Contracts

Front 1

What is a contract?

Back 1

A promise or set of promises for breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty

Generally, contracts are governed by Common Law. Contracts for sale of goods are governed by Article 2 of the UCC as well as common law. When there is a conflict between Article 2 and the common law, Article 2 prevails.

Front 2

Express Contract

Back 2

Promises are communicated by language, oral or written.

Example: X promises to paint Y's portrait in return for Y's promise to pay X $100.

Front 3

Implied Contract

Back 3

Parties' conduct indicates that they assented to be bound.

Examples:
X fills her car with gas at Y's gas station. There is a contract for purchase and sale of the gas.

X watches Y paint X's house, knowing that Y mistakenly thought they had an agreement for Y to be paid for it. There is an implied contract.

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Quasi-Contract

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Not a real contract, but rather is a way to avoid unjust enrichment. Thus, even if an agreement does not qualify as a contract, under a quasi-contract, a party can recover the benefit she has conferred on the other party.

Example:
X contracts with Y to build a house for Y. X becomes ill and is unable to continue after completing a third of the work. X cannot sue on the contract, but may recover the benefit conferred on Y.

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Bilateral Contract

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Requires an exchange of promises. Most contracts fall into this category.

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Unilateral Contract

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Limited to two circumstances:
(1) where the offeror clearly indicates that performance is the ONLY manner of acceptance; or
(2) where there is an offer to the public clearly contemplating acceptance by performance (e.g., a reward offer).

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Void Contract

Back 7

One without any legal effect from the beginning (e.g., an agreement to commit a crime).

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Voidable Contract

Back 8

One that a party may elect to avoid or ratify (e.g., a contract by a minor).

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Unenforceable Contract

Back 9

One otherwise valid but for which some defense exists extraneous to formation (e.g., violates the Statute of Frauds).

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Creation of a Contract

Back 10

Three elements are required to create a contract:
(1) mutual assent (i.e., offer and acceptance);
(2) consideration or a substitute; and
(3) no defenses to formation.

Front 11

Mutual Assent

Back 11

One party must accept the other's offer. An objective standard is used; i.e., did words or conduct manifest a present intention to enter into a contract?

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Offer

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Creates a power of acceptance in the offeree. To be valid, an offer must be: (1) an expression of promise, undertaking, or commitment to enter into a contract; (2) definite and certain in its terms; and (3) communicated to the offeree.

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Promise, Undertaking, or Commitment

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Consider:
(1) language used;
(2) surrounding circumstances;
(3) prior relationship of the parties;
(4) method of communication - the broader the communicating media, the less likely it is an offer;
(5) custom in the industry; and
(6) degree of definiteness and certainty of terms.

Watch out - COULD just be an invitation to deal.

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Terms Must Be Definite and Certain

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Must sufficiently identify the offeree or class of offerees to justify the inference that the offeror intended to create a power of acceptance.

Definiteness varies with different contracts:
(1) Real Estate - requires identification of land and price terms.
(2) Sale of Goods - quantity must be certain (requirements and outputs generally OK).
(3) Employment - duration of employment must be specified.

Offer MUST be communicated to the offeree.

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Termination of Offer

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An offer may be accepted only as long as it has not been terminated. It may be terminated by (1) an act of either party or (2) operation of law.

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Termination of Offeror

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The offeror terminates an offer if he:
(1) directly communicates the revocation (i.e., retraction of the offer) to the offeree; or
(2) acts inconsistent with continued willingness to maintain the offer, and the offeree receives correct information of this from a reliable source. Offers made by publication may be terminated only by use of comparable means of publication.

Revocation is effective when received by offeree (or when published, if by publication).

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Limitations on Offeror's Power to Revoke

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Offers not supported by consideration or detrimental reliance can be revoked at will by the offeror, even if he's promised not to do so for a certain period of time.

Offeror's power to revoke is limited if:
(1) there is an option contract supported by consideration;
(2) there is a firm offer under the UCC (a signed writing by a merchant promising to hold the offer open for some period of time);
(3) Offeree has detrimentally relied on the offer and the offeror could reasonably have expected such reliance; or
(4) In the case of a unilateral contract, the offeree has embarked on performance.

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Termination by Offeree - Rejection

Back 18

An offeree may reject an offer (1) expressly or (2) by making a counteroffer (as distinguished from a mere inquiry).

Rejection is effective when received.

Rejection of an option does NOT terminate the offer; offeree is still free to accept the offer within the option period unless the offeror has detrimentally relied on the offeree's rejection.

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Termination by Offeree - Lapse of Time

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An offer may be terminated by the offeree's failure to accept within the time specified by the offer or within a reasonable period if no deadline was specified.

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Termination by Operation of Law

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The following events will terminate an offer:
(1) Death or insanity of either party (need not be communicated to the other party);
(2) Destruction of the proposed contract's subject matter; or
(3) Supervening illegality.

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Acceptance

Back 21

Valid acceptance of a bilateral contract requires: (1) an offeree with the power of acceptance, (2) unequivocal terms of acceptance, and (3) communication of acceptance.

Front 22

Who may accept?

Back 22

The person to whom the offer was addressed has the power of acceptance, as does a member of the class to whom the offer was addressed. Although right to accept most contracts cannot be assigned, option contracts supported by consideration can be assigned to a "new" offeree.

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Terms and Communication of Acceptance

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Acceptance must be unequivocal At common law, the acceptance had to mirror the offer's terms, otherwise it would be a counter offer. Under the UCC, however, an acceptance need not mirror the terms.

Acceptance is judged on an objective standard - the offeree's subjective state of mind is irrelevant. Modern rule and UCC permit acceptance by any reasonable means, unless the offeror unambiguously limits acceptance to particular means.

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"Mailbox Rule"

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If acceptance is by mail or similar means and properly addressed and stamped, it is effective at the moment of dispatch. If improperly sent, it is effective upon receipt.

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Limitations on the Mailbox Rule

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(1) Does not apply if the offer stipulates that acceptance is not effective until received.
(2) Does not apply if an option contract is involved (acceptance is effective upon receipt).
(3) If the offeree sends a rejection and then sends an acceptance, whichever arrives first is effective.
(4) If the offeree sends an acceptance and then a rejection, the acceptance is effective unless the rejection arrives first and the offeror detrimentally relies on it.

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Formation Problems with Unilateral Contracts

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Generally, the offeree of unilateral contract must act with knowledge of the offer and be motivated by it. There is a duty to give notice of performance to the offeror if he requests notice or if the act would not normally come to his attention; otherwise, there is no duty to notify.

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Formation Problems with Bilateral Contracts

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An offeree's ignorance of certain contractual terms may be a defense to formation of a bilateral contract. Also, oppressive terms or provisions contrary to public policy may prevent contract formation. Blanket form recitals that state that the offeree has read and understood all terms will not prevent a court from holding that there is no contract if a reasonable person would not understand the provisions.

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Consideration

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Courts will enforce a contract only if it is supported by consideration or a substitute for consideration.

Consideration involves two elements: (1) bargain and (2) legal value.

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Bargained-for Exchange

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Parties must exchange something. In the case of a bilateral contract, they exchange promises. In the case of a unilateral contract, they exchange a promise for an act.

Gift: No bargain involved when one party gives a gift to another. Act or forbearance by the promisee will be sufficient to form a bargain IF it benefits the promisor. If one party gives the other peace of mind or gratification in exchange from something, it may be sufficient to establish a bargain.

Past or Moral Consideration: A promise given in exchange for something already does does not satisfy the bargain requirement UNLESS the past obligation is unenforceable because of a technical defense and a new promise is made in writing or is partially performed.

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Legal Value

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Courts do NOT inquire into the adequacy or fairness of consideration. However, if something is entirely devoid of value (token consideration), it is insufficient. Sham consideration (recited in contract, but not actually paid) may also be insufficient. Where there is a possibility of value in the thing bargained for, consideration will be found even if the value never comes into existence.

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Legal Benefit and Legal Detriment Theories

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The majority of courts require that a party incur detriment (by doing something he is not legally obligated to do or by refraining from something he has a legal right to do) to satisfy the legal value element. Under the minority rule, conferring a benefit on the other party is also sufficient.

Front 32

Preexisting Legal Duty

Back 32

Traditionally, performing or promising to perform an existing legal duty is insufficient consideration.

Exceptions:
(1) New or different consideration is promised.
(2) Promise is to ratify a voidable obligation.
(3) Preexisting duty is owed to a third person rather than to the promisor.
(4) There is an honest dispute as to the duty.
(5) There are unforeseen circumstances sufficient to discharge a party.

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Forbearance to Sue

Back 33

A promise to refrain from suing on a claim may constitute consideration if the claim is valid or the claimant in good faith believed the claim was valid.

Front 34

Mutuality

Back 34

Consideration must exist on both sides of a contract (although the benefit of the consideration generally need not flow to all parties). If one party is bound to perform, the promise is illusory and will not be enforced. Courts often supply implied promises to infer mutuality.

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Examples of Contracts that Satisfy the Mutuality Requirement

Back 35

(1) Requirements and Output Contracts
(2) Conditional Promises (unless the condition is entirely within the promisor's control)
(3) Contracts Where Party Has Right to Cancel (if that right is somehow restricted)
(4) Voidable Promises
(5) Unilateral and Option Contracts
(6) Gratuitous Suretyship Promises (made before consideration flows to the principal debtor)

Front 36

Right to Choose Alternative Courses

Back 36

Illusory, unless every alternative involves legal detriment to the promisor. Promise will not be found illusory if:
(1) at least one alternative involves legal detriment and the power to choose rests with the promisee or a third party; or
(2) a valuable alternative is actually selected.

Front 37

Substitutes for Consideration

Back 37

(1) Promissory Estoppel or Detrimental Reliance

Front 38

Promissory Estoppel

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Elements:
(1) promisor should reasonably expect her promise to induce action or forbearance;
(2) of a definite and substantial character; and
(3) such action or forbearance is in fact induced.

Front 39

Seal as Consideration

Back 39

In many states, and under the UCC, a seal is NO LONGER a substitute for consideration.

Front 40

Mutual Mistake

Back 40

A mistake by bother parties is a defense to formation if:
(1) mistake concerns a basic assumption on which the contract was made;
(2) mistake has a material adverse effect on the agreed-upon changed; and
(3) adversely affected party did not assume the risk of the mistake.

Assumption of Risk: Note that when the parties know that their assumption is doubtful (so-called conscious ignorance), mutual mistake is not a defense - the parties will be deemed to have assumed the risk that their assumption was wrong.

Mistake in value generally goes unremedied, as courts presume parties assume the risk in determining value. But note: There are exceptions (such as when the parties rely on a third party to establish value).

Front 41

Unilateral Mistake

Back 41

Whether it be of identity, subject matter, or computation, a mistake by one party is generally insufficient to make a contract voidable. However, if the non mistaken party knew or should have known of the mistake, the contract is voidable by the mistaken party.

Front 42

Mistake by Intermediary (Transmission)

Back 42

Where there is a mistake by an intermediary (e.g., a telegraph company makes a mistake), the message usually will be operative AS TRANSMITTED unless the party receiving the message should have been aware of the mistake.

Front 43

Latent Ambiguity Mistakes

Back 43

If the contract includes an ambiguous term, the result depends on the parties' awareness of the ambiguity:
(1) Neither party aware - no contract unless both parties intended the same meaning.
(2) Both parties aware - no contract unless both parties intended the same meaning.
(3) One party aware - binding contract based on what the ignorant party reasonably believed to be the meaning of ambiguous words.

Ambiguity is one area where subjective intent is taken into account.

Front 44

Misrepresentation

Back 44

If a party induces another to enter into a contract by using fraudulent misrepresentation (e.g., by asserting information she knows is untrue) or by using nonfraudulent material misrepresentation (e.g., by asserting information that she does not know is untrue but that would induce a reasonable person to enter into a contract), the contract is voidable by the innocent party if she justifiably relied on the representation.

If there is fraud in the factum (i.e., if a party is tricked into assenting without understanding the significance of her action) rather than fradulent misrepresentation (which is a type of fraud in the inducement), the contract is void, rather than voidable.

Front 45

Absence of Consideration

Back 45

If promises exchanged at the formation stage lack elements of bargain or legal detriment, no contract exists.

Front 46

Public Policy Defenses - Illegality of Contract

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If the consideration or subject matter of a contract is illegal (e.g., a contract to commit a murder), the contract is void. Exceptions:
(1) plaintiff is unaware of the illegality while the defendant knows of the illegality;
(2) the parties are not in pari delicto (i.e., one party is not as culpable as the other); or
(4) the illegality is the failure to obtain a license when the license is for revenue-raising purposes rather than protection of the public.

If only the purpose behind the contract is illegal, the contract is voidable by a party who was (1) unaware of the purpose, or (2) aware but did not facilitate the purpose AND the purpose does not involve serious moral turpitude (e.g., murder).

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Defenses Based on Lack of Capacity

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In most jurisdictions, persons under age 18 lack capacity to contract. Some exceptions exist, e.g., contracts providing for the incapacitated party's necessities. Upon reaching majority, the infant may affirm her contractual obligation (if no express disaffirmance, this will be construed as affirmance). A contract between an infant and an adult is voidable by the infant, but binding on the adult. Insane persons lack capacity, although such persons may contract during a lucid interval. Intoxicated persons may also lack capacity if the other party has reason to know of the intoxication. Contracts induced by duress and coercion are voidable.

Front 48

Agreements Subject to Statute of Frauds (SF)

Back 48

(1) Promises by executors or administrators to pay estate's debts out of their own funds.
(2) Promises to answer for the debt or default of another.
(3) Promises made in consideration of marriage.
(4) Promises creating an interest in land.
(5) Promises that by their terms cannot be performed within a year.
(6) Agreements for the sale of goods for $500 or more except specially manufactured goods, a written confirmation of an oral agreement between merchants, admission in pleadings or court that a contract for goods existed, or partial payment or delivery made and accepted.

Front 49

Memorandum Requirements (SF)

Back 49

SF is satisfied if the writing contains the following:
(1) Identity of the parties sought to be charged;
(2) Identification of the contract's subject matter;
(3) Terms and conditions of the agreement;
(4) Recital of the consideration; and
(5) Signature of the party to be charged.

Front 50

Unconscionability

Back 50

A contract may be voidable where the clauses are so one-sided as to be unconscionable. This includes contracts with inconspicuous risk-shifting provisions (e.g., disclaimers of warranty buried in fine print) and contracts of adhesion ("take it or leave it"). Unconscionability is tested at the time the contract was made, not later. The defense is often applied where one party has substantially superior bargaining power.

Front 51

Third-Party Beneficiary

Back 51

Intended beneficiaries have contractual rights, but not incidental beneficiaries.

Two types of intended beneficiaries:
(1) creditor beneficiary - a person to whom a debt is owed by the promisee; and
(2) donee beneficiary - a person the promisee intends to benefit gratuitously.

Front 52

Intended or Incidental Beneficiary?

Back 52

Consider whether beneficiary is:
(1) identified in the contract,
(2) receives performance directly from the promisor, or
(3) has some relationship with the promisee.

Front 53

When does a third-party beneficiary acquire contractual rights?

Back 53

A third-party can enforce a contract only when his rights have vested. This occurs when he:
(1) manifests assent to a promise in the manner requested by the parties;
(2) brings a suit to enforce the promise; or
(3) materially changes the position in justifiable reliance on the promise.

Prior to vesting, the promisee and promisor are free to modify or rescind the beneficiary's rights under the contract.

Front 54

Who can sue whom? (Third-Party Beneficiaries)

Back 54

Third-Party Beneficiaries (3PBs) may sue the promisor on the contract. Promisor may raise against the 3PB any defense that the promisor has against the promisee.

3PB if CREDITOR beneficiary may sue the promisee on the existing obligation between them. She may also sue the promisor, but may obtain only one satisfaction. A donee beneficiary has no right to sue the promisee unless grounds for detrimental reliance exist.

Front 55

What rights may be assigned?

Back 55

Generally, all contractual rights may be assigned. Exceptions:
(1) an assignment that would substantially change the obligor's duty or risk;
(2) an assignment of future rights to arise from future contracts; and
(3) an assignment prohibited by law (e.g., wage assignments).

Front 56

Nonassignment Provisions

Back 56

A clause prohibiting assignment of "the contract" will be construed as barring only delegation of the assignor's duties. A clause prohibiting assignment of contractual rights generally doesn't bar assignment, but merely gives the obligor the right to sue for damages. However, if the contract provides that attempts to assign will be void, the parties can bar assignment. Also, if the assignee has notice of the nonassignment clause, an assignment will be ineffective.

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What is necessary for an effective assignment?

Back 57

Assignor must manifest an intent to immediately and completely transfer her rights. A writing is usually not required. Consideration is not required either.

Front 58

Is an assignment revocable?

Back 58

An assignment not for consideration is generally revocable; however one for consideration will be irrevocable.

Gratuitous assignment is irrevocable if:
(1) the obligor has already performed;
(2) a token chose (i.e., a tangible claim) is delivered;
(3) an assignment of a simple chose is put in writing; or
(4) the assignee can show a detrimental reliance on the gratuitous assignment.

A revocable gratuitous assignment can be terminated by:
(1) death or bankruptcy of the assignor;
(2) notice of revocation by the assignor to the assignee or the obligor;
(3) assignor taking performance directly from the obligor; or
(4) subsequent assignment of the same right by the assignor to another.

Front 59

Who can sue whom? (Assignments)

Back 59

Assignee v. Obligor: Assignee can sue the obligor, as the assignee is the real party in interest. The obligor cannot raise the assignor's defenses against the assignee.

Assignee v. Assignor: Assignee can sue assignor for wrongfully exercising the power to revoke an irrevocable assignment.

Front 60

Problems with Successive Assignments of Same Rights

Back 60

If first assignment is revocable, subsequent assignment revokes. If irrevocable, the first assignment will usually prevail. Exceptions (if 2nd assignee has paid value and taken without notice):
(1) subsequent assignee gets the first judgment against the obligor;
(2) subsequent assignee gets the first payment of a claim from the obligor;
(3) subsequent assignee gets delivery of a token chose;
(4) subsequent assignee is the party to a novation releasing the assignor; or
(5) subsequent assignee can proceed against the first assignee on estoppel theory.

Front 61

What duties may be delegated?

Back 61

Generally all duties may be delegated. Exceptions:
(1) duties that involve personal judgment and skill;
(2) delegation would change the obligee's expectancy;
(3) special trust was reposed in the delegator by the other party to the contract; and
(4) there is a contractual restriction on delegation.

Front 62

Requirements for Effective Delegation

Back 62

Delegator must manifest a present intention to make a delegation. There are no special formalities to be complied with. It may be written or oral.

Front 63

Rights and Liabilities of Parties (Delegation)

Back 63

Obligee must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the contract; thus, the obligee may sue the delegator for nonperformance by the delegate. The obligee may sue the delegate for non performance, but can require the delegate to perform only if there has been an assumption. This promise creates a contract between the delegator and the delegate in which the obligee is a third-party beneficiary.

Front 64

Rules of Contract Construction

Back 64

A contract is construed as a "whole," and according to the ordinary meaning of words. If there is an inconsistency between provisions, written or typed provisions prevail over printed provisions. Ambiguities are construed against the party preparing the contract, absent evidence of the intention of the parties. Courts look to the custom and usage in a particular business and in a particular locale to determine the parties' intent when it is unclear. Courts generally will try to reach a determination that a contract is valid and enforceable.

Front 65

Parol Evidence Rule

Back 65

Evidence of prior or contemporaneous negotiations and agreements that contradict, modify, or vary contractual terms is inadmissible if the written contract is intended as a complete and final expression of the parties. A "merger clause" (recital that the contract is complete on its face) strengthens the presumption that the written document is final.

Exceptions - Evidence of the following is admissible:
(1) formation defects;
(2) existence of a condition precedent to a contract;
(3) parties' intent regarding ambiguous terms;
(4) consideration problems;
(5) prior valid agreement which (as by mistake) is incorrectly reflected in the writing;
(6) collateral agreement if it does not contradict or vary the main contract and if it is not so closely connected as to be part of the main contract; and
(7) subsequent modification.

Front 66

Condition Precedent

Back 66

Condition must occur before performance is due. Once condition occurs, performance is due.

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Conditions Concurrent

Back 67

Conditions to occur at the same time. If one condition has occurred, performance of the other is due.

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Condition Subsequent

Back 68

Condition cuts off already existing duty. If condition occurs, the duty to perform is excused.

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Express Conditions

Back 69

Those expressed in the contract.

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Implied Conditions

Back 70

AKA "Implied in Fact" Conditions. These conditions are to be inferred from evidence of the parties' intention.

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Constructive Conditions

Back 71

AKA "Implied in Law" Conditions. These are read into the contract without regard to the parties' intention in order to ensure that the parties receive what they bargained for.

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Have the conditions been excused?

Back 72

Conditions may be excused in several ways:
(1) Excuse of Condition by Failure to Cooperate - party who wrongfully prevents a condition from occurring will no longer be given the benefit of it.
(2) Excuse of Condition by Actual Breach - An actual, material breach by one party excuses the other's duty of counterperformance.
(3) Excuse of Condition by Anticipatory Repudiation
(4) Excuse of Condition by Prospective Inability or Unwillingness to Perform - Party might have reasonable grounds to believe the other party will be unable/unwilling to perform when performance is due.
(5) Excuse of Condition by Substantial Performance
(6) Excuse of Condition by Divisibility of Contract
(7) Excuse of Condition by Waiver or Estoppel
(8) Excuse of Condition by Impossibility, Impracticability, or Frustration

Front 73

Excuse of Condition by Anticipatory Repudiation

Back 73

Anticipatory Repudiation (AR) must be unequivocal, not just an expression of doubt. If applies only if there are executory (unperformed) duties on both sides of a bilateral contract. AR gives the nonrepudiating party four alternatives:
(1) Treat the contract as totally repudiated and sue immediately;
(2) Suspend his own performance and wait until the performance is due to sue;
(3) Treat the repudiation as an offer to rescind and treat the contract as discharged; or
(4) Ignore the repudiation and urge performance.

Repudiation may be retracted until the nonrepudiating party has accepted the repudiation or detrimentally relied on it.

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Excuse of Condition by Divisibility of Contract

Back 74

Where a party performs one of the units of a divisible contract, she is entitled to the agreed equivalent for that unit even though she fails to perform the other units.

Three tests must be met to find that a contract is divisible:
(1) Performance of each party is divided into two or more parts under the contract;
(2) Number of parts due from each party is the same; and
(3) Performance of each part by one party is the agreed equivalent of the corresponding part by the other party.

Front 75

Excuse of Condition by Waiver or Estoppel

Back 75

(1) Estoppel Waiver - party may "waive" a condition by indicating that he will not insist on it. However, such a waiver may be retracted at any time unless the other party relies on the waiver and changes her position to her detriment. Upon such detrimental reliance, the waiving party is estopped from asserting the condition.
(2) Election Waiver - If a condition is broken, the party who was to have its benefit may either terminate his liability or continue under the contract. If he chooses the latter, he is deemed to have waived the condition.
(3) Conditions that May be Waived - No consideration is given for the waiver, the condition must be one that is ancillary or collateral to the main purpose of the contract. Otherwise, the waiver amounts to a gift and is thus not enforceable.
(4) Right to Damages for Failure of Condition - Waiving a condition does not waive one's right to damages for the other's defective performance.

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Ways to Discharge Duty to Perform

Back 76

(1) Discharge by Performance or Tender of Performance
(2) Discharge by Condition Subsequent
(3) Discharge by Illegality
(4) Discharge by Impossibility, Impracticability, or Frustration
(5) Discharge by Rescission
(6) Partial Discharge by Modification of Contract
(7) Discharge by Novation
(8) Discharge by Cancellation
(9) Discharge by Release
(10) Discharge by Substituted Contract
(11) Discharge by Accord and Satisfaction
(12) Discharge by Account Stated
(13) Discharge by Lapse
(14) Discharge by Operation of Law

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Discharge by Impossibility

Back 77

The duty may be discharged by impossibility (objective standard - NOBODY court perform according to terms). This impossibility must arise after the contract was entered into. A party who has rendered part performance prior to impossibility may recover in quasi-contract.

Examples:
(1) death or physical incapacity of a person necessary to effectuate the contract;
(2) subsequently enacted law rendering contract subject matter illegal; and
(3) subsequent destruction of the contract's subject matter or means of performance.

Front 78

Discharge by Impracticability

Back 78

Requires that a party encounter extreme and unreasonable difficulty or expense that was not anticipated. A mere change in the difficulty or expense due to normal risks that could have been anticipated will NOT warrant a change (e.g., increase in price of raw materials).

Front 79

Discharge by Frustration of Purpose

Back 79

Requires:
(1) a supervening event;
(2) that was not reasonably foreseeable at the time of entering into the contract;
(3) which completely or almost completely destroys the purpose of the contract; and
(4) the purpose was understood by both parties.

Front 80

Discharge by Rescission

Back 80

Mutual Rescission: Both parties expressly agree to it. Must be executory (not performed) on both sides. May be made orally unless subject matter is within SF.

Unilateral Rescission: May be unilateral where only one of the parties to the contract desires to rescind it. In this case, that party must have adequate legal grounds.

Front 81

Discharge by Novation

Back 81

A new contract substituting a new party for one of the parties to the original contract.

Elements:
(1) previous valid contract;
(2) an agreement among all parties, including the new party;
(3) immediate extinguishment of contractual duties as between the original contracting parties; and
(4) valid new contract.

Front 82

Discharge by Accord and Satisfaction

Back 82

An accord is an agreement in which one party to a contract agrees to accept performance different from that originally promised. Generally requires consideration. Doesn't discharge a contractual duty - merely suspends other party's right to enforce it. Payment of a smaller amount than is due on a claim is valid consideration if it is made in good faith and there is a bona fide dispute as to the claim. This is often accomplished by tendering a check conspicuously marked "payment in full."

Satisfaction is the performance of the accord. Discharges both the accord and the original debt.

Front 83

When does breach occur?

Back 83

If (1) the promisor is under an absolute duty of performance and (2) this duty has not bee discharged, then the failure to perform in accordance with the contractual terms may be held to be a breach of contract.

Front 84

Tests for Materiality (Breach)

Back 84

(1) Amount of benefit received by the nonbreaching party;
(2) Adequacy of compensation for damages to the injured party;
(3) Extent of part performance by the breaching party;
(4) Hardship of the breaching party;
(5) Negligent or willful behavior of the breaching party; and
(6) Likelihood that the breaching party will perform the remainder of the contract.

Failure to perform on time stated in the contract is generally not material if performance is rendered within a reasonable time (unless "time is of the essence").

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Remedies for Breach

Back 85

(1) Damages - compensatory, nominal, and punitive.
(2) Specific Performance
(3) Rescission and Restitution
(4) Quasi-Contractual Relief

Front 86

Measure of Damages for Breach of Contracts for Sale of Goods

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Measured by the difference between the contract price and the market price when the seller tenders the goods or when the buyer learns of the breach. If the buyer breaches, seller may withhold delivery, stop delivery and resell the goods/recover difference, or recover ordinary contract damages for nonacceptance. If buyer has already accepted, can sue for contract price. If seller breaches, buyer may reject nonconforming goods, cancel, cover, recover goods identified to the contract, obtain specific performance, or record damages for nondelivery. If buyer accepts nonconforming goods, buyer may recover difference between the goods should have been worth and the value of what he got.

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Measure of Damages for Breach of Contracts for Sale of Land

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Difference between contract price and fair market value.

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Measure of Damages for Breach of Construction Contract

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If breached by owner, builder entitled to profits that would have resulted from contract plus any costs expended.

If breached by builder, owner is entitled to cost of completion plus reasonable compensation for the delay. Most courts allow builder to offset or recover for work performed to date to avoid unjust enrichment.

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Measure of Damages for Breach of Contracts Calling for Installment Payments

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If contract calls for payments in installments and a payment is not made, there is only partial breach. Aggrieved party is limited to recovering only the missed payment, not the entire contract price. However, contract may include an acceleration clause, which would allow the aggrieved party to recover the entire amount upon late payment.

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Consequential Damages

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Awarded in addition to standard measure and will be given if a reasonable person would have foreseen at the time of entering the contract that such damages would result from breach. Note that plaintiff bears burden of proving the foreseeability of damages where "special circumstances" are involved.

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Punitive and Nominal Damages

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Punitive damages are typically NOT awarded in commercial contract cases. Nominal damages (e.g., $1) may be awarded where a breach is shown but no actual loss is proven.

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Liquidated Damages

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A liquidated damages provision will be valid if (1) damages were difficult to ascertain at the time the contract was formed, and (2) the amount agreed upon was a reasonable forecast of compensatory damages. If these requirements are met, the plaintiff will receive the liquidated damages amount even though no actual money damages have been suffered. If amount is unreasonable, the courts will construe this as a penalty and will not enforce the provision.

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Duty to Mitigate Damages

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Nonbreaching party has a duty to mitigate damages. If she does not do so, her damages will be reduced by the amount that might have been avoided by mitigation. In employment contracts, the employee is under a duty to use reasonable diligence to find a like position. In sale of goods contracts, cover must be reasonable, in good faith, and without reasonable delay. In construction and manufacturing contract, mitigation requires the builder or manufacturer to cease work unless completion would decrease damages (e.g., finishing partly manufactured goods).

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Suit in Equity for Specific Performance

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When legal remedy (damages) is inadequate, nonbreaching party can seek specific performance - essentially an order from the court to perform or face contempt of court charges. The legal remedy is considered inadequate when the subject matter of the contract is rare or unique. Available for contracts involving the sale of land and for contracts for the sale of unique or rare goods. However, NOT granted in a service contract (involuntary servitude).

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Equitable Defenses Available Against Suit for Specific Performance

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(1) Laches
(2) Unclean Hands
(3) Sale to a BFP

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Quasi-Contractual Relief - Failed Contract

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Where quasi-contractual relief is used to remedy a failed contract, all that is necessary is that the failed contract results in unjust enrichment of one of the parties. Even the breaching party might be able to recover in quasi-contract, as long as the breach did not involve seriously wrongful or unconscionable conduct.

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Quasi-Contractual Relief - Where No Contract Involved

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Requires that:
(1) one party has conferred a benefit on the other by rendering services or expending properties;
(2) the conferring party had a reasonable expectation of being compensated;
(3) benefits were conferred at the express or implied request of the other person; and
(4) unjust enrichment would result if the defendant were allowed to retain the benefits without compensating the plaintiff.

Modern rule grants relief even though the defendant, in fact, received no benefit, as long as the plaintiff expended something on the defendant's behalf. The measure of relief is the benefit received by the defendant, or the detriment suffered by the plaintiff. Relief may exceed the proposed contract price.