then changes his mind, neither party will be bound. 1. Preparations: This doctrine applies only to the beginning of actual performance, not the making of preparations to perform. Preparations to perform may, however, constitute justifiable reliance sufficient to make the offeror's promise binding under §87(2). Example: On facts of above example, if B went out and bought expensive walking shoes in preparation for crossing, this act would not cause his offer to be irrevocable. 2. Common situations: Rewards and non-commercial arrangements among relatives and friends. E. If the offer invites a promise, was there reliance on the part of the offeree?: Usually on applies in construction cases. A general contractor planning to bid on a construction contract, solicits bids from subcontractors and uses the most favorable one in making its own bid. A problem arises if the contractor is awarded the contract but, before the contractor has a chance to notify the subcontractor whose bid the contractor used, the subcontractor attempts to revoke its bid. The subcontractor‘s reason might be another better opportunity, a sudden rise in costs, or a mistake in figuring its bid. 1. Majority rule from Drennan: An offer by a subcontractor to a general contractor will often become temporarily irrevocable as an option contract under §87(2). Must show he reasonably relied to his detriment on the bid. Don‘t forget the elements of reliance and to show that there isn‘t an option contract under §87(1)! The following situations will typically preclude promissory estoppel: (a) Irrevocability is temporary: The irrevocability only lasts long enough to give the the general contractor a reasonable opportunity to accept. (b) Revocability clause: Express or clearly implied statement of revocability in its offer is usually enough. (c) Mistake: A mistake defense is applicable if the offeree knew or should have known that the offeror made a mistake (e.g., estimate greatly exceeds historical variance for similar projects). Goes against justifiable reliance. (d) Inequitable conduct: Inequitable conduct by the general contractor also precludes promissory estoppel. Two situations: ―Bid shopping,‖ the practice of trying to find another subcontractor who will do the work more cheaply will continuing to claim that the original bidder is still bound, and ―bid chopping,‖ the attempt to renegotiate with the bidder to reduce the price. (e) Custom: Prior dealings between the parties or standards in the industry may dictate that an option contract is formed only under §87(1). Example: A, sub-contractor, offers to supply steel to B on a job where B is bidding to become the general contractor. B calculates his bid in reliance on the figure quoted by A. B gets the job. Before B can accept, A tries to revoke. If B can show that he bid a lower price because of A‘s sub-bid, the court will probably hold A to the contract, or at least award B damages equal to the difference between A‘s bid and the next-lowest available bid. But observe that B, the offeree, is not bound, so B could accept somebody else‘s sub-bid. XI. WHEN ACCEPTANCE BECOMES EFFECTIVE A. Mailbox rule: In most courts, the acceptance is effective upon proper dispatch. This is called the ―mailbox‖ rule. Example: On July 1, A offers to sell 100 widgets to B at $5 apiece. On July 2, B deposits a properly-addressed acceptance in the mail. On July 10, A finally receives the letter, several days later than would ordinarily be expected from first-class mail. A contract was formed on July 2. Any attempt at revocation by A on, say, July 5 would have been ineffective. 1. Offer provides otherwise: The ―mailbox‖ rule does not apply if the offer provides otherwise (e.g., ―This offer will be accepted when and if your letter of acceptance is personally received by me‖). In this case the mode of acceptance is mandatory and exclusive. 2. Lost in transmission: If the acceptance is lost in transmission or delayed, the applicability of the mailbox rule depends on whether the communication was properly addressed. (a) Properly addressed: If the acceptance is properly addressed, it is effective at the time of dispatch even if it is lost and never received by the offeror at all. (But a court might ―discharge‖ the offeror in this circumstance, for instance if he had sold the goods to someone else.) (b) Not properly addressed: If the acceptance is not properly addressed, or not properly dispatched (e.g., sent by an unreasonably slow means), it will be effective upon dispatch only if it is received within the time in which a properly dispatched acceptance would normally have arrived. If it comes later than this ―normal‖ time, it will not be effective until receipt. B. Both acceptance and rejection sent by offeree: If the offeree sends both an acceptance and rejection, the rule depends on which is dispatched first. 1. Rejection sent first: If the rejection is sent first, then the acceptance will be effective if (and only if) the offeror receives it before he receives the rejection. 2. Acceptance dispatched first: If the acceptance is sent before the rejection, the acceptance is effective upon dispatch, and the subsequently-dispatched ―rejection‖ (really a ―revocation of acceptance‖) does not undo the acceptance, whether that rejection is received by the offeror before or after he receives the acceptance. C. Option contracts: The acceptance of an option contract is effective upon receipt by the offeror, not upon dispatch. D. Risk of mistake in transmission: The risk of a mistake in transmission of the terms of the offer is upon the offeror. That is, a contract is formed on the terms of the offer as received by the offeree. Example: A intends to offer to sell 100 widgets at $5 each. Instead, the telegraph company transmits the offer as an offer to sell 200 widgets at $4. If B accepts without knowledge of the error, A will be stuck having to sell 200 widgets at $4. 1. No right to “snap up” obviously wrong offer: However, if the offeree knows or should reasonably have known that the offer has undergone a mistake in transmission, she cannot ―snap up‖ the offer. XII. STATUTE OF FRAUDS A. Nature of Statute of Frauds: Most contracts are valid despite the fact that the are only oral. A few types of contracts, however, are unenforceable unless they are in writing. Contracts that are unenforceable unless in writing are said to fall ―within the Statute of Frauds.‖ The SOF is pretty much identical from state to state. B. Using SOF as a defense against enforcement: 1. Does the contract fall within the SOF?: First, is the contract at issue one of the types to which the SOF applies, so that a signed memorandum will be required for its enforcement? (Is it ―within‖ the statute?) If NO, then the SOF is inapplicable and a P is free to use any relevant evidence to prove the contract. 2. Is the SOF satisfied?: If YES, the second question is: Is the SOF ―satisfied?‖ That is, is there some sort of written statement (―some memorandum or note‖) of its terms, signed by the D (the ―party to be charged‖; the party against whom enforcement is sought), that is sufficient to meet the statute‘s requirements? If YES, then the SOF is not a bar to enforcement. (a) Disaffirmance caveat: If a D (original ―party to be charged‖) had signed memorandum X and was sued for enforcement by the P, the D can later enforce the same agreement against the P, even if the P has not signed the memorandum X. The P cannot in good faith disaffirm the contract. (b) Oral contract: An oral contract can be brought under the SOF by a later written and signed record of the conversation. See BATTLE OF THE FORMS, PER, or MODIFICATION sections apply. 3. Other factors?: If NO, the third question is: Are there other factors in the case, such as performance or reliance by the P, which might invoke an exception to the statutory bar? XIII. THREE MAIN CATEGORIES THAT FALL WITHIN THE SOF A. The Land Contract Provision 1. Generally: A promise to transfer or buy any interest in land is within the Statute. The Statute does not apply to the conveyance itself (which is governed by separate statutes everywhere) but rather to a contract providing for the subsequent conveyance of land. Example: C, the owner of Blackacre, orally promises to convey it to A in return for A‘s payment of $100,000. If A fails to come up with the $100,000 by closing date, C cannot sue for breach. Conversely, if C refuses to make the conveyance even though A tenders the money, A cannot sue C for breach. (a) Interests in land: The Statute applies to promises to transfer not only a fee simple interest in land, but to transfer most other kinds of interests in land. (b) Leases: For instance, a lease is generally an ―interest in land,‖ so that a promise to make a lease will generally be unenforceable if not in writing. (1) One year or less: But most states have statutes making oral leases enforceable if their duration is one year or less. (c) Mortgages: A promise to give a mortgage on real property as security for a loan also usually comes within the Statute. (d) Contracts incidentally related to land: But contracts that relate only incidentally to land are not within the Statute. Thus a contract to build a building is not within the Statute, nor is a promise to lend money with which the borrower will buy land. 2. Part performance: Even if an oral contract for the transfer of an interest in land is not enforceable at the time it is made, subsequent acts by either party may make it enforceable. 3. Conveyance by vendor: First, if the vendor under an oral land contract makes the contracted-for conveyance, he may recover the contract price. 4. Vendee’s part performance: Second, the vendee under an oral land contract may in reliance on the contract take actions which: (1) show that the oral contract was really made; and (2) also create a reliance interest on the part of the vendee in enforcement. Such a vendee may then obtain specific performance (a court order that the vendor must convey the land) even though the contract was originally unenforceable because oral. (a) Taking possession and making improvements: For instance, if the vendee pays some or all of the purchase price, moves onto the property, and then makes costly improvements on it, this combination of facts will probably induce the court to grant a decree of specific performance. (b) Payment not sufficient: Usually, the fact that the vendee has paid the vendor the purchase price under the oral agreement is not by itself sufficient to make the contract enforceable. (Instead, the vendee can simply recover the purchase price in a non-contract action for restitution.) B. The One-Year Provision 1. General rule: If a promise contained in a contract is incapable of being fully performed within one year after the making of the contract, the contract must be in writing. (a) Time runs from making: The one-year period is measured from the time of execution of the contract, not the time it will take the parties to perform. Example: On July 1, 1990, Star promises Network that Star will appear on a one-hour show that will take place in September, 1991. This contract will be unenforceable if oral, because it cannot be performed within one year of the day it was made. The fact that actual performance will take only one hour is irrelevant. 2. Impossibility: The one-year provision applies only if complete performance is impossible within one year after the making of the contract. The fact that performance within one year is highly unlikely is not enough. (a) Judge from time of contract’s execution: The possibility of performing the contract within one year must be judged as of the time the contract is made, not by benefit of hindsight. Example: C orally promises A that C will pay A $10,000 if and when A‘s husband dies. A‘s husband does not die until four years after the promise. The promise is nonetheless enforceable, because viewed as of the moment the promise was made, it was possible that it could be completed within one year - the fact that it ended up not being performed within one year is irrelevant. 3. Possibility of performance, not possibility of discharge: It is only the possibility of ―performance,‖ not the possibility of ―discharge,‖ that takes a contract out of the one-year provision. Thus the fact that the contract might be discharged by impossibility, frustration, or some other excuse for non-performance will not take the contract out of the Statute. (a) Fulfillment of principal purpose: It will often be hard to tell whether a certain kind of possible termination is by performance or by discharge. The test is whether, if the termination in question occurs, the contract has fulfilled its principal purpose. If it has fulfilled this purpose, there has been performance; if it has not, there has not been performance. Using this rule gives these results: (1) Personal service contract for multiple years: A personal services contract for more than one year falls within the one-year rule (and is thus unenforceable unless in writing) even though the contract would terminate if the employee died. The reason is that when the employee dies, the contract has merely been ―discharged‖, not performed. (2) Lifetime employment: A promise to employ someone for his lifetime is probably not within the one-year provision, since if the employee dies, the essential purpose of guaranteeing him a job forever has been satisfied. So an oral promise of a lifetime job is probably enforceable. (3) Non-compete: A promise by a seller of a business not to compete with the buyer for a period longer than a year is not within the one-year provision, since if the seller dies within a year, the buyer has received the equivalent of full performance (he knows the seller won‘t be competing with him). 4. Termination: Courts are split about whether the existence of a termination clause that permits termination in less than a year will remove a more-than-one-year contract from the one-year provision. Example: Boss orally hires Worker to work for three years. Their oral agreement allows either party to cancel on 60 days notice. Courts are split on whether this contract is within the one-year agreement and must therefore be in writing. The Second Restatement seems to say that the giving of 60 days notice would be a form of ―performance,‖ so that this contract will be enforceable even though oral - Worker might give notice after one month on the job, in which case the contract would have been ―performed‖ within three months of its making, less than one year. 5. Full performance on one side: Most courts hold that full performance by one party removes the contract from the one-year provision. This is true even if it actually takes that party more than one year to perform. 6. Applies to all contracts: The rule that a contract incapable of performance within one year must satisfy the Statute applies to all contracts (including those that just miss falling within some other SOF provision). For instance, even though the special UCC sale-of-goods statute (discussed below) requires a writing only where goods are to be sold for more than $500, a contract to sell goods for $300, to be delivered 18 months after the contract is made, must be in writing. C. Contract for the Sale of Goods 1. General rule: UCC §2-201(1) says that ―a contract for the sale of goods for the price of $500 or more is not enforceable ... unless there is some writing sufficient to indicate that a contract for sale has been made....‖ So an oral contract for goods at a price of $500 or more is unenforceable under the UCC. 2. Exceptions: Even if a sales contract is for more than $500, it is exempted from the SOF requirement in three situations: (a) Specially manufactured goods: No writing is required if the goods are to be specially manufactured for the buyer, are not suitable for sale to others, and the seller has made ―either a substantial beginning of their manufacture or commitments for their procurement.‖ §2-201(3)(a). (b) Estoppel: A writing is also not required ―if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted.‖ §2-201(3)(b). (c) Goods accepted or paid for: Finally, no writing is required ―with respect to goods for which payment has been made and accepted or [GOODS] which have been received and accepted.‖ §2-201(3)(c). Example: Buyer orally orders three pairs of shoes from Seller for a total of $600. Buyer then sends a check for this amount in advance payment. Once Seller takes the check and deposits it in the bank, Seller loses his SOF defense. XIV. SATISFACTION BY A MEMORANDUM A. Are the general requirements of a memorandum satisfied?: Even if there is no signed ―contract,‖ a signed memorandum summarizing the agreement may be enough to satisfy the SOF. See §131. A memorandum satisfies the SOF if it: 1. reasonably identifies the subject matter; 2. indicates that a contract has been made between the parties; 3. states with reasonable certainty the essential terms of the contract; AND 4. is signed by or on behalf of the party to be charged. B. Signature: Because of the requirement of a signature ―by the party to be charged,‖ some contracts will be enforceable against one party, but not the other. The signature to a memorandum may be any symbol made or adopted with an intention, actual or apparent, to authenticate the writing as that of the signer. See §134. Example: Buyer orally agrees to buy Owner‘s house for $200,000. Buyer then sends a document marked ―confirmation,‖ which states, ―This confirms our agreement whereby I will buy your house for $200,000. [signed, Buyer]‖ Owner can enforce the agreement against Buyer, but Buyer cannot enforce it against Owner, since only Buyer has signed the memorandum. C. Several writings can satisfy SOF: The memorandum may consist of several writings if one of the writings is signed and the writings in the circumstances clearly indicate that they relate to the same transaction. See §132. 1. Acquiescence of party to be charged: Even if there is no internal reference or physical connection, the documents may be read together if in the circumstances they clearly relate to the same transaction and the party to be charged has acquiesced in the contents of the unsigned writing. (a) Informal writing is permitted: The SOF may be satisfied by a signed writing not made as a memorandum of a contract. An informal writing includes things such as a letter or a diary entry. See §133. Example: A and B enter into an oral contract for the sale of Blackacre. A writes and signs a letter to his friend C containing an accurate statement of the contract. The letter is a sufficient memorandum to charge A even though it is never mailed. Example: A writes to B the following letter: ―Dear B: I will employ you as superintendent of my mill for a term of three years from date, at a salary of $ 28,000 a year. Let me know if you wish to accept this offer. [Signed] A.‖ B accepts the offer orally. The letter is a sufficient memorandum to charge A. (b) Writing that repudiates contract is permitted: A memorandum may even be sufficient even though it repudiates or cancels the contract, or it asserts that it is not binding because it is not in writing. Example: A and B enter into an oral contract by which A promises to sell and B promises to buy Blackacre for $ 5,000. A writes and signs a letter to B in which he states accurately the terms of the bargain, but adds ―our agreement was oral. It, therefore, is not binding upon me, and I shall not carry it out.‖ The letter is a sufficient memorandum to charge A. XV. RELIANCE EXCEPTION TO THE STATUTE OF FRAUDS A. Did one party rely to his detriment on the contract?: Instead of a quasi-contract suit (which will generally protect only the P‘s restitution or reliance interest), a P who has relied on a contract that is unenforceable due to non-compliance with the Statute of Frauds may instead use the doctrine of promissory estoppel. Where one party to an oral agreement foreseeably and reasonably relies to his detriment on the existence of the agreement, the court may enforce the agreement notwithstanding the Statute, if this is the only way to avoid injustice. See §139. Example: P works for an established company, and has good job security. He orally accepts a two-year oral employment agreement with D, another company. By leaving his present employer, P loses valuable pension and other rights. Once P leaves the old employer to take the job with D, a court may well apply promissory estoppel to hold that the P-D agreement is enforceable notwithstanding noncompliance with the Statute of Frauds, since injustice cannot be otherwise prevented. 1. Misrepresentation regarding Statute: Courts are especially likely to apply promissory estoppel where the D has intentionally and falsely told the P that the contract is not within the Statute, or that a writing will subsequently be executed, or that the defense of the Statute will not be used. 2. UCC: Courts are split about whether promissory estoppel may be a substitute for the Statute of Frauds in a UCC context. 3. Degree of injury and unjust enrichment: The more grievously the P is injured (or the more extensively the D is unjustly enriched) by application of the Statute, the more likely the court is to allow promissory estoppel to be a substitute for compliance with the Statute. XVI. PRINCIPLES OF INTERPRETATION A. Subjective approach: Under the subjectivist view, if the parties attribute materially different meanings to contractual language, no contract was formed. Courts reasoned that there was no “meeting of the minds.” This approach has been rejected as making contracts too difficult to enforce. B. Objective approach: Words and conduct should be interpreted in accordance with the standard of a reasonable person familiar with the circumstances. The ―external‖ method was deemed fair because a speaker would always expect his words to be understood in accordance with their normal usage. This approach was rejected because it led to the conclusion that contractual language could be given a meaning that neither of the parties intended. C. Modified objective approach: In the modified objective approach to interpreting contracts the court should ask two questions: (1) Whose meaning controls the interpretation of the contract? (2) What was that party‘s meaning? This approach was adopted by the Restatement (Second). 1. Step 1: If both parties do in fact attach the same meaning to a provision, that meaning will govern. §201(1). Thus, the mutual understanding of the parties controls, even if it is different from the interpretation that would be given to the contract by a reasonable person. Must take into account third party beneficiaries! 2. Step 2: In many cases the crucial issue in interpreting a contract is whether either party knew or had reason to know of the meaning attached to the contract by the other. If so, the party having knowledge or reason to know is bound by the meaning of the other. Predicated on least cost avoider theory. §201(2)(b). 3. Step 3: If a court should conclude that the parties did indeed attach different meanings to a material term of the contract, but neither party knew or had reason to know the meaning of the other, then no contract exists due to lack of mutual assent. D. Maxims of interpretation: In Step 2 above, the courts will use the following principles of interpretation to aid them in giving meaning to expressions of contractual agreement. 1. Specific provision is exception to general one: If two provisions of a contract are inconsistent with each other and if one is ―general‖ enough to include the specific situation to which the other is confined, the specific provision will be deemed to qualify the more general one, that is, to state an exception to it. 2. Handwritten or typed provisions control printed provisions: A term that has been negotiated between the parties will control over one that is part of a standardized portion of the agreement (i.e., the fine print "boilerplate"). 3. Purpose of the parties: If the "primary purpose" of the parties in making the contract can be ascertained, that purpose is given great weight. 4. Construction against drafter: An ambiguous term will be construed against the person who (clearly) drafted the contract. Often used when there is great disparity in bargaining power or in the case of adhesion contracts. Cannot be used if term is unambiguous and considered as a rule of last resort. 5. Public interest preferred: If the language if reasonably susceptible to two interpretations and only one favors the public interest, this interpretation will be preferred. 6. Others: (a) The meaning of a word in a series is affected by others in the same series. (b) If one or more specific items are listed, without any more general or inclusive terms, other items although similar are rejected. (c) A general term joined with a specific one will be deemed to include only that that are like the specific one. Leads to restrictive interpretations. (d) Every term should be interpreted in the context of the contract as a whole. (e) Preference for an interpretation for makes contract valid rather than invalid. E. Trade usage, course of performance, and course of dealing: There are three special sources which are used in interpreting the terms of a contract. These are especially important in sales contracts, since the UCC gives these sources specific treatment: 1. Course of performance: A "course of performance" refers to the way the parties have conducted themselves in performing the particular contract at hand. Example: The contract calls for repeated deliveries of "highest grade oil." Evidence as to the quality of oil delivered and accepted in the first installments would be admissible as a course of performance to help determine whether oil delivered in a later installment met the contract standard. 2. Course of dealing: A "course of dealing" refers to how the parties have acted with respect to past contracts. 3. Usage of trade: A "usage of trade" is "any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question." UCC §1-303(c). Thus the meaning attached to a particular term in a certain region, or in a certain industry, would be admissible. (a) Used to interpret even a complete integration: Course of dealing, course of performance, and usage of trade may be introduced to help interpret the meaning of a writing even if the writing is a complete integration. That is, these sources are not affected by the parol evidence rule - even though a writing is found to be the final and exclusive embodiment of the agreement, it may still be explained by evidence from these three sources. (b) Contradiction of express terms: But these customs may not be used to contradict the express terms of a contract. See UCC §1-303(e). However, if these customs can reasonably be harmonized with the writing, then the customs may be shown and may become part of the contract. (c) Priorities: Where more than one of these types of customs is present, the most specific pattern controls. Thus an express contractual provision controls over a course of performance, which controls over a course of dealing, which controls over a trade usage. UCC §§1-303(e)(1)-(3). F. Omitted terms: In some cases the evidence of intent to be bound or the degree of performance already rendered may cause rescission (Step 3) to be inappropriate. §204 recommends that in these situations the courts should supply a term that is reasonable under the circumstances. The court should consider the following in attempting to fill the gap: 1. Addressing public interests and public good. 2. Allowing for sharing of unanticipated losses and gains. 3. Avoiding the windfall to one party at the cost of denying recovery to the other side. 4. The parties‘ good or bad faith behavior. 5. UCC ―gap fillers.‖ XVII. THE PAROL EVIDENCE RULE (DEVICE TO CONTROL THE JURY) A. Generally: The parol evidence rule (PER) does not define what evidence is affirmatively admissible, it only operates to exclude evidence (oral or written) – evidence that would otherwise be admissible as rationally probative of some fact at issue. If the PER is: 1. Applicable: If the PER applies at all in a given situation, it has the effect of preventing one party from introducing into court extrinsic evidence of matters not contained in the written agreement between the parties (hence ‗extrinsic‖ to it), where that evidence is offered to supplement or contradict the written agreement. Extrinsic evidence may be considered to determine if a term in the contract is reasonably susceptible to an alternative interpretation. If it is, then the evidence is admissible to the trier of fact.. 2. Not applicable: If the PER does not apply then the admission of evidence will turn on the body of rules that collectively make up the law of evidence. The extrinsic evidence may be introduced. (a) The PER may not apply because either: (1) the parties have not executed a written agreement (does not need to be signed, however); OR (2) the offered evidence comes within some exception to the PER. (b) Even if the parol evidence is ruled admissible and received into evidence, that alone may not prove decisive: It may still be rejected as not credible by the trier of fact. B. The application of the PER depends on the writing’s integration: The correct application of the PER requires that the court to first determine whether the writing in question is intended to be a final expression of the parties‘ agreement and, if so, whether it is a complete or partial statement of the contract terms. 1. Complete or full integration: The term complete integration refers to a writing that is intended to be a final and exclusive expression of the agreement of the parties. The PER applies; no evidence of prior or contemporaneous agreements or negotiations may be admitted which would either contradict or add to the writing. Can still use maxims of interpretation, trade usage, and course of performance or dealing. 2. Partial integration: Partial integration refers to a writing that is intended to be final but not complete because it deals with some but not all aspects of a transaction between the parties. The PER applies; no evidence of prior or contemporaneous agreements or negotiations (oral or written) may be admitted if this evidence would contradict a term of the writing. Evidence that would provide additional or supplementary terms may be permitted. 3. No integration: A writing is not integrated if it is not intended to be a final expression of the agreement of the parties. The PER does not apply. C. What method to use in determining if the writing is fully or partially integrated?: 1. Classic view: The question of integration must be determined from the “four corners” of the writing without resort to extrinsic evidence. The written contract that appears complete on its face is conclusively presumed to be final and complete. Detractors of this approach argue that one cannot know the intent of the parties simply by looking at the document, and that even when applied in the more permissive modern approach the rule can still perform its function of keeping extrinsic evidence from the jury if the judge rules that the writing is indeed an integration of their agreement. 2. Modern view: The contextual approach allows a court to consider evidence of all the facts and circumstances surrounding the execution of the contract, as well as the writing, in determining integration. Detractor argue that the modern approach permits consideration of extrinsic evidence on the threshold question of integration, which it to do exactly what the PER is designed to avoid. Modern courts will consider the following factors: 3. Other factors: Relative sophistication of the parties, detail and complexity of the written agreement, handwritten or typed, specially prepared or form agreement, representation by counsel, and formality of the negotiations. D. Even if the writing is integrated, the PER does not apply to: 1. Evidence offered to explain or interpret the meaning of the agreement: If the contract is partially integrated, the writing may not be contradicted by extrinsic evidence, but may be supplemented by additional consistent terms. A completely integrated writing cannot be contradicted or supplemented. Whatever the level of integration, extrinsic evidence can be used to explain the writing. §214(c). Two views on the scope of this exception. (a) Classical view: Courts following this view admit parol evidence for explanatory purposes only if the writing appears on its face to be ambiguous. Therefore, extrinsic evidence is only allowed for a patent ambiguity. (b) Modern view: A latent ambiguity arises from extraneous or collateral facts which make the meaning of a written agreement uncertain although the language on its face appears clear and unambiguous. Extrinsic evidence is allowed to both reveal a latent ambiguity and interpret a patent ambiguity. (1) A party may use extrinsic evidence to support its claim of latent ambiguity, but this evidence must show that some specific term or terms in the contract are ambiguous; it cannot simply show that the parties intended something different that was not incorporated in the contract. (2) The specific term must be reasonable susceptible to the alternative meaning that the aggrieved party seeks to ascribe to it. (3) Objective evidence, testimony of disinterested third parties or trade usage or the like, is deemed permissible to establish latent ambiguity. Subjective testimony, testimony about what the parties believed the contract meant, is not acceptable because it can be easily fabricated and is often selfserving. 2. Agreements, whether oral or written, made after the execution of the writing: Subsequent and separate agreements (supported by consideration and conforming to the rules of offer and acceptance) are not barred. (a) "No oral modifications" clause: However, if the written document contains a "no oral modification" clause, that clause will usually be enforced by the court, unless the court finds that the defendant waived the benefits of that clause. (b) Contemporaneous writing: If an ancillary writing is signed at the same time a formal document is signed, the ancillary document is treated as part of the writing, and will not be subject to the parol evidence rule. 3. Evidence offered to show that effectiveness of the agreement was subject to an oral condition precedent: That is, a verbal expression of a condition that must take place in order for the contract to be valid is not barred by the PER. Put another way, an oral condition precedent is a notion that the execution of this agreement is dependent on some event taking place, e.g., ―If I get this job, then…‖ 4. Evidence offered to show that the agreement is invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake, or illegality: Some courts would limit the fraud exception to ―fraud in the execution‖—e.g., if A asked B to sign what he says is a receipt for ducks delivered, but it‘s really a contract for the sale of more ducks. Most courts, however, will extend the fraud exception to ―fraud in the inducement‖ cases —misrepresentations of fact that induce the other party to enter into the contract. Some courts will prohibit the introduction of parol evidence to support a claim of fraud in the inducement if the alleged misrepresentation directly contradicts a term in the writing. 5. Evidence that is offered to establish a right to an “equitable” remedy, such as “reformation” of the contract: If one party can establish that a part of the agreement was inadvertently omitted from the writing due to some mistake (―scrivener‘s error‖), that party may seek judicial reformation of the agreement – a court order declaring that the mistakenly omitted provision will be treated in law as part of the agreement. Must show clear and convincing evidence. 6. Evidence introduced to establish a “collateral” agreement between the parties: A collateral agreement is the type of thing that would not be included in the agreement. A warranty would not be in the collateral agreement. An agreement will not be regarded as fully integrated if the parties have made a consistent additional agreement which is either agreed to for separate consideration or is ―such a term as in the circumstances might naturally be omitted from the writing.‖ § 216(2). Example: In a written agreement that seems to be a complete expression of the parties' intent, A promises to sell B a particular automobile. As part of the transaction, the parties orally agree that B may keep the car in A's garage for one year for $15 per month. Because the alleged oral agreement is supported by separate consideration - the $15 per month - B may prove that the oral agreement occurred even though there is an integrated writing that does not include that agreement. E. Is there a “merger clause?”: A merger clause states that the writing is intended to be final and complete; all prior understandings are deemed to have been ―merged‖ into or superseded by the final writing. 1. Classic: Conclusive or nearly conclusive weight is given to the merger clause. 2. Modern: Question of integration depends on all relevant evidence; merger clause is not dispositive and its weight will depend on the facts and circumstances of each particular case. XVIII. IMPLIED TERMS A. Is the promise illusory?: A promise, even if bargained for, will not serve as consideration for a promise in return if it is ―illusory‖ – if it makes performance entirely optional with the promisor. In such cases, the illusory promise will be unenforceable by its terms, because it does not restrict the freedom of the promisor nor confers consideration to the promisee. Example: A says to B, "I'll sell you as many widgets at $4 apiece, up to 1,000, as you choose to order in the next 4 weeks." B answers, "Fine, we've got a deal." B then gives A an order for 100 widgets, and A refuses to sell at the stated price because the market has gone up. B's promise is illusory, since she has not committed herself to do anything. Therefore, A's promise is not supported by consideration, and is not binding on him. 1. Unfettered right to terminate: If the contract allows one or both parties to terminate the agreement at his option, this right of termination might make the promise illusory and the contract therefore unenforceable. 2. Obligation to give notice: If the agreement allows one party to terminate simply by giving notice at any time, the traditional common law view is that the party with the termination right has not furnished consideration. But the modern trend is to hold that as long as the terminating party has the obligation to give notice (even if this obligation is an implied one), this duty of notice itself furnishes consideration. B. Was there an implied promise that makes the promise not illusory?: Courts try to avoid striking down agreements for lack of consideration. One way they do this is by finding that the promisee has made an implied promise in return. The court will look at the agreement in an objective fashion. What would a reasonable person have intended in this situation? If in similar circumstances, a reasonable person would understand would intend to use reasonable effort, then the contract is binding. Example: D, a fashion designer, gives P the exclusive right to sell products made from D's designs. P promises to pay royalties on any product sold, but the agreement does not expressly require P to make sales. D violates the agreement by letting someone else sell her designs. P sues D, who defends on the grounds that P did not really promise to do anything, and that there is thus no consideration for D's promise of exclusivity. 1. Exclusivity: In an exclusive agency promise, the promisor is bound and the promisee is not. In addition, the promisor cannot receive any benefits under the contract until the promisee performs. Although, this agreement looks like a unilateral contract, the circumstances may suggest a bilateral contract. The court will construe an implied promise on the part of the promisee to use best or reasonable efforts to perform. Both parties are now bound. (a) UCC §2-306(2): A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. Best efforts (diligence) is more onerous than good faith (honesty and fairness). 2. Requirements and output contracts: These commercial arrangements are generally regarded as being enforceable despite the indefiniteness/illusoriness of the commitment involved. See UCC §2-306. (a) If not a requirement contract, could be a series of Unilateral Contracts 3. Enforcing distributorship agreements: If the contract did not require the distributor to purchase a specific quantity of goods, some courts implied an obligation of best and reasonable efforts to prevent the contract from failing because of lack of consideration or lack of mutuality. For sales of goods, UCC §§ 2-306 and 2309 eliminate most problems of lack of mutuality or lack of consideration. A distributorship contract of indefinite duration is still subject to termination at-will upon reasonable notice C. Is there a UCC “gap filler” provision?: These provisions will as a matter of law be implied in contracts for the sale of goods unless otherwise agreed by the parties. 1. Terminations clauses: Termination of a contract by one party (except on the happening of an agreed event) requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable. §2-306(3). Mandatory, cannot be varied by agreement. Some possibly relevant factors in determining what constitutes ―reasonable notification‖ include: (a) The distributor‘s need to sell off inventory (b) Whether the distributor still has substantial unrecouped investment made in reliance on the agreement (c) The reasonable time it takes to find a substitute arrangement (d) Terms contained in the parties‘ present or prior agreement (e) Industry standards 2. Others: Place of delivery. §2-308. Time of payment. §2-310. Risk of loss. §2-509. Buyer‘s right of inspection. §2-513. XIX. IMPLIED OBLIGATION OF GOOD FAITH A. Generally: Every contract or duty within its scope imposes an obligation of good faith in its performance or enforcement. For merchants, UCC §2-103(1)(b) defines good faith as requiring: 1. Subjective honesty (pertains to non-merchants); AND 2. Objective reasonableness: observance of reasonable commercial standards of fair dealing in the trade. B. Applications: The obligation of good faith should be employed in cases where one party‘s actions were such as to undermine the ―spirit‖ of the contract – either by enabling that party to realize gains in making that contract he had implicitly agreed to surrender, or by unfairly denying to the other party the fruits of the contract that he reasonably expected to receive. In this sense, the obligation of good faith can be viewed as a device for protecting the bargain that the parties themselves have made against later attempts by one side to undermine it. C. Requirements contracts: A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. 1. Need for commitment: A requirements contract binds the buyer to buy all its needs of an item from the particular seller, at least in a particular market or region. An agreement that does not to some appreciable degree bind the buyer to buy only from the particular seller is likely to be viewed as invalid and unenforceable as an illusory promise. 2. Excessive overdemand: The seller in a requirements contract is to be protected against increases in demand that exceed the bounds of good faith. A “ballooning” of demand by a requirements buyer has often been held to be in bad faith. Not allowable even with good faith. 3. Excessive underdemand: A substantial reduction or elimination of all requirements by a buyer is subject to the test of good faith even though the contract contains an estimate. The reason for the reduction is pivotal is assessing compliance with UCC §2-306. (a) Valid reasons: A reduction will probably be in good faith if resulting from reasons beyond the buyer’s control. A shut-down for lack of orders might be permissible if done in good faith. (b) Invalid reasons: A buyer that attempts to procure its requirements more cheaply elsewhere or with intent to harm the seller is clearly acting in bad faith. A requirements contract that has become unprofitable is not a sufficient reason for reducing or eliminating production. D. Output contract: Output contracts are agreements to sell exclusively to a buyer all goods that the seller may produce. Termination of output is likely to be judged be a standard very similar to evaluating a reduction of requirements by a buyer. Good faith standard applies even if there is an estimate. XX. MUTUAL MISTAKE (MISTAKE OF BOTH PARTIES) A. Generally: Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154. B. Timing: The mistake must have existed at the time of contract formation. The date of discovery is irrelevant. C. Three Elements: Remember, a mistake involves a belief, not an assertion, that is not in accord with the facts. Three requirements must be satisfied before the adversely-affected party may avoid the contract on account of mutual mistake under §152: 1. Did the mistake go to a basic assumption of the contract?: The mistake must concern a basic assumption on which the contract was made. Examples of basic assumptions would be those concerning the existence, identity, quantity, or quality of the subject matter. Look at the aggrieved party‘s motivation for entering into the contract. Examples: The belief that a violin is a Stradavarius when it is in fact a worthless 20th century imitation is a ―basic‖ mistake. But the seller‘s belief that a buyer to whom he is selling on credit is credit-worthy is probably a ―collateral‖ rather than a ―basic‖ mistake. (a) Market conditions or financial ability: Mistakes as to market conditions will generally not be ―basic‖ ones, so the mistaken party will not be able to avoid the contract. Example: Seller agrees to sell Blackacre to Buyer. Both parties believe that comparable land is worth $5,000 per acre. Buyer can‘t avoid the contract if comparable land is really worth $2,000 per acre. (b) Existence of subject matter: The existence of the subject matter of the contract is usually a ―basic‖ assumption. Example: Seller agrees to sell land containing timber to Buyer. Both parties believe that there are 100,000 board feet on the property. In fact, fire has destroyed much of the timber, so that only 20,000 feet remain. This will be a basic assumption, so Buyer can avoid the contract when the facts emerge, whether this is before or after closing. (c) Quality of subject matter: A major mistake as to the quality of the contract‘s subject matter is often a ―basic‖ assumption, so the disadvantaged party can avoid the contract. Example: If both parties believe a violin is a Stradavarius when in fact it is an almost worthless imitation, this will be a mistake on a basic assumption, and Buyer can avoid the contract. 2. Did the mistake have a material effect of the agreed exchange?: The mistake must have a material effect on the ―agreed exchange of performance.‖ He must show that the resulting imbalance in the agreed exchange is so severe that he can not fairly be required to carry it out. Ordinarily he will be able to do this by showing that the exchange is not only less desirable to him but is also more advantageous to the other party. Sometimes this is so because the adversely affected party will give, and the other party will receive, something more than they supposed. Example: If both Buyer and Seller thinks that a violin is a Stradavarius, but it is in fact a Guarnarius worth almost the same amount, the mistake would not have a ―material effect‖ on the agreed exchange. (a) Effect of other relief: A court will consider where relied other than avoidance is available to the adversely effected party. If, for instance, the mistake concerns the contents or effect of a writing and the party adversely affected can have it rectified by reformation, avoidance is not available as an alternative. 3. Did the adversely affected party assume the risk: Under §154, the adversely-affected party (the one seeking to avoid the contract) bears the risk of a mistake when: (a) By agreement: The risk is allocated to him by agreement (e.g., an ―as is‖ clause) of the parties; OR (b) Failure to investigate: He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient; OR (c) Judicial decision: The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. (1) Minerals in land: In land-sale contracts, the Seller will almost always bear the risk that valuable oil and gas deposits will be found on the land (i.e., Seller cannot avoid the contract when such a discovery is made). (2) Building conditions: When a builder contracts to construct a building on land owned by the other party, the builder will almost always be found to bear the risk of a mistake about soil or other unexpected conditions, so he cannot avoid the contract if construction proves much more difficult than expected. XXI. UNILATERAL MISTAKE (MISTAKE OF ONE PARTY) A. Generally: Where the mistake is unilateral, it is more difficult for the mistaken party to avoid the contract than in the mutual mistake situation. Remember there cannot be a mistake of judgment; must be a mistake of fact. The mistaken party must make the same three showings as for mutual mistake (basic assumption, material effect, and risk on the other party) under §152, plus must prove either of the two elements under §153: 1. Would enforcement of the contract be unconscionable?: The mistake is such that enforcement of the contract would be unconscionable; (a) Must be unduly burdensome to the adversely effected party (a substantial loss not lowered profit); AND (b) No substantial reliance by the other party (perhaps no money spent or reasonable alternative). Go through elements of reliance. OR 2. Did the other party have reason to know of the mistake?: The other party had reason to know of the mistake, or the other party‘s fault caused the mistake. Also see if there is a NONDISCLOSURE issue. B. Negligence: Although not a formal element, negligence will often be an important factor in a unilateral mistake case. At a minimum, the mistaken party‘s conduct must not fall below the level of good faith and fair dealing. In addition, keeping silent as to the mistaken party‘s unilateral mistake may amount to fraudulent nondisclosure. C. Construction bids: The most common type of unilateral mistake occurs where a contractor or sub-contractor makes an error on a bid for a construction job. 1. Unconscionability: The mistaken contractor will succeed in showing unconscionability only if he shows that not only will he be severely harmed if forced to perform, but also that the other party has not relied on the bid. Example: Sub-contractor gives contractor a bid of $50,000 for electrical work. Contractor relies on this bid to prepare her own master bid for the entire project. Contractor gets the contract, enters into a sub-contract with Sub-contractor, and Sub-contractor then discovers that his $50,000 bid should have been $75,000, due to a clerical error. The court would probably not find it unconscionable to hold Sub-contractor to the contract, because Contractor has relied on the $50,000 sub-bid. 2. “Snapping up” of offer: Alternatively, the mistaken contractor may try to show that the other party either knew or had reason to know of the error. Can compare to other bids or historical variance. Example: On the above example, if Sub-contractor can show that Contractor should have known that there probably was a mistake, because Sub-contractor‘s bid was much lower than all other sub-bids, the court is likely to let Sub-contractor avoid the contract based on unilateral mistake. XXII. IMPOSSIBILITY A. Introduction to changed circumstances: Impossibility, impracticability and frustration of purpose have nothing to do with any problem in formation and presupposes that a binding contract was made. Rather, it is concerned with whether a post-formation change of circumstances has such a serious effect on the reasonable expectations of the parties, that is should be allowed to excuse performance. B. Generally: If a court concludes that performance of the contract has been rendered "impossible" by events occurring after the contract was performed, the court will generally discharge both parties. Example: Contractor agrees to paint Owner's house for $10,000. Just before painting starts, the house burns down. A court will almost certainly conclude that performance has become impossible, and will therefore discharge both parties. Contractor does not have to do the painting, and , Owner does not have to pay anything. If the house burned down before the agreement was reached and neither party knew of this occurrence, then the case would be one of mutual mistake. C. Three situations in which impossibility arises: 1. Supervening illegality: If supervening governmental action prevents a party‘s performance by prohibiting it or imposing requirements that make it impossible, that party is excused. 2. Death or disability of the promisor: If a person‘s existence is necessary for performance of a duty, and performance is prevented by that person‘s death or disability, the duty is discharged. Typically is the case when the contract calls for a personal service. 3. Supervening destruction: If the existence of a particular thing is necessary for a party‘s performance, the party is excused if the destruction or deterioration of that thing, through no fault of either party, prevents performance. The particular thing must be essential to the performance of the contract. (a) Subject matter must be specifically referred to: If property which the performing party expected to use is destroyed, that party is discharged only if the destroyed property was specifically referred to in the contract, or at least understood by both parties to be the property that would be used. It is not enough that the party who seeks discharge intended to use the destroyed property. Example: Contractor agrees to paint Owner's house for $10,000. Unknown to Owner, Contractor intends to use 100 gallons of paint which Contractor has left over from another job. After the signing, this paint is destroyed in a fire. Contractor will not be discharged by impossibility, because the specific leftover paint is not referred to in the contract, and is not understood by both parties to be the particular paint to be used in the contract. (b) Construction contracts: If a building contractor contracts to construct a building from scratch on particular land, and the building is destroyed by fire when it is partially completed, most courts hold that the contractor may not use the defense of impossibility. He must still perform the contract. (c) Repair of buildings: But when a party contracts to repair an existing building, he usually will be discharged if the building is destroyed. (d) Sale of goods: Contracts for the sale of goods may or may not be discharged when there is destruction of the "subject matter" of the contract. (1) Was the good unique?: If a contract calls for the delivery of a particular identified unique good (e.g., a racehorse), and that good is destroyed before the ―risk of loss‖ has passed to the buyer, the contract will be discharged. (2) Was there a reasonable substitute available?: If non-essential aspects of the contract - such as ones dealing with the means of delivery or the means of payment - become impossible, usually the contract will not be discharged. Instead, a commercially reasonable substitute must be used. (Example: If A agrees to ship goods by post office to B, and the post office goes on strike, A must use a truck, UPS, or other commercially reasonable substitute.) XXIII. IMPRACTICABILITY A. Generally: Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. Usually for the judge to decide, not the jury. All four elements must be satisfied. B. Did the event render the party’s performance impracticable?: Relief is only appropriate if the change in circumstance renders the performance unduly burdensome. The even must have such a sever impact on the performance that it cannot be rendered without great loss, risk, or other hardship. 1. Must be unduly burdensome: Relief under impracticability requires more than a showing of inconvenience, lack of profitability, or loss of better opportunity. A huge loss that threatens bankruptcy makes a better case than a manageable smaller loss. A minority of courts will allow relief for overwhelming increase in cost of performance. 2. Reasonable alternative: If the agreement gives a party a choice between alternative ways of performing, the fact that one of these alternatives becomes impracticable will not excuse the party if another remains open, because the agreed performance has not become impracticable. C. Did an event occur after the contract was made, the non-occurrence of which was a basic assumption of the contract?: The parties must be faced with an event so contrary to the assumption that changes the very basis of the exchange. The occurrence must be an unforeseen supervening circumstance not within the contemplation of the parties at the time of contracting. An event is unforeseen by the parties if they themselves did not contemplate it as a real likelihood. UCC §2-615. The following events may give rise to impracticability: 1. Death or incapacity: The parties will ordinarily assume that a person who is necessary for performance will neither die nor be deprived of a necessary capacity before the time for performance. Look out for reasonable alternative. 2. Continuing existence of essential item: The parties ordinarily assume that a thing that is necessary for performance will remain in existence and in such condition that performance can take place. Look out for reasonable alternative. 3. Change in the law or government regulation: Of the law changes to prohibit a performance that was lawful at the time of contracting, the change in the law defeats a basic assumption of the contract. Good faith compliance with the regulation excuses performance, even if the regulation is later found to be invalid. Most courts require the performance to be virtually worthless and the change in the law unforeseeable. 4. Change in market conditions: Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. (a) Possible exceptions (courts are split): A severe shortage of raw materials or of supplies due to a contingency such as war, embargo, labor unrest, natural disaster, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section. However, must take into account reasonable alternatives. D. Was the party seeking relief at fault in causing the occurrence?: The degree to which the party was in some way responsible for his troubles, or could have surmounted them with reasonable effort, is a relevant factor to be taken into account. E. Did the party seeking relief bear the risk of the event occurring?: If the party adversely affected by the event had expressly or impliedly assumed the risk of occurrence, the nonperformance cannot be excused even though all the other elements are satisfied. 1. Is there an express and specific term assigning risk?: See if a general provision (force majeure clause) exists allocating the risk of disruptions or calamities. There may also be a clause that allocates risk for a particular contingency. 2. Is there a term that impliedly places risk on a party?: A contract may impliedly place risk on a party by means of a provision such as a warranty, an undertaking to obtain insurance, or some other commitment from which the assumption of risk may be inferred. 3. What if the contract terms do not settle the issue?: Look to the context of the contract, including normal commercial practices and expectations. Unless the contract provides otherwise, the usual commercial assumption is that a party takes the risk of market fluctuations unless the change is so dramatic and unexpected as to be beyond the normal range or risk. F. Relief for impracticability: Typically, relief comes in the form of a discharge of contractual duties for both parties. If any performance has been render by either party under the contract prior to the finding of impracticability, restitution must be made akin to mistake. G. Application of Parol Evidence Rule: In determining what assumptions the parties made, a court should look at all relevant circumstances. Some courts have held that if the agreement is completely integrated, the parol evidence rule bars extrinsic evidence to the basic assumptions of the parties. However, there is no reason why such evidence should not be admitted for the limited purpose of showing circumstances that would justify the court is supplying a term. The better view allows such evidence to show, for example, an assumption that a particular source of supply would be in existence at the time for performance. XXIV. FRUSTRATION OF PURPOSE A. Generally: The effect of frustration of purpose is not to make the performance of one party unduly burdensome, rather to deprive one party entirely of the benefit he expected from the other party‘s performance. Impracticability operates to the advantages of parties (sellers) that are bound to furnish goods, land, services, or some similar performance, while frustration of purpose operates to the advantage of parties (buyers) that are to pay money in return for those performances. B. Did the event substantially frustrate the principal purpose of the contract?: The event must so seriously affect the value or usefulness of the benefit reasonably expected by the aggrieved party that it frustrates the contract‘s central purpose for that party. 1. Broad view of principal purpose: The mere fact that some exceptional event has prevented a party from taking advantage of the transaction in the particular way expected may not suffice to satisfy the requirement of a substantial frustration if the party can turn the bargain to it advantage in some other way. Reasonable alternative. 2. Frustration must be nearly total: The mere fact that what was expected was a profitable transaction has turned out to be a losing one is not enough. 3. Shared basis of purpose: A party‘s private motivation is not relevant to the contract and cannot be a basis for disappointing the other party‘s reliance. Therefore, the purpose must be so obvious to the other party that it can be reasonably regarded as the shared basis of the contract. C. All the other elements are same as impracticability. XXV. MODIFICATION A. If one party is looking to modify a contract, does the pre-existing duty rule apply?: Merely promising to perform an existing obligation will not serve as valid consideration for additional return compensation from the other party. However, even slight or modest addition to or alteration of the performance are enough to support modification. Look out for coercive behavior such as DURESS. B. Do any of the following exceptions apply?: 1. Unforeseen change of circumstances: §89(a) states that a promise of modification is binding if fair and equitable in view of circumstances not anticipated by the parties when the contract was made. This exception applies even if the unforeseen circumstances do not qualify under the impracticability doctrine. General premise of frustration of purpose, but is only relevant to modification. 2. Reliance: R(2) §89(c) asks if one party suffered a legal detriment by performing its duties as promised in the original agreement.. Would defeat the preexisting duty rule in whole if allowed. Courts are very restrained in doing in applying this rule. In almost any case there is a reliance. Here formally, but ALMOST NEVER APPLIED. Make it as argument but make clear it will not work. 3. Mutual release: A new contract can be upheld as being the product of mutual rescission, followed by a new and valid contract, but only in the absence of coercion, an unexpected change in circumstances, and justifiable reliance on the new promise. The big worry is coercion. Courts police this expression very strictly. Not an uncommon situation. 4. Bankruptcy – many courts have held that a promise not to file bankruptcy has been held to be valid consideration for a promise to reduce or extend a debt provided that the debtor is really in financial difficulty, he would be justified in seeking bankruptcy relief, and he is otherwise acting in good faith C. Application of the Statute of Frauds to oral modifications: 1. Common law: Generally, to determine whether an oral modification of an existing contract is effective, the contract as modified must be treated as if it were an original contract. This is true whether the original contract is oral or written. If the modifications are unenforceable, the original contract is left standing. 2. UCC: Under UCC §2-201(1) the required memorandum must specify only the quantity; other terms, such as the price, may be expressed orally. Under this analysis, an oral modification of a written agreement would be enforceable unless the modification would change the quantity term or an increase in price over the $500 UCC threshold. D. Is there a “no oral modification” (NOM) clause?: An NOM clause requires that any modification must be in writing and signed to be effective. 1. Common law: NOM clauses are usually held to be ineffective to restrict the parties‘ freedom to later modify their agreement by whatever mode they might choose, written or oral. 2. UCC: UCC §2-209(2) authorizes parties to employ a NOM clause to create a ―private statute of frauds‖ governing modifications by providing that a signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded. (a) Was there a waiver?: However, UCC §2-209(4) provides that although an attempt at modification or rescission does not satisfy the requirements of UCC §2-209(2), it can operate as a waiver. Generally, an NOM clause may be waived, by oral agreement to that effect, or by some combination of words and conduct that in the circumstances evidences the parties‘ willingness to dispense with its protection. Usually, such conduct is satisfied by the detrimental reliance of one party on the assurance of an oral waiver by the other. (1) Was there a “no-waiver” clause?: A ―no-waiver‖ clause is intended to insulate the parties (or at least the drafter) from a claim that any provision in the contract, including the NOM clause, had been waived orally. Not dispositive but strongly influential (presumably can be waived also). Usually used with a “merger clause” to ensure that any dispute is resolved on the basis of the writing only. E. If there an attempted modification through settlement?: Suppose a debtor resists payment of an asserted obligation, claiming that he does not owe as much as the creditor claims. What if at some point the debtor offers the creditor a check for some amount less than he claims, and says, in effect, ―Here‘s a check for what I‘m willing to pay, marked ‗payment in full.‘ You can have this right now, without a lawsuit, but only if you accept it as full settlement of your claim.‖ If the creditor accepts and cashed the check, can he later assert a right to payment of the balance of his claim? 1. Is the amount unliquidated?: If the amount actually owed is not reduced to a dollar amount or is the subject of a good faith dispute, acceptance of a check tendered in full payment will in legal effect amount to an ―accord and satisfaction‖ that discharges any remaining obligation. The same is true even if the creditor attempts to reserve his rights to seek the balance either by sending a letter to that effect or by endorsing the check ―under protest‖ or ―with full reservation of rights.‖ 2. In the amount liquidated?: Agreements to settle a undisputed claim for less than the full amount have traditionally not been binding on the creditor and does not discharge the remaining obligation. Extension of the pre-existing duty rule. However, a minority of court will discharge any remaining obligation. XXVI. MINORITY & INCAPACITY (STATUS DEFENSES) A. Generally: Certain classes of persons have only a limited power to contract. Most important are infants and the mentally infirm. For these people, any contract they enter into is voidable at their option – they can enforce the contract or escape from it. B. Infants: Until a person reaches majority or is emancipated, any contract which he enters into is voidable [not void!] at his option. The age of majority is a matter of statute, and in most states is now 18. See §14. Example: A, a 16 year old, agrees to sell Greenacre to B. A later changes his mind and refuses to go through with the sale. B may not enforce the agreement against A. But A, if he wishes, may enforce it against B, e.g., by suing B for damages for failure to go through with the purchase. 1. Disaffirmance: In nearly every state, an infant may avoid the contract even before he reaches majority. This is called ―disaffirmance.‖ He may do this orally, by his conduct (e.g., refusing to go through with the deal), or by a defense when sued for breach. The other party is still bound until disaffirmance. (a) Land conveyances: But where the contract is for a conveyance of land, most states do not allow the infant to disaffirm the contract until he has reached majority. 2. Ratification: A contract made by an infant is not void, but merely voidable, so the infant can choose to enforce it if he wishes. If he does this, he is said to have ratified the contract. (a) Must reach adulthood to ratify: The most important thing to remember about ratification is that the minor may not ratify until he has reached adulthood. Ratification may occur in three ways: (1) Failure to disaffirm: By inaction – if the infant does not disaffirm within a reasonable time after reaching majority, she will be held to have implicitly ratified. Other party‘s reliance is a factor, too. (2) Express: Expressly – the contract may be ratified by words, either written or (in most states) oral. (3) By conduct: By conduct – if the former infant actively induces the other party to perform, this conduct may constitute a ratification (e.g., both parties begin to exchange performances after the infant‘s majority). But mere part payment or part performance by the former infant is probably not by itself a ratification. 3. Relief following disaffirmation: After disaffirmance, the general rule is as follows: (a) Infant: The infant must return his present economic advantage. Put another way, the infant must return whatever property he still retains at disaffirmance and does not have to pay the market value for any services or property consumed, lost or dissipated. (b) Other party: The major party must make full restitution to the minor. (1) Minority rule: A minority of courts have permitted offset against the minor‘s recovery for the reasonable value of the minor‘s use of what was received and consumed. The major party must not have taken advantage of the minor and have acted fairly and reasonably. Example: Infant buys a car for $4,000 in cash from D. Infant then disaffirms and sues to recover his $4,000. To recover the $4,000, Infant will have to return the car. If Infant has wrecked the car, or sold it for money which he has then spent, the value of the car will be subtracted from any recovery by Infant. So if the car was in fact worth $4,000, Infant will recover nothing if he no longer has the car. (c) Exceptions: There are two instances in which the infant must make restitution for benefits received (value consumed): (1) Necessaries: A minor is liable to pay for the reasonable value of necessaries consumed (goods or services reasonably needed for the minor‘s livelihood). Produces the same result as holding the minor to the contract, unless the amount the minor paid was not reasonable or the minor was taken advantage of. A necessity can be defined as anything suitable to the minor‘s social position and station in life and is not purely luxurious. But usually refers to things like food and shelter. (2) Misrepresentation or willful destruction of goods: The other party must have been reasonable in believing the misrepresentation of age and must have actually given value to the minor or suffered a detriment as a result of the misrepresentation. Two theories on recovery: (i) Tort: Deliberate misrepresentation is a tort for fraud, and accountability for tortious conduct could begin at an age earlier than majority. Recovery in tort aims as restoring loss, rather than enforcing the expectations of the contract, so the relief award could be quite different. (ii) Estopped from disaffirming: If the infant misrepresents his age, some courts permit the other to estop the infant from disaffirming the contract. C. Mental Illness or Defect: A mental incompetent is governed by the same basic rules as an infant – he may either disaffirm the contract or ratify it. A person lacks capacity to contract because of mental illness if either: 1. Cognitive test: he is unable to understand in a reasonable manner the nature and consequences of the transaction; OR 2. Volitional test: he understands it, but acts irrationally, and the other person knows he is acting irrationally. 3. Exception: Court can uphold the contract if it is on fair terms, if the other party has no actual knowledge of the impairment and if the other party has relied on the K, or circumstance have changed such that avoidance would work a great hardship on the other party. In addition, as long as the other party doesn‘t know about the impairment, the other party still has full rights of restitution. D. Intoxication: Intoxication will give a party the power of avoidance only if: 1. he is so intoxicated that he cannot understand the nature of his transaction; AND 2. the other party has a reason to know that this is the case. XXVII. DURESS (BEHAVIORAL DEFENSE) A. Duress generally: In duress, there needs to be a threat, the threat must be improper or wrongful, and the threat has to induce the making of the contract (causation), and there must be no reasonable alternative. Duress makes the contract voidable at the instance of the P and the contract is rescinded. B. Was there a threat and was it improper or wrongful?: A threat is the manifestation on an intent to inflict some harm or loss on another. The threat need not necessarily be illegal. Here are some of the acts or threats that may constitute duress: 1. Threat to instigate criminal action. Not permissible as a matter of legal ethics and is an improper threat in the context of a civil litigation. 2. Threat of physical harm is an improper threat 3. Initiating civil process where there is no good faith basis to do so. 4. A threat to breach a contract if there is no good faith basis to do so. 5. A situation where there is a threat that is unfair. A threat that creates a situation in which there is harm to the victim and no benefit to me. This threat is vindictive. (Example, a threat to make public embarrassing information concerning the victim unless the victim makes the proposed contract.) C. Did the threat induce the P’s manifestation of assent?: This element is a matter of causation. A subjective standard is used to determine whether this party‘s free will has been overcome. Thus even though the will of a person of ―ordinary firmness‖ might not have been overborne, if D can show that he was particularly susceptible, and was in fact coerced, he may use the defense. 1. Majority rule: The fact a party agreed to a settlement because of a desperate need for cash could not be the basis for duress unless the other side caused the financial hardship. For economic duress, there must be a causal link between the coercive acts and the circumstances of economic duress. 2. Minority rule: Some courts have held that it is enough that one party took advantage of the other‘s dire circumstances without having caused the financial hardship. Example: Finding economic duress is settlement agreement because dominant party knew that victim was a new company, overextended to its creditors and subcontractors, and faced imminent bankruptcy if not paid. D. Was the there a lack of a reasonable alternative?: Possible reasonable alternatives include the available legal options, alternative source of goods, services or funds, when there is a threat to withhold such things, and toleration if the threat is minor. Litigation may not be an option if the P was facing bankruptcy. A threat to withhold goods, services or payment to which the victim is entitled may leave the victim with no reasonable alternative. E. Additional info on threat to breach contract: Most commonly, duress arises in contract cases because one party threatens to breach the contract unless it is modified in his favor; the other party reluctantly agrees, and the question is whether the modification is binding. In general, courts apply a ―good faith‖ and ―fair dealing‖ standard here: if the party seeking modification is using the other‘s vulnerability to extract an unfair advantage, the duress defense is likely to succeed. Also look at pre-existing duty rule. If, by contrast, the request for modification is due to unforeseen difficulties (impracticability), the duress defense will probably fail. F. Abusive or oppressive acts: If one party threatens another with a certain act, it is irrelevant that the former would have had the legal right to perform that act – if the threat, or the ensuing bargain, are abusive or oppressive, the contract will be void for duress. Example: Client hires Lawyer to prepare Client‘s defense against criminal charges, for a flat $10,000 fee. The night before the trial is to begin, Lawyer tells Client, ―Double the fee, or I‘m resigning from the case.‖ Client agrees. A court will probably hold that given the timing of Lawyer‘s threat, the threat and/or the ensuing bargain were abusive or oppressive, in which case the court will not enforce the modification. XXVIII. UNDUE INFLUENCE (BEHAVIORAL DEFENSE) A. Undue influence generally: Undue influence is a shorthand legal phrase used to describe persuasion which tends to be coercive in nature and overcomes the will without convincing the judgment. Used in place of duress (when there‘s no threat) and misrepresentation. Results in a voidable contract. B. The elements of undue influence are: 1. Undue susceptibility in the servient person (a) A total weakness of mind which leaves a person totally without understanding (b) A lesser weakness of mind that destroys the capacity to contract (1) Could be a lack of full vigor due to age, physical condition, or emotional anguish (2) Cases usually involve the elderly with their wills AND 2. Excessive pressure by the dominating person. Consider the following factors: (a) Discussion of the transaction at an unusual or inappropriate time (b) Consummation of the transaction in an unusual place (c) Insistent demand that the business be finished at once (d) Extreme emphasis on untoward consequences of delay (e) The use of multiple persuaders by the dominant side against a single servient party (f) Absence of third party advisors or attorneys (g) Statements that there is no time to consult financial advisors or attorneys C. Elements not essential to undue influence: Although not dispositive, an allegation with these elements are persuasive: 1. Confidential relationship between P and D. 2. Misrepresentation. 3. Bad faith. P can still win even if D acted in good faith D. High standard: Undue influence cannot be used to avoid bad bargains. In addition, ordinary people typically are not unduly susceptible. XXIX. MISREPRESENTATION (BEHAVIORAL DEFENSE) A. Misrepresentation generally: If a party can show that the other made a misrepresentation to him prior to signing, he may be able to use this in either of two ways: (1) he may use this as a defense in a breach of contract action brought by the other; or (2) he may use it as the grounds for rescission or damages in a suit in which he is the P. B. Fraudulent misrepresentation (fraud in the inducement; voidable contract): A fraudulent misrepresentation concerning a fact that forms the basis of the contract, giving the party to whom it is made a false incentive to enter it. Three elements: 1. Was there an assertion not in accord with the facts?: There D must make a false assertion as it relates to a past event (―I have put the machine in running order.‖) or present circumstances (―The machine is in running order.‖), but cannot be one of a future event (―I will put the machine in running order.‖). (a) Different types of assertions: (1) Affirmative statements: Whether a statement is false depends on the meaning of the words in all circumstances. What is asserted may be fairly inferred. This a half truth that is true as to the facts stated, but fails to include a qualification necessary to prevent a false inference, is a misrepresentation. Example: If the seller of a house knows that the old beams underneath the roof are rotten and about to collapse, but she says to the buyer, ―we recently replaced the beams supporting the porch, and they are solid,‖ that is an affirmative false statement. (2) Concealment: An affirmative act that is intended or known to be likely to keep another from learning a fact. Example: Say that the beams under the porch were so weak that it had begun to sag and wobble. If the owner does not actually say anything about the beams, but before the buyer came to look at the house, she had temporarily placed some jacks under the porch to remove the sagging and stabilize it, she has taken deliberate action to conceal the truth. (3) Nondisclosure or silence: Typically need to show that disclosure is needed to correct a previous assertion or to correct a mistake, or when there is a relationship of trust between the parties. Disclosure may also be required when it is demanded by reasonable standards of fair dealing. See below for broader discussion of NONDISCLOSURE. Example: Even if the owner takes no action to hide the defect and says nothing at all about the porch, if she does not actually tell the buyer of the problem her failure to speak could be misrepresentation by silence. (b) What constitutes a fact?: The following are also attacks on the P’s justifiable reliance: (1) Opinion: A statement of opinion is usually not actionable unless the one giving the opinion: (i) stands in a relationship of trust or confidence to the recipient (a ―fiduciary relationship‖); OR (ii) is an expert on matters covered by the opinion; OR (iii) renders the opinion to one who, because of age or other factors, is peculiarly susceptible to misrepresentation. (2) Promise of future performance or prediction of future events: These are typically not actionable unless the promisor misrepresented his state of mind when making the assertion. (3) Failure to read: In most courts a duty to read is not required when there is fraud. The theory is that because the fraud worked due to the victim‘s carelessness, doesn‘t render it any less a fraud. Courts will be more sympathetic to this argument if some artifice has been used to prevent the recipient from reading or if a consumer is involved. 2. Was the assertion either fraudulent or material? (a) Fraudulent: The misrepresentation must be made with knowledge of falsity (scienter) and with intent to mislead. (1) Knowledge of falsity: There is clear scienter if the maker of the assertion knows, or even believes without actually knowing, that the facts are otherwise than as stated. Includes reckless assertions where the maker simply lack confidence in it knowledge of facts but nevertheless chooses to assert them as of it own knowledge, rather than confine the assertion to opinion. (2) Intent to mislead: The requirement is met if the maker acts either with the desire to mislead another or in the belief that the other is substantially certain to be misled. An example would be an assertion that the maker knows is open to two interpretations. No particular recipient need exist at the time the misrepresentation be made. OR (b) Material: The requirement of materiality is usually met be showing that the misrepresentation would have been likely to have induced a reasonable recipient to make the contract. Put another way, relevant information that is significant to decision made by the other party. 3. Was the assertion relied on by the recipient in manifesting assent? (a) Material misrepresentation: If the misrepresentation was material, it is assumed that the misrepresentation substantially contributed to the party‘s decision to enter into the contract. However, the misrepresentation need not be the sole or primary reason. (b) Independent investigation: If it appears that the recipient made an independent investigation of the fact asserted and relied solely on this investigation, rather than the misrepresentation, the recipient is not entitled to relief. (c) “As is” clause: The courts are split on whether an ―as is‖ clause is sufficient to bar relief. (d) Minority rule requiring detriment: If rescission is sought, the question is whether the petitioner has a sufficient interest to justify the finality of the contract. This question is satisfied if the petitioner suffers a pecuniary detriment or if he obtained something of equal value that is substantially different from what was expected. 4. Was the reliance of the recipient justified?: Court look at the reliance from two views: (a) Subjective view (more weight): The courts are particularly indulgent if the recipient is weak or credulous, even if the falsity of representation would be obvious to a normal person. (b) Objective view (less weight): A recipient may be barred from enforcing the contract if the misrepresentation was obviously false or it could not be expected to be taken seriously. It would be difficult to convince the jury of the causal link if the reliance was irrational or the alleged inducement made little sense in light of normal patterns of thinking. C. Negligent or innocent misrepresentation (fraud in the factum; void contract): A misrepresentation relating to the nature or effect of the document to be signed. 1. Negligent misrepresentation: A misrepresentation is negligent if the person making it failed to act with reasonable care in ascertaining and communicating the truth. 2. Innocent misrepresentation: Same as negligent misrepresentation but no duty is breached. 3. Avoidance: To permit avoidance under negligent or innocent misrepresentation, the misrepresentation must have been material and have induced reasonable reliance. (a) Material: Must be a fact central to the transaction. (b) Reasonable reliance: Corresponds to the materiality of the misrepresentation. D. Non-disclosure: As a general rule, only affirmative statements can serve as the basis for a misrepresentation action. A party‘s failure to disclose will generally not justify the other party in obtaining rescission or damages for misrepresentation. But there are some exceptions, situations where non-disclosure of a fact will support an action and be equivalent to an assertion that fact does not exist: 1. Half truth: If part of the truth is told, but another part is not, so as to create an overall misleading impression, this may constitute misrepresentation. Example: Let‘s say buyer needs to know both A and B, and A or B by itself is misleading, you must disclose both. 2. Failure to correct past statement: If the party knows that disclosure of a fact is needed to prevent some previous assertion from being misleading, and doesn‘t disclose it, this will be actionable. 3. Fiduciary relationship: If the parties have some kind of fiduciary relationship, so that one believes that the other is looking out for her interests, there will be a duty to disclose material facts. 4. Mistake in basic assumption: If one party knows that the other is making a mistake as to a basic assumption, the former‘s failure to correct that misunderstanding will be actionable if the non-disclosure amounts to a ―failure to act in good faith‖ and with ―reasonable standards of fair dealing.‖ May need to look at MISTAKE as well. Example: Jeweler lets Consumer buy a stone, knowing that Consumer falsely believes that the stone is an emerald when it is in fact a topaz worth much less. This would probably be such bad faith that it would constitute misrepresentation. Example: Seller Q buys a house and divides it up into apartments knowing that his actions constitute a zoning violation. Buyer Z wishes to buy the house as an income producing property and represents his interests as such. Buyer Z never asks about the zoning issue but would never have bought house if he knew. After Buyer Z purchases the house, the city finds out about the violation and puts a restriction on the nonconforming use. Can Buyer Z rescind the K? Yes. Seller Q‘s nondisclosure probably falls under §161(b) and maybe even (a). The mistake when to a basic assumption of the agreement, there was subjective dishonesty and Seller Q did not act in reasonable standard of fair dealing (a) Limits of fair dealing: A party cannot be expected to correct all known mistakes of the other party, even if they go to the basic assumption of the contract. The burden of disclosure is most often put on sellers rather than buyers because they are more likely to have special knowledge not available to the public. Example: Mining company develops a technology to fly over land and detect valuable oil deposits. Company starts buying up the properties without disclosing that the properties are over these deposits and does not disclose who they are. Can the seller rescind the K after finding out? Did the company have an affirmative obligation to disclose? No. Is this any different than zoning violation? Yes. The relevant undisclosed fact goes to an enhancement value versus an impairment in value. The property is worth more to the party w/o the information as opposed to less. We are generally more likely to protect buyers against defects than to protect sellers against ignorance. The goal of K law is to enhance value. In the mining example, both parties has an equal right to discover or develop the oil. However, the company is more industrious. B/c it developed the technology, it is enhancing value. The company should get the benefit of its R&D. If it must disclose, then it wouldn‘t bother to try and find the oil. However, the company may not engage in unfair dealing (e.g., trespassing or taking advantage of nonpublic information). XXX. UNCONSCIONABILITY (SUBSTANTIVE DEFENSE) A. Unconscionability generally: If a court finds that a contract or clause is so unfair as to be ―unconscionable,‖ the court may decline to enforce that contract or clause. There is no accepted definition of unconscionability. The issue is whether the clause is so one-sided, so unfair, that a court should as a matter of judicial policy (not for the jury) refuse to enforce it. Last ditch defense where no others will work. See UCC §2-302(1) and R(2d) §208. B. Elements: Unconscionability has been recognized to include the absence of a meaningful choice (“procedural”) on the part of one of the parties together with contract terms which are unreasonably favorable (“substantive”) to the other party. 1. Was there procedural unconscionability?: The ―procedural‖ sort occurs where one party is induced to enter the contract without having any meaningful choice. Here are some possible types: (1) burdensome clauses tucked away in the fine-print boilerplate; (2) high-pressure salespeople who mislead the uneducated consumer; and (3) industries with few players, all of whom offer the same unfair ―adhesion contracts‖ to defeat bargaining (e.g., indoor parking lots in a downtown area, all disclaiming liability even for gross negligence). AND 2. Was there substantive unconscionability?: The ―substantive‖ sort of unconscionability occurs where the clause or contract itself (rather than the process used to arrive at the contract) is unduly unfair and onesided. (a) Excessive price: An important example of substantive unconscionability is where the seller charges an excessive price. Usually, an excessive price clause only comes about when there is also some sort of procedural unconscionability (e.g., an uneducated consumer who doesn‘t understand what he is agreeing to), since otherwise the consumer will usually simply find a cheaper supplier. (b) Remedy-meddling: Also, a term may be substantively unfair because it unfairly limits the buyer‘s remedies for breach by the seller. Types of remedy-meddling that might be found to be unconscionable in a particular case include: (1) disclaimer or limitation of warranty, especially prohibiting consequential damages for personal injury; (2) limiting the remedy to repair or replacement, where this would be a valueless remedy; (3) unfairly broad rights of repossession by the seller on credit; (4) waiver of defenses by the buyer as against the seller‘s assignee; and (5) a cross-collateralization clause by which a secured seller who has sold multiple items to a buyer on credit has the right to repossess all items until the last penny of total debt is paid. C. Remedies for unconscionability: Here are some of the things a court might do to remedy a clause or contract which it finds to be unconscionable: 1. Refusal to enforce clause: Most likely, the court will simply strike the offending clause, but enforce the rest of the contract; 2. Reformation: Alternatively, the court may ―reform‖ the offending clause (e.g., by modifying an excessive price to make it a reasonable price); 3. Refusal to enforce whole contract: Very occasionally, the court may simply refuse to enforce the entire contract, denying P any recovery at all. D. Consumers: Courts have very rarely allowed businesspeople to claim unconscionability; only consumers are generally successful with an unconscionability defense. E. Arbitration agreements in employment contracts: Courts have begun to scrutinize much more closely clauses in employment contracts in which the employee agrees to arbitrate claims against the employer. For instance, a clause that requires the employee to arbitrate claims against the employer, but that doesn‘t require the employer to arbitrate claims against the employee, might well be found unconscionable. XXXI. PUBLIC POLICY (SUBSTANTIVE DEFENSE) A. Generally: A court may be moved by two considerations in refusing to enforce an agreement on grounds of public policy: 1. First, it may regard its refusal as an appropriate sanction to discourage undesirable conduct, either by the parties or others. 2. Second, it may regard enforcement of the promise as an inappropriate use of the judicial process to uphold an unsavory agreement. B. Enforcement: Enforcement should not be refused unless the potential benefit in deterring the misconduct or avoiding an inappropriate use outweighs the factors favoring enforceability. Factors to weigh: 1. Protecting the justified expectations of the parties. 2. Any forfeiture that will result by loss of the reliance interest if enforcement is denied. 3. The party‘s excusable ignorance of the contravention of public law. 4. The strength of the public policy involved. 5. The seriousness and deliberateness of the conduct. XXXII. MATERIAL BREACH A. Substantial performance: A constructive condition to a party‘s duty of performance is that the other party have made a ―substantial performance‖ of the latter‘s previous obligations. In other words, if one party fails to substantially perform, the other party‘s remaining duties do not fall due. B. Is the breach material?: In determining whether a failure to render or to offer performance is material, the following circumstances are significant: 1. Deprivation of expected benefit: The more the non-breaching party is deprived of the benefit which he reasonably expected, the more likely it is that the breach was material. The court must ask why the party made the contract. 2. Adequate compensation to nonbreaching party: Any difficulty that the injured party may have in proving loss with sufficient certainty to be fully compensated in damages will diminish the adequacy of the damage claim and will make a finding of substantial performance less appealing. 3. Forfeiture by party who fails: The extent to which the breaching party will suffer forfeiture is important. A failure is less likely to be regarded as material if it occurs late, after substantial preparation or performance, and more likely to be regarded as material if it occurs early, before such reliance. 4. Likeliness of cure: The more likely that the breaching party will cure his failure, taking account of all the circumstances including any reasonable assurances, the less likely the breach is material. 5. Willfulness: The extent to which the behavior of the breaching party comports with standards of good faith and fair dealing will have a substantial impact on whether the breach is deemed material or not. Will also effect the measure of damages. C. If the breach is not material and substantial performance is found: If the breaching party substantially performed, he can recover on the contract the full price less any damages to which the owner is entitled because of the breach. Recovery is based on either the diminution-in-value (DIV) or cost-to-completion (CTC) measure of damages. The nonbreaching party must perform. D. If the breach is material, then is it partial or total?: The injured party must make an assessment whether the relevant breach is partial (can be cured) or total (cannot be cured). 1. Partial breach (curable): If there is a partial breach, the injured party may suspend performance, wait a reasonable time for a cure, and then claim compensation for any loss suffered due to the delay in performance. A cured partial breach is equivalent to substantial performance. The failure to cure a partial breach is treated as a total breach. 2. Total breach (not curable): If there is a material breach the injured party may withhold performance, rescind the contract, and then claim full damages for breach. E. What is the measure of damages?: 1. Cost-to-completion: Default measure of damages. CTC is the cost to the injured party of rectifying the work or repairing the property. 2. Diminution-in-value: The difference between the value of the tendered performance and the expected performance. Typically, the DIV measure of damages is less than the CTC measure. Courts are more likely to award this measure if the breach was not willful. Or if the CTC measure was disproportionate to any realistic loss actually suffered by the injured party. Most importantly, the court will consider the amount of forfeiture to be suffered by breaching party. F. Material breach in contract for sale of goods: UCC has perfect tender rule: No rule in commercial contracts for less than perfect tender, i.e., substantial performance. Sale of goods contracts, if something trivial like time or method of shipment is not perfect, then buyer make reject the contract. Still have good faith requirement in UCC. If there is some small failure but no prejudice to buyer, court will say that you have to take delivery in good faith. Other limitations, must give reason for rejecting something based on perfect tender rule. The other party can have opportunity to cure the breach. If goods are accepted, then the perfect tender rule goes away. XXXIII. ANTICIPATORY REPUDIATION A. General rule: If a party makes it clear, even before his performance is due, that he cannot or will not perform, he is said to have anticipatorily repudiated the contract. The victim of such an anticipatory repudiation is allowed to sue before the repudiator’s time for performance has arrived. Example: Star promises Movie Co. that Star will act in Movie Co.‘s movie, shooting for which is scheduled to commence in the U.S. on July 1. On June 1, Star announces to the press that he is going to live abroad for a year beginning the next day and will not do the movie. Under the rule of Hochster v. De La Tour, Movie Co. can sue Star for breach as soon as he issues his press statement; Movie Co. need not wait until July 1, the time at which Star‘s performance is due. B. What constitutes repudiation?: An anticipatory repudiation is a manifestation by one party to the other that the first cannot or will not perform at least some of its obligations under the contract. It may be words or other conduct. 1. Statement: The repudiation takes the form of a definite and unequivocal statement by the promisor that he intends not to perform. (The above example illustrates this.) But the fact that the promisor states vague doubts about his willingness or ability to perform is not enough. A refusal to perform except as a condition outside the terms of the contract could be viewed as an anticipatory repudiation. Example: On facts of above example, Star says, ―I‘m feeling pretty exhausted, so I don‘t know if I‘ll be able to perform the role, but let‘s hope I‘ll feel well enough.‖ This would probably not be an anticipatory repudiation, because it is equivocal. 2. Voluntary actions: The repudiation may occur by means of an act by the promisor that makes his performance practically impossible. A delay is not an anticipatory repudiation. Example: Seller contracts to convey Blackacre to Buyer, the closing to take place on July 1. On June 15, Seller conveys Blackacre to X. This is an anticipatory repudiation by action, and Buyer may sue immediately, rather than waiting until July 1. 3. Prospective inability to perform: Something analogous to anticipatory repudiation occurs when it becomes evident that the promisor will be unable to perform, even though he desires to do so. When this occurs, all courts agree that the promisee may suspend her performance. But courts are split on whether the promisee may bring an immediate suit for breach, as she is allowed to do where the repudiation is a statement or a voluntary act. C. Was the repudiation retracted?: See UCC §2-6ll(1). A statement of repudiation may be retracted if notification of the retraction comes to the attention of the injured party before he: 1. brings suit for breach; 2. materially changes his position in reliance on the repudiation; OR 3. states that he regards the repudiation as final. D. If the promisor is insolvent, did the promisee ask for adequate assurances? : The promisor‘s financial difficulties, even to the level of insolvency, do not constitute an anticipatory repudiation. But the promisee may request assurances of performance, and if the promisor can‘t give these (e.g., he can‘t show that he will become sufficiently solvent to perform), then an immediate suit for breach is allowed. In fact, a minority of courts require that adequate assurances be requested prior to invoking anticipatory repudiation. Bankruptcy is determined by federal law. 1. Right to demand adequate assurances: When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. See UCC §2-609 and R(2d) §251. (a) Reasonable grounds for insecurity: Reasonable grounds for insecurity is an issue of fact that depends upon various factors, including the buyer‘s exact words or actions, the course of dealing or performance between the parties, and the nature of the sales contract and the industry. Financial insecurity, and failure to meet other obligations, is usually enough of a reason. Must be based on circumstances that arise after the contract was formed. (b) Request must be in writing: The courts have not strictly adhered to this formality as long as an unequivocal demand is made. (c) Adequate assurance: What constitutes ―adequate‖ assurance of due performance is subject to the good faith test of commercial reasonableness and factual conditions. Repeated demands for adequate assurances are within the contemplation of UCC §2-609. A further change in circumstances can give rise to this. (d) Failure to respond: A failure to respond with adequate assurances constitutes an anticipatory repudiation. A reasonable time (not exceeding 30 days in sale of goods contracts) for response is mandated. E. Damages: Anticipatory repudiation gives rise to a claim for breach of contract. The other party‘s duties are discharged. Even when after retraction, the other party can still sue for damages for the delay. XXXIV. EXPRESS CONDITIONS A. Generally: A condition precedent is an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises. Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself. In the latter situation, no contract arises ―unless and until the condition occurs.‖ B. Terminology: The party whose performance hinges on a condition precedent is referred to as the obligor, the one whose performance is at issue. The other party is the obligee, the one to whom the performance obligation is owed, and the one who is presumably attempting to enforce it. C. Is the condition express of constructive?: Conditions precedent of a contract can be express or constructive (implied). 1. Express conditions are those agreed to and imposed by the parties themselves: Express conditions must be literally performed. If an express condition is not met when it arises, then the nonbreaching party‘s performance is excused. A minority of courts will not insist on strict enforcement of an express condition if it is not material. 2. Constructive conditions are those imposed by law to do justice: Constructive conditions, which ordinarily arise from language of promise, are subject to the precept that substantial performance is sufficient. If a constructive condition is not met, then perform a substantial performance analysis. D. Even if there is an express condition, is there an excuse?: The nonoccurrence of the condition may be excused by forfeiture or waiver. A court may also adversely interpret the condition as being constructive. 1. Forfeiture: To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange. If there is potential for forfeiture then substantial performance may be adequate. (a) Definition: ―Forfeiture‖ is used to refer to the denial of compensation that results when the obligee loses his right to the agreed exchange after he has relied substantially, as by preparation or performance on the expectation of that exchange. The extent of the forfeiture in any particular case will depend on the extent of that denial of compensation. (b) Weigh obligee’s forfeiture against the importance of the obligor’s condition: In determining whether the forfeiture is “disproportionate,” a court must weigh the extent of the forfeiture by the obligee against the importance to the obligor of the risk from which he sought to be protected and the degree to which that protection will be lost if the non-occurrence of the condition is excused to the extent required to prevent forfeiture. (c) Obligee’s conduct: The court will look at the reasons for the failure to comply (must not be intentional, willful, or culpable conduct). 2. Adverse interpretation: Doubtful language will be read as a constructive condition or a promise. (a) Interpret as a constructive condition: If a condition is interpreted as being constructive rather than express, the doctrine of substantial performance can be applied. A perfect tender is then not required. This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the obligee. (1) Beware the “unmistakable language” of an express condition: There is a an express condition rather than a promise, if the parties employed the unmistakable language of condition (―if,‖ ―unless and until‖). Useful guideline but not a strict rule. (b) Interpret as a promise: Court will interpret as a promise not a condition, in which case the standard is not perfect tender but substantial performance. The obligor‘s duty is not discharged and must bring suit for breach. (1) Beware the “promissory condition”: A court may interpret a contractual term as both a promise and a condition. If an event is a ―promissory condition,‖ failure of the event to occur justifies the obligor in treating his obligations as discharged, and also subjects the obligee to liability for damages. Treat the same as an express condition, Example: ―If you promise to come to class, I will give you a book.‖ Is treated as a promise and also as an express condition of the other party doing its half of the bargain. In cases like this, treat as an express condition and must have perfect tender. Even if there is substantial performance, the nonbreaching party can walk away from the contract and sue the breaching party. 3. Waiver or estoppel: Argue both on a given set of facts. (a) Waiver: A waiver is an intentional relinquishment of a known right. By prior word, conduct or course of dealings, an obligor has waived the right to insist on fulfillment of the condition before performing the duty. Often refers to passive conduct. A waiver is effective for minor (―technical‖ or ―procedural‖) conditions but not material ones. (Example: ―In the past you‘ve never insisted that it be in writing.‖) (1) Beware a material condition: A waiver is effective without consideration or reliance, but only if the condition waived was not a material part of the performance that the obligor was to receive in exchange or a material part of the risk assumed. A material condition may thus not be merely waived in this sense, but its protection may be foregone by the obligor in return for consideration, or overcome by an estoppel, based on the obligee‘s reliance on the obligor‘s expression of willingness to perform without it. (2) Retraction: If the waiver of a non-material condition is made after the time for fulfillment of that condition has passed, then the waiver should be non-retractable. If it is made beforehand, however, and the obligor attempts to retract it while there is still time for the condition to occur, the retraction will be effective unless the obligee‘s change of position in reliance on the waiver has made that unjust. (b) Estoppel: A more affirmative variation of wavier. Not just a minor condition, but a material one as well can be overcome by an estoppel, based on the obligor’s expression of intention not to insist on it, followed by the plaintiff obligee‘s prejudicial reliance on that manifestation of intention. (Example: ―In the past you instructed me that it did not have be in writing.‖) E. Satisfactory performance as a condition: Contracts frequently contain express terms that obligate one party to perform to the ―satisfaction‖ of the other. 1. Common law: Under §228, An obligor‘s declaration of dissatisfaction is judged by two standards: (a) Objective or “utility”: Preferred. This standard is traditionally employed in cases where commercial quality, operative fitness, or mechanical utility are in question. The objective test is preferred when it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied. Is attractive when there is a risk of forfeiture. (b) Subjective or “aesthetic”: This standard is likely to be employed where personal aesthetics or fancy are at issue. The subjective standard should be use only where the agreement leaves no doubt that is only honest dissatisfaction that is meant and no more. Where personal services are involved, a court is more likely to use this standard. 2. UCC: Under UCC §1-201(9), conditions of satisfactory performance in contracts for the sale goods by merchants, require that the performance in question be judged by both a subjective (honesty in fact) and objective standard (observance of reasonable commercial standards). I. REMEDIES TO BREACH OF CONTRACT A. Monetary Damages: there are three kinds of interests on the part of a disappointed contracting party which may be protected by the court through damages: 1. Expectation – in most breach of contract cases, the P will seek, and receive, protection for her ―expectation interests.‖ Here, the court attempts to put the P in the position he would have been in had the contract been performed. In other words, the P is given the ―benefit of the bargain‖ including any profits she would have made from the contract. 2. Reliance – sometimes the P receives protection for his reliance interest. Here, the court puts the P in as good a position as he was in before the contract was made. To do this, the court usually awards the P his out-of-pocket costs incurred in the performance he has already rendered (including costs attributable to the preparation to perform). When reliance is protected, the P does not recover any part of the profits he would have made on the contract had it been completed i) When Used – 1) when it is impossible to measure the P‘s expectation interest accurately and 2) when the P seeks recovery based on the Promissory Estoppel theory 3. Restitution – the court forces the D to pay the P an amount equal to the benefit which the D has received from the P‘s performance in order to prevent unjust enrichment. Not about promisee, but rather placing the promisor in the position they would have been if the contract was never made. i) When Used – 1) a non-breaching P has partly performed, and the restitution measure is greater than the contract price and 2) a breaching P was not substantially performed, but is allowed to recover the benefit of what he was conferred on the D B. Equitable Remedies: these are awarded when monetary damages are an inadequate remedy 1. Types i) Specific Performance – orders the promisor to render the promised performance ii) Injunction – directs a party to refrain from doing a particular act. This is especially common in cases where the D is used by his former employer and charged with breaching an employment contract by working for a competitor 2. Limitations i) Inadequacy of Damages – equitable relief will not be granted unless damages inadequate to protect the injured party. Two reasons: 1) b/c the injury cannot be estimated w/ sufficient certainty; or 2) b/c money cannot purchase a substitute for the contracted-for performance ii) Definiteness – the court will not give equitable relief unless the contract‘s terms are definite enough to enable the court to frame an adequate order iii) Difficulty of Enforcement – the court will not grant equitable relief where there are likely to be significant difficulties in enforcing and supervision the order II. EXPECTATION DAMAGES A. Generally – expectation damages are the usual measure of damages for breach of contract. The court tires to put the P in the position he would have been in had the contract been performed by the D. The P should end up with a sum equal to the profit he would have made had the contract been completed B. Formula For Calculating Expectation Damages (Expected Net Profit + Contractor’s Unreimbursed Expenses at Time of Breach w/ Mitigation) General Measure of Damages = Loss in Value + Other Loss – Cost Avoided – Loss Avoided 1. Loss in Value – difference btw what was contracted for and what was received i) To be awarded loss in value damages, a party would want to prove… a. Seller’s Damages – must show that the mkt value is less than contract price – if mkt price is equal or greater than contract there would be no damage to the seller b/c could sell property/goods for same price or more b. Buyer’s Damages – must show that the mkt value is more than the contract price – if mtk price is equal or less than the contract there would be no damages b/c buyer could buy property/goods for same price or less ii) How To Prove Market Value? a. Experts b. Owner‘s Opinion c. Actual Sale Price (however, courts don‘t widely use this b/c of issues like appreciation) 2. Other Loss – other costs that incidentally came about b/c breach i) Incidental Damages – additional costs incurred after the breach in a reasonable attempt to avoid loss, even if the attempt is unsuccessful ii) Consequential Damages – include such items as injury to person or property caused by the breach 3. Cost Avoided – additional expense that non-breaching party would have incurred if performance had occurred. Money that was saved on undelivered benefit to the breaching party 4. Loss Avoided – mitigation; avoidance of some loss that would otherwise have been incurred; money saved by some corrective action C. Default award is Cost of Completion: where D has defectively performed, P normally can recover the cost of readying D‘s defective performance. 1. Exception – But if the cost of remedying defects is clearly disproportionate to the loss in market value from the defective performance, P will only recover the loss in market value (i.e. the diminution of value). The Diminution in Value standard is often applied where the defect is minor, and remedying it would involve ―economic waste,‖ such as the destruction of what has already been completed D. Limitations on Expectation Damages: P may only recover for losses which were foreseeable, certain, and caused by the breach 1. Foreseeability – courts will not award consequential damages for breach unless… i) Arise Naturally (i.e. General Damages) – the damages were foreseeable by any reasonable person, regardless of whether the D foresaw them (i.e. objective standard) ii) Remote or Unusual Consequences (i.e. Special Damages) – the damages were remote or unusual, but only if the D had actual notice of the possibility of these consequences iii) Exception – Parties may allocate risks themselves – the parties may always modify this general rule of foreseeability by expressly agreeing otherwise (ex: parties can expressly agree for recovery of unusual damages even w/out notice) 2. Certainty – an injured party cannot recover damages that are ―speculative.‖ P may only recover for losses which he establishes with ―reasonable certainty.‖ Mainly this means that a P who claims that he would have made profits had the D not breached must not only show that there would have been profits, but also the likely amount of those profits i) Two Pieces a. Is it certain that there are damages? b. What is the amount of the damages? ii) If you are certain w/ factual support that there are damages, court will be liberal with the certainty attached to the exact amount of the damages iii) “New” Business Rule – courts are especially reluctant to award lost profits from a new business, that is, a business which at the time of breach was not yet in actual operation. However, recently courts have been more liberal in their awards. 3. Causation – A party must prove that the breach actually caused the full amount of the damages claimed. i) Termination Clauses – If the contract has a termination provision, thus limiting the maximum total period of breach, then damages will be only awarded for the time w/in the termination period (i.e. 30 day mandatory termination agreement = 30 day breach) E. Duty to Mitigate Damages: where P might have avoided a particular item of damage by reasonable effort, he may not recover for that item if he fails to make such an effort. This is sometimes called the ―duty to mitigate‖ rule, but it‘s a duty only in the sense that if P fails to do it, he‘ll lost the right to collect damages, not in the sense that P has breached some obligation. i) Reasonableness – the duty to mitigate only requires that the P make reasonable efforts to mitigate damages. P does not have to incur substantial expense or inconvenience, damage his reputation, or break any other contracts, in order to mitigate. a. Mitigation does not mean that party will do everything to fix situation; if are unreasonable costs associated with mitigation, no obligation if objectively unreasonable ii) Equal Opportunity Rule – in a situation where either party could effectively mitigate, the obligation to mitigate disappears (∆ needs to try to mitigate the costs if possible) a. Only some courts accept this – rationale is that taking burden off π to mitigate b/c will try to make the ∆ do it instead 2. Rationale – court imposes a duty to mitigate in order to minimize the wasteful results of the breach and to protect ∆ from the π exploiting the breach to excessive/wasteful consequences 3. Land Contracts and Duty to Mitigate i) For mitigation purposes, look at the difference between the contracted price of the land and the market value of the land (i.e. if the value of the land goes up and can sell for a higher price, then resulting profits are should be deducted from the award) 4. Building Contracts and Duty to Mitigate i) Rule – if party receives ―absolute directive‖ (i.e. notice) to stop work, must cease performance. a. Treat the contract as breached when π receives the notice. At that point, π must do all reasonable efforts to mitigate the results/damages of the breach ii) Measure of Damages a. Compensation for Part Performance prior to repudiation b. Profit which would have been realized if the contract was fulfilled 5. Employment Contracts and Duty to Mitigate i) Burden of proof – the burden of proof to show that the P did not mitigate damages is on the D b/c presumably D benefited from the breach. ii) “Comparable or Substantially Similar” Position – the employer may prove that P employee failed to mitigate by not accepting a comparable or substantially similar position offering. If the means of mitigation offered by the employer a. If the means of mitigation are not unduly risky, burdensome, or humiliating, it does not call on the victim to waive any right to relief under the breached contract, and it provides the most reasonably means of reducing the loss, the victim must pursue it, or risk losing the right to claim any damages that could have been prevented by taking it. b. D bears the burden to prove that such a position existed b/c D presumably has more information available to prove that position was ―comparable or substantially similar‖ and b/c justice requires breaching party to have the burden of proof c. Some jurisdictions go further and say that not only does the employer bear the burden of proving employment was available, but also efforts to obtain employment would have been successful. iii) Failure of Burden – If the breaching party does not carry the burden to prove that the other party failed to mitigate, P still given the total amount of damages even if no mitigation was actually pursued (i.e. proves that there is no legal duty to mitigate b/c if burden to prove is not met, no need to mitigate) iv) Special Circumstances – absent of special circumstances such as undue burden, harm, or humiliation, if exact same position is offered by D employer, P must accept to mitigate damages. §350(1) v) Incidental Damages – in seeking substitute employment, a wrongfully discharged employee may have to spend money in various ways, such as travel costs seeking other employment and fees to employment agencies. These will be ―incidental expenses‖ which recovery may be sought from the employer vi) Inferior & Subsequent Contracts a. π doesn‘t have to take an inferior position, but if you do, then wages that you take from it will be subtracted from the damages (This is to protect against overcompensation) b. Exception: This is different in cases where you can do both things – for example, if you could keep both jobs – then it would not be subtracted for mitigation. F. Justification for Expectation Damages 1. Generally - Expectation Damages encourages general goal of contracts – i.e. fulfill intended agreement of the contracting parties i) Baseline Question – did the party who made the promise intend to be legally bound by it? ii) Expectation damages are the manifestation of this principle by effectuating the desired intent – i.e. place the parties in the position they would have been if the contract (i.e. the intended result) had been achieved 2. Problems? i) Are Expectation Damages too Large? (hold breaching party strictly liable?) ii) Are Expectation Damages too Small? (punitives?) 3. Rationale for Expectation Damages i) Create incentives to not breach contracts ii) Encourage making contracts by creating confidence that expectations will be met iii) Compensate for ―gains prevented‖ or ―opportunity costs‖ that cannot be adequately calculated (i.e. reliance damages are often hard to estimate and expectation damages creates at least base standard) iv) In Futures Contracts need to Compensate for Different Risk Allocation (i.e. by allowing breach, altering negotiated allocation of risk, thus breaching party should pay for this alteration of the risk allocation) 4. Executory Contracts Issue i) Executory Contract – a contract not yet either relied upon or performed ii) General rule is to award expectation damages iii) This may create ―unfair results‖ but the court wants to possibly ―over-compensate‖ rather than ―undercompensate‖ III. RELIANCE DAMAGES A. Generally – Reliance damages are the damages needed to put the P in the position he would have been in had the contract never been made. Therefore, these damages usually equal to the amount the P has spent in performing or in preparing to perform. They are used either where there is a contract but expectation damages cannot be accurately calculated, or where there is no contract but some relief is justifiable. B. The main situations where reliance damages are awardable are… 1. Expectation Damages are Difficult To Calculate or Speculative – where expectation damages cannot be computed b/c P‘s lost profits are too speculative or uncertain (i.e. new business rule) 2. Vendee in Land Contract – where the P is the vendee under a land contract, and the D fails to convey. Some states do not allow expectation damages in this situation, so P can recover his reliance damages (i.e. the down-payment, plus any expenses reasonably incurred). 3. Promissory Estoppel – where P successfully brings an action based on promissory estoppel. Here the suti is usually not truly on the contract, but is rather in quasi-contract. The court is trying to reduce injustice, so it gives P a ―half-way‖ measure, less than expectation but more than nothing. C. Limits on Amount of Reliance Recovery – the P‘s reliance damages are sometimes limited to sum smaller than the actual expenditures 1. Contract Price as Limit – where D‘s only obligation under the contact is to pay a sum of money (i.e. the contract price), reliance damages will almost always be limited to this contract price 2. Recovery Limited to Profits – most courts do not allow reliance damages to exceed expectation damages. However, the D has to bear the burden of proving what P‘s profit or loss would have been. i) Subtracted Amount of Loss – another way to express this idea is that there will be subtracted from the P‘s reliance recovery the amount of the loss which D shows P would have suffered had the contract been performed a. Ex: if reliance costs incurred were $100,000 of the expected $250,000 total costs (i.e. 2/5) and that the expected loss from the K was $20,000, then multiply the reliance ratio (2/5) by loss ($20,000) and adjust the reliance damages accordingly for loss prevented i. i.e. 2/5 reliance ratio * 20,000 loss = $8,000 loss saved; 100,000 reliance – 8,000 = $92,000) 3. Expenditures Prior to Signing – the P will not normally be permitted to recover as reliance damages expenditures made before the contract was signed, since these expenditures were not made in reliance on the contract D. Calculating the Reliance Damages 1. “Cost to P, not value to D” – when reliance damages are awarded, they are usually calculated according to the cost to the P of his performance, not the value to the D. 2. Damages Calculated by Basis for Enforcing Promise – if consideration, then usually expectation damages; if promissory estoppel, then usually reliance damages; if unjust enrichment, then usually restitution damages i) Except w/ Promissory Estoppel – two possibilities… a. If PE to prove valid K and is substitute for consideration (i.e. shield) – then expectation damages b. If PE is basis for liability w/ no valid K (i.e. sword) – only reliance damages 3. Type of Reliance i) Essential Reliance – amount directly following the promise (i.e. money paid to promisor) ii) Incidental Reliance – all other resulting damages IV. RESTITUTION DAMAGES A. Generally: Restitution Damages are usually awarded when other damage couldn’t be awarded or are too hard to calculate. The plaintiff's restitution interest is defined as the value to the defendant of the plaintiff's performance. Restitution's goal is to prevent unjust enrichment. 1. When used: The main uses of the restitution measure are as follows: (1) a nonbreaching plaintiff who has partly performed before the other party breached may bring suit on the contract, and not be limited by the contract price (as she would be for the expectation and reliance measures); and (2) a breaching plaintiff who has not substantially performed may bring a quasi-contract suit and recover the value that she has conferred upon the defendant. 2. Market value: Restitution is based on the value rendered to the defendant, regardless of how much the conferring of that value costs the plaintiff and regardless of how much the plaintiff was injured by the defendant's breach. This value is usually the sum which the defendant would have to pay to acquire the plaintiff's performance, not the subjective value to the defendant. B. Not limited to the contract price: The main use of the restitution measure is that, in most courts, it is not limited by the contract price. If the work done by P prior to D's breach has already enriched D in an amount greater than the contract price, this entire enrichment may be recovered by P. This makes restitution sometimes very attractive, compared with both reliance and expectation measures. 1. Example: Contractor agrees to build a house for Owner for $100,000. After Contractor has done 90% of the work, Owner repudiates. At trial, Contractor shows that Owner can now resell the mostly-built house for $120,000, not counting land. Contractor will be permitted to recover the whole $120,000 on a restitution theory, even though this sum is greater than the contract price (and thus greater than the expectation damages would be), and greater than the reliance measure (actual expenditures by Contractor). 2. Not available where plaintiff has fully performed: If at the time of D's breach, P has fully performed the contract (and D only owes money, not some other kind of performance) most courts do not allow P to recover restitution damages. C. Losing contract: Restitution may be awarded where P has partly performed, and would have lost money had the contract been completed. (Example: On the facts of the above example, assume that Contractor would have lost $10,000 had the contract been fulfilled. Contractor may use the restitution measure to collect $120,000, thus turning a$10,000 loss into a$10,000 profit.) D. §371 – Measurement of Restitution Damages 1. Cost Avoided – asks ―what would have it cost in the market to get these services from somebody else‖ 2. Net Enrichment – asks ―how much was promisor unjustly enriched‖ 3. Often, are equivalent but not always (i.e. death situations – how much is emergency medical help worth) i) Net Enrichment is often more difficult to calculate and higher than cost avoided ii) π will argue for larger, but courts will often award the smaller E. §373 – Restitution When Other Party is in Breach 1. K is breached but the party can‘t get either reliance or expectation damages i) 373(1) – allows for recovery of restitution damages ii) 373(2) – limitation of recovery of restitution damages a. Full Performance Exception: if everything but the payment has been completed: if the nonbreaching party has fully performed and the breaching party has not paid §373(2): you cannot get fully restitution if you as the non-breaching party have fully performed (i.e., built the $60,000 house) but the breaching party has not paid, they can only pay you the agreed upon $30,000 because of your full performance F. §374 – Restitution in Favor of Party in Breach 1. Restitution is actually sought by the breaching party 2. Courts traditionally said that such recovery was not available b/c guilty party should not recover i) Problem – this makes the nonbreaching party unjustly richer a. Ex: $1000 to paint house; ½ way the painter stops; if couldn‘t recover $500, the nonbreaching party could get the rest of the house painted for $500 and thus be unjustly enriched by $500 3. Limitations i) Limit of Restitution Damages is the Contract Price ii) Restitution Damages are reduced by all incidental costs, thus doesn‘t make sense to litigate but rather the parties usually settle the claim G. §376-7 – rule dealing where the K has failed and restitution damages are applicable 1. Based on defenses such as impossibility, impracticality, minority, etc. i) Ex: minorities repudiating K‘s – restitution dmg‘s need to be paid H. Takeaway from Jessie Ventura Case – professional wrestling is not real V. SPECIFIC PERFORMANCE A. Generally - Specific Performance orders the promisor to render the promised performance 1. Land-sale Contracts – the most common situation for a court to award specific performance is where D breaches a contract under which he is to convey a particular piece of land to the P 2. Personal Service Contracts – courts almost never order specific performance of a contract for personal services. This is true on both sides: the court will not order the imployer to resume the employment, nor will it order the employee to perform the services i) Injunction – but where the employee under an employment contract breaches, the court may be willing to grant an injunction preventing him from working for a competitor. The employer must show that: 1) the employee‘s services are unique or extraordinary; and 2) the likely result will not be to leave the employee w/out other reasonable means of making a living B. Specific Performance is Available where… 1. Monetary Damages are inadequate or extremely difficult to calculate or completely speculative 2. Required performance is unique, for example, land is unique, or a car driven by Elvis is unique. C. Limitations on Specific Performance 1. Constitutional/moral limitations: for example, court supervision may violate. 2. Definite/specificity, is the court ordering parties to do what they didn‘t actually agree to 3. Hardship to defendant 4. Public policy: constitutional moral issue, if the court should be in the business of long-term supervision 5. Unfairness: the court will not grant equitable relief if it is unfair. D. Problems with Specific Performance 1. Supervision Issue i) Specific Performance requires some sort of supervision on the actual performance a. Problem – if order specific performance on a person and that person does not perform, the remedy is jail – this is not a good result b. Court says that issue is not relevant b/c plans were already made for mall & stores ii) Lack of Clear Standards 2. A lot of contracts are time specific, i.e., specific performance is inadequate or impossible. 3. Ineffectiveness/Good Faith 4. There‘s an autonomy concern, forcing people to do things they don‘t want to do. 5. Economic inefficiency 6. Specific performance may not be available: the unique product may not exist anymore, destroyed or sold to someone else. VI. EFFICIENT BREACH AND NONAWARDABLE DAMAGES A. EFFICIENT BREACH – knowledge of the likely benefit & harm of breaching contracts and if you can compensate for any harm and still profit more than if the contract was fulfilled, breach should be pursued 1. Theory a. Parado Optimality – by some transaction, some are better off and none are worse off; this is the basis for all efficient breach theory b. Coercive Efficient Breach– there is no gain and merely trying to extract more money out of the other party and the contract 2. Problems? i) Calculation Problems – good efficient breach theory should encompass more than mere economic damages to compensate for other transaction costs, social harm, etc. ii) Transaction Costs – there are additional transaction costs involved with additional negotiations and any litigation needed to resolve the contract iii) Freewill Theory – you should be able to enter into any contract you want; the law of contracts should not restrict freedom of contract based on whether the contract will be efficient iv) Theory of Contracts – no parties actually negotiate to get either performance of the contract or money; people negotiate/contract for some actual performance v) Efficiency – there is a cost involved with every breach, no matter how small, thus it is a burden to society as a whole when aggregated vi) Morality – often ―efficient breach‖ is threatened and used as an excuse for bad faith dealing; notion that law ―doesn‘t give a damn about morality‖; what matters is not what is right it‘s what is legal! B. NONAWARDABLE DAMAGES 1. Attorney Fees – ―American Rule‖ is contrary to the general notion that attorney fees is part of the cost that should be awarded to a party to ―get them back to the position they were before the contract‖ 2. Mental Distress Damages – as a general matter, in US contract law, court do not give damages for mental anguish or other ―noneconomic‖ damages i) Why Not Award Mental Distress Damages? – a. Calculation Problems – hard to calculate 1) whether there will be such damages (not foreseeable) and 2) the value of such damages b. Notion that Contracts are not Emotional – negotiation and contracting should not invoke emotion or a harmful emotional result ii) Exceptions? (i.e. where mental distress is exceedingly likely) a. Tortious Claims – courts will sometimes allow tort violations to be ―read-in‖ to the verdict of the intentional breach of a contract (Ex: where there is Bodily Harm b/c contract) b. Unconscionability – Ex: violation w/re: surrogacy agreements c. Related to Death – Ex: contract w/ mortuary to deliver body or contract to deliver notice of someone‘s death C. Punitive Damages – damages to penalize the other party but the general goal of civil law (i.e. contracts, property, torts, etc.) is to compensate for any harm and not to penalize 1. Punitive Damages are Controversial Worldwide i) Punitive Damages are much more like criminal law in which the goal is to penalize a party ii) Thus, punitive damages are controversial b/c there is a lower burden of proof w/re: civil cases that actually could penalize the other party iii) Most other countries will refuse to allow the enforcement of punitive damages abroad 2. Why No Punitive Damages in Contracts? i) Encourage Efficient Behavior – if punish for not fulfilling contract when efficient breach is better option, then courts are actually encouraging inefficient behavior ii) Contract Law does Not seek to Encourage Morality – only efficient contracting iii) Strict Liability – in contract law, party is liable regardless of fault if the contract is breached. Liability is not based on fault, thus damages shouldn‘t be based on fault either iv) Law has No Preference btw Fulfillment of the Contract & Paying for Breach – if punitive damages were awarded, this choice would be diminished b/c ―paying‖ would become much more expensive 3. Exceptions? i) Malicious Conduct ii) Behavior Defenses iii) Insurance Contracts a. worry that all cases are determined by cost-benefit analysis (act in bad faith) b. insurance is specifically designed to deal w/ situations of susceptibility and provide stability, thus w/out imposition to do so the goal would be undermined c. person has no bargaining power with the insurance company (can‘t adjust terms of agreement) thus imposition of punitive damages if take advantage of the customers d. Breach is not likely to be discovered and if discovered not likely to be held liable – thus punitive damages serve as a mechanism to force people to follow the law I. THIRD PARTY BENEFICIARIES A. Introduction: A third party beneficiary (TPB) is a person whom the promisee in a contract intends to benefit. Example: Contractor (promisee) agrees to paint Owner's (promisor) house for $10,000. Contractor wants to pay off a debt he owes Creditor, so he provides that upon completion, payment should be made not to Contractor but to Creditor. Creditor is a third party beneficiary of the Owner-Contractor contract. Owner is the promisor. B. When may a TPB sue?: The most important question about TPBs is: When may the TPB sue the promisor on the contract? The modern rule, exemplified by the Second Restatement, is that "intended" beneficiaries may sue, but "incidental" beneficiaries may not sue. See §302. 1. The TPB must be an intended beneficiary: There are three tests to measure intent: i) Promisee: A person will be an intended beneficiary if the promisee (alone) intended to benefit the beneficiary. ii) Promisee and promisor: A person is an intended beneficiary only if both promisee and promisor intend to benefit her. (So in such a court, in the example below, Magnate couldn't sue Painter unless Magnate showed that Painter, as well as Tycoon, intended to benefit Magnate.) iii) Promisee and promisor has reason to know: The promisor must know or have reason to know of the promisee‘s intent to benefit the third party, even if the promisor had no particular desire to confer a benefit one or create an obligation to the third person. 2. Is there evidence of the intent?: A term in the contract specifically confirming or negating standing for a TPB will usually be enough. Absent such express language, most courts will look at the totality of the circumstances such as the language and the provisions of the agreement, the background of the contract, and considerations of fairness and practicality. 3. Generally, the TPB must either be a creditor or a donee beneficiary: "Intended beneficiaries" fall into two categories: i) Did the promisee have a pecuniary obligation to the TPB?: First, a person is an intended beneficiary if the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary. This is sometimes called a "creditor beneficiary." See §302(1)(a). Example: Contractor agrees to paint Owner's house for $10,000. The contract provides that payment should be made to Creditor, to satisfy a debt previously owed by Contractor to Creditor. Since Owner's fulfillment of his side of the contract will cause money to be paid to Creditor, Creditor is an intended beneficiary, of the "creditor beneficiary" variety. ii) Did the promisee intend to give the benefit of a performance or a gift to the TPB?: Second, a person will be an intended beneficiary if the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. A person may fall into this class even if the purpose of the promisee is to give a gift to the beneficiary (in which case the beneficiary is sometimes called a "donee beneficiary"). But intent to make a gift is not necessary - a beneficiary may fall into this "intended beneficiary" class even if the promisee's purpose is not to make a gift, but rather to fulfill some other business objective. See §302(1)(b). Example: Tycoon (promisee) contracts with Painter (promisor) for Painter to paint a portrait of Magnate, a businessman friend of Tycoon, and to deliver the portrait to Magnate. Since Tycoon intends for Magnate to get the benefit of Painter's performance, Magnate is an intended beneficiary who may sue Painter for non-performance; this is true even though Tycoon's motive is to butter up Magnate so that Magnate will do business with Tycoon. 4. Unless all the above elements are satisfied, the TPB is considered an incidental beneficiaries: A beneficiary who does not fall into the above two classes is called an "incidental" beneficiary. An incidental beneficiary may not sue the promisor. See §302(2). Example: Developer contracts with Contractor to have Contractor put up an expensive building on developer's land. Neighbor, who owns the adjoining parcel, would benefit enormously because her land would increase in value if the building were built. However, since the parties don't intend to benefit Neighbor, and aren't paying money to her, Neighbor is an incidental beneficiary, not an intended one. Therefore, Neighbor cannot sue Contractor if Contractor fails to perform as agreed. C. Is there a defense available to the promisor?: The promisor-defendant may assert against the beneficiary any defenses which he could have asserted had he been sued by the promisee. For instance, the promisordefendant may defend on the ground that the promisee never rendered the performance which he promised under the contract, i.e., that the promisee breached. The rules of contract formation still apply as well as any justifications for nonperformance or avoidance. Example: Contractor (promisee) agrees to paint Owner's (promisor) house for $10,000, with payment to be made to Friend, in repayment of a debt owed by Contractor to Friend. If Owner does not make payment and Friend sues Owner as a third party beneficiary, Owner may defend on the grounds that Contractor did not perform the painting work as promised. 1. Set-offs not allowed: But this principle that the beneficiary "stands in the shoes" of the promisee is limited – only defenses relating to the main contract may be asserted by the promisor-defendant. The promisordefendant may not assert against the beneficiary defenses or claims from unrelated transactions with the promisee. Example: Same facts as above example. Contractor performs the painting work correctly. However, Contractor also owes Owner $2,000 in damages from work previously done incorrectly by Contractor for Owner on a different contract involving Owner's office. If Friend sues Owner for the $10,000 fee, Owner may not reduce the payment by the $2,000 owed on the office contract. D. Have the rights of the TPB vested?: A TPBs rights vest when they are no longer subject to change by agreement of the promisor and promisee. Once the TPBs rights vest, the promisor and promisee can no longer modify or rescind the contract between them. Unless the contract prohibits modification by the promisor and promisee, §311 permits variation of the rights of the intended beneficiaries until the third party does one of three things: 1. Agrees to status as TPB: Manifests assent at the invitation of the promisor or promisee 2. Reliance: Materially changes position in justifiable reliance on the promise; OR 3. Litigation: Brings suit on the promise. E. Is there a government contract?: When government makes a contract with a private company for the performance of a service, a member of the public who is injured by the contractor's non-performance generally may not sue the contractor. Suit may be permitted if §302 is satisfied and one of the exceptions embodied in §313 apply: Example: City contracts with Water Co. to supply water for fire hydrants. P's house burns down when Water Co. does not give adequate hydrant pressure. Held, P is not an intended beneficiary of the City-Water Co. contract, and therefore may not recover. [H.R. Moch & Co. v. Rensselaer] 1. Express agreement: A TPB may bring suit if the party contracting with the government has explicitly promised to undertake liability to members of the public for breach of the contract; OR 2. Duty: A TPB may bring suit if the government has a duty of its own to provide the service which it has contracted for. (Example: City contracts to have its street-repair duty picked up by Contractor. A member of the public who is injured when the street is improperly maintained may sue Contractor). i) Other factors that weigh against allowing suit against the promisor: Among factors which may make inappropriate a direct action against the promisor are arrangements for governmental control over the litigation and settlement of claims, the likelihood of impairment of service or of excessive financial burden, and the availability of alternatives such as insurance. II. ASSIGNMENT AND DELEGATION A. Generally: When a party to an existing contract transfers to a third person his rights under a contract, he has made an assignment. See §317. When an existing party appoints a third person to perform his duties under the contracts, he has made a delegation. See §318. Example: A has a right to $100 against B. A assigns his right to C. A's right is thereby extinguished, and C acquires a right against B to receive $100. Example: A owes B $100, and asks C to pay B. Payment or tender to B by C has the effect of payment or tender by A. B. Assignment: An assignment is a present transfer of one‘s rights under a contract. No consideration is required. A promise to transfer one‘s rights in the future is not an assignment, even though it may be a contract. A contract right can be assigned unless: Example: Contractor contracts to paint Owner‘s house for $10,000. Contractor then assigns to Bank Contractor‘s rights to receive the $10,000 when due. Contractor is the assignor, Bank is the assignee, and Owner is the obligor. 1. Material adverse effect on the obligor: The assignment is not permitted if the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him; OR 2. Forbidden by statute: The assignment is not permitted if it is forbidden by statute or is otherwise inoperative on grounds of public policy; OR 3. Valid preclusion: The assignment is not permitted if it is validly precluded by contract. Ordinarily a bar, but the preclusion must be valid and will be construed narrowly. C. Delegation: A party that wishes to have another person perform his duties, delegates them When the performance of a duty is delegated, the delegator remains liable. If the obligee expressly agrees to accept the delegatee‘s performance in place of the delegator (he gives a novation), then delegator is no longer liable for the performance. 1. Non-delegable duties: A contract is not delegable when the obligee has a substantial interest in having the delegator perform. Contracts which call for the promisor‘s use of his own particular or specialized skills are normally not delegable. Thus contracts involving artistic performances, the professional services of a lawyer or doctor, are not delegable. Similarly, contracts in which there are duties of close personal supervision may not be delegated. 2. Delegable duties: Construction contracts are usually delegable. Unless against public policy, any duty may be delegable by agreement of the parties.