[Note: Numbers in brackets refer
to the printed pages of the Emanuel Law Outline where the topic is discussed.]
Emanuel Law Outlines
Contracts
Chapter 1
INTRODUCTION
I. MEANING OF "CONTRACT"
1. Written v. oral contracts:
Although the word "contract" often refers to a written document, a
writing is not always necessary to create a contract. An agreement may be
binding on both parties even though it is oral. Some contracts, however,
must be in writing under the Statute of Frauds.
II. SOURCES OF CONTRACT LAW
A. The UCC: Contract law is
essentially common law, i.e. judge-made, not statutory. However, in every
state but Louisiana, sales of goods are governed by a statute, Article 2 of
the Uniform Commercial Code.
Chapter 2
OFFER AND ACCEPTANCE
I. INTENT TO 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. [10 - 11]
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. 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. [11 - 12]
Example: Both parties would like to
be bound by their oral understanding, but mistakenly believe that an oral
contract cannot be enforceable. This arrangement will be enforceable, assuming
that it does not fall within the Statute of Frauds.
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 enforceable;
(2) but in a social or domestic situation, the presumption will be that
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.
C. 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.)
[12 - 13]
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.
II. OFFER AND ACCEPTANCE GENERALLY
1. "Offer" defined: An
offer is "the manifestation of willingness to enter into a
bargain," which justifies another person in understanding that his
assent can conclude the bargain. In other words, an offer is something that
creates a power of acceptance.
Example: A says to B, "I'll
sell you my house for $100,000, if you give me a check right now for $10,000
and promise to pay the rest within 30 days." This is an offer. If B
says, "Here is my $10,000 check, and I'll have the balance to you next
week," this is an acceptance. After the acceptance occurs, the parties
have an enforceable contract (assuming that there is no requirement of a
writing, as there probably would be in this situation).
B. Unilateral vs. bilateral
contracts: An offer may propose either a bilateral or a unilateral contract.
[14 - 15]
1. Bilateral contract: A bilateral
contract is a contract in which both sides make promises. (Example: A says
to B, "I promise to pay you $1,000 on April 15 if you promise now that
you will walk across the Brooklyn Bridge on April 1." This is an offer
for a bilateral contract, since A is proposing to exchange his promise for
B's promise.)
2. Unilateral contract: A
unilateral contract is one which involves an exchange of the offeror's
promise for the offeree's act. That is, in a unilateral contract the offeree
does not make a promise, but instead simply acts.
Example: A says to B, "If you
walk across the Brooklyn Bridge, I promise to pay you $1,000 as soon as you
finish." A has proposed to exchange his promise for B's act of walking
across the bridge. Therefore, A has proposed a unilateral contract.
III. VALIDITY OF PARTICULAR KINDS OF
OFFERS
A. 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. [16]
B. 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. [16]
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."
C. 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.) [19]
1. 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.)
2. 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.)
D. Auctions: When an item is put up
for auction, this is usually not an offer, but is rather a solicitation of
offers (bids) from the audience. So unless the sale is expressly said to be
"without reserve," the auctioneer may withdraw the goods from the
sale even after the start of bidding. See UCC § 2-328(3). [20]
IV. THE ACCEPTANCE
A. Who may accept: An offer may be
accepted only by a person in whom the offeror intended to create a power of
acceptance. [23]
Example: O says to A, "I offer
to sell you my house for $100,000." B overhears, and says, "I
accept." Assuming that O's offer was reasonably viewed as being limited
to A, B cannot accept even though the consideration he is willing to give is
what O said he wanted.
B. Offeree must know of offer: An
acceptance is usually valid only if the offeree knows of the offer at the time
of his alleged acceptance.
C. Method of acceptance: The offeror
is the "master of his offer." That is, the offeror may prescribe the
method by which the offer may be accepted (e.g., by telegram, by letter, by
mailing a check, etc.). [26 - 31]
Example: A says to B, "I'll
pay you $1,000 if you cross the Brooklyn Bridge." This can only be
accepted by A's act of completely crossing the bridge. (However, the offer
will be rendered temporarily irrevocable once B starts to perform, as
discussed below.)
a. Shipment of goods: For
instance, if a buyer of goods places a "purchase order" that
does not state how acceptance is to occur, the seller may accept by either
promising to ship the goods, or by in fact shipping the goods. UCC § 2-206(1)(b).
b. Accommodation
shipment: If the seller is "accommodating" the buyer by shipping
what the seller knows and says are non-conforming goods, this does not act
as an acceptance. In this "accommodation shipment" situation,
the seller is making a counter-offer, which the buyer can then either
accept or reject. If the buyer accepts, there is a contract for the
quantity and type of goods actually sent by the seller, not for those
originally ordered by the buyer. If the buyer rejects, he can send back
the goods. In any event, seller will not be found to be in breach. UCC § 2-206(1)(b). [28]
4. Notice of acceptance of
unilateral contract: Where an offer looks to a unilateral contract, most
courts now hold that the offeree must give notice of his acceptance after he
has done the requested act. If he does not, the contract that was formed by
the act is discharged. [29]
Example: A says to B, "I'll
pay you $1,000 if you cross the Brooklyn Bridge by April 1." B crosses
the bridge on time. As soon as B crosses, a contract is formed. But if B
does not notify A within a reasonable time thereafter that he has done so,
A's obligation will be discharged.
c. 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.)
V. ACCEPTANCE VARYING FROM OFFER
A. Common law "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. If the
response conflicts at all with the terms of the offer, or adds new terms, the
purported acceptance is in fact a rejection and counter offer, not an
acceptance. [32 - 33]
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.
B. UCC view: The UCC rejects the
"mirror image" rule, and will often lead to a contract being formed
even though the acceptance diverges from the offer. Wherever possible, the UCC
tries to find a contract, so as to keep the parties from weaseling out (as
they often try to do when the market changes). This entire "battle of the
forms" is dealt with in UCC § 2-207, probably the most important
UCC provision for the Contracts student. [34 - 35]
Example: Buyer
sends a "purchase order" containing a warranty. Seller responds
with an "acknowledgement," containing a disclaimer of warranty.
There will be a contract under the UCC, even though there would not have
been one at common law.
2. Acceptance
expressly conditional on assent to changes: An "expression of
acceptance" does not form a contact if it is "expressly made
conditional on assent to...additional or different terms." § 2-207(1). So if the purported
"acceptance" contains additional or different terms from the
offer, and also states something like, "This acceptance of your offer
is effective only if you agree to all of the terms listed on the reverse
side of this acceptance form," there is no contract formed by the
exchange of documents. [36 - 40]
a. Limited: Courts are reluctant
to find that this section applies. Only if the second party's form makes
it clear that that party is unwilling to proceed with the transaction
unless the first party agrees to the second party's changes, will the
clause be applied so as to prevent a contract from forming.
3. "Additional" term in
acceptance: Where the offeree's response contains an "additional"
term (i.e., a clause taking a certain position on an issue with which the
offer does not deal at all), the consequences depend on whether both parties
are merchants. [41 - 43]
a. At least one party not
merchant: If at least one party is not a merchant, the additional term
does not prevent the offeree's response from giving rise to a contract,
but the additional term becomes part of the contract only if the offeror
explicitly assents to it.
Example: Consumer sends a
purchase order to Seller, which does not mention how disputes are to be
resolved. Seller sends an acknowledgement form back to Consumer, which
correctly recites the basic terms of the deal (price, quantity, etc.), and
then says, "All disputes are to be arbitrated."
Even though the acknowledgement
(the "acceptance") differed from the purchase order by
introducing the arbitration term, the acknowledgement formed a contract.
However, since at least one party (Consumer) was not a merchant, this
additional term will only become part of the contract if Consumer
explicitly assents to that term (e.g., by initialing the arbitration
clause on the acknowledgement form).
b. Both merchants: But if both
parties to the transaction are "merchants," then the additional
term automatically becomes part of the contract, as a general rule.
(Example: On facts of prior example, if Buyer was a merchant, the
arbitration clause would become part of the contract.) However, there are
two important exceptions to this "additional term becomes part of the
contract" rule:
i. Materiality: The addition
will not become part of the contract if it is one which "materially
alters" the contract. For instance, a disclaimer of warranty will
always be found to materially alter the contract, so if the seller
includes such a disclaimer in his acknowledgement form after receiving
the buyer's purchase order, the disclaimer will not become part of the
contract.
4. Acceptance 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. [42 - 43]
5. Conflicting terms in documents:
If an issue is covered one way in the offering document and another
(conflicting) way in the acceptance, most 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. [43 - 45]
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.
7. Contract by parties' conduct: If
the divergence referred to in the prior paragraph occurs (so that the
exchange of documents does not create a contract), the parties' conduct
later on can still cause a contract to occur. Section 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." [45 - 47]
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. [46]
a. Terms: Where a contract by
conduct is formed, the terms "consist of those terms in which the
writings of the parties agree, together with any supplementary terms
incorporated under any other provisions of this Act." § 2-207(3). For instance, the price
term would be a "reasonable price at the time for delivery," as
imposed by § 2-305's price "gap
filler."
a. Additional terms in
confirmation: If the confirmation contains a term that is additional to
the oral agreement, that additional term becomes part of the contract
unless either: (1) the additional term materially alters the oral
agreement; or (2) the party receiving the confirmation objects to the
additional terms.
VI. DURATION OF THE POWER OF ACCEPTANCE
A. General strategy: For an
acceptance to be valid, it must become effective while the power of acceptance
is still in effect. So where there is doubt about whether the acceptance is
timely: (1) pinpoint the moment at which the "acceptance" became
effective; and (2) ask whether the power of acceptance was still in effect at
that moment. If the answer to part (2) is "yes," the acceptance was
timely. [53]
B. Ways of terminating power of
acceptance: The offeree's power of acceptance may be terminated in five main
ways: (1) rejection by the offeree; (2) counter-offer by the offeree; (3)
lapse of time; (4) revocation by the offeror; and (5) death or incapacity of
the offeror or offeree. [53 - 58]
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 counter-offer on July 2.
a. Contrary statement: But as
with a rejection, a counter-offer does not terminate the power of
acceptance if either offeror or offeree indicates otherwise. (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.)
3. Lapse of time: 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. [55 - 56]
i. 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.
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.
5. 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." [58]
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.
C. Irrevocable offers: 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: [59 -
61]
b. Modern (Restatement) approach:
But the modern approach, as shown in the Restatement, is that a signed
option contract that recites the payment of consideration will be
irrevocable, even if the consideration was never paid.
2. "Firm offers" under
the UCC: The UCC is even more liberal in some cases: it 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. [60]
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.
a. Offer for unilateral contract:
Where the offer is for a unilateral contract, the beginning of performance
by the offeree makes the offer temporarily irrevocable. As long as the
offeree continues diligently to perform, the offer remains irrevocable
until he has finished. [61]
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.
i. Preparations: This doctrine
applies only to the beginning of actual performance, not the making of
preparations to perform. (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.)
b. Preparations by Offeree: If
the offer is for a bilateral contract (i.e., a contract which is to be
accepted by a return promise), the offeree's making of preparations will
cause the offer to be temporarily irrevocable if justice requires.
"An offer which the offeror should reasonably expect to induce action
or forbearance of substantial character on the part of the offeree before
acceptance and which does induce such action or forbearance is binding as
an option contract to the extent necessary to avoid injustice." Rest.2d, § 87(2). [65]
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.
VII. WHEN ACCEPTANCE BECOMES EFFECTIVE
A. Mailbox rule: In most courts, the
acceptance is effective upon proper dispatch. This is called the
"mailbox" rule. [67 - 71]
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.
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. [71 - 73]
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. [73]
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. [73]
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.
VIII. INDEFINITENESS
A. Generally: No contract will be
found if the terms of the parties' "agreement" are unduly
indefinite. (Example: A and B agree that B will buy widgets from A from time
to time. The parties do not decide anything about quantity, price, delivery,
etc. A court would probably find that even though A and B may have meant to
conclude a binding agreement, the absence of terms makes their agreement void
for indefiniteness.) [76]
1. Court supplies missing term: But
if the court believes that the parties intended to contract, and the court
believes that it can supply a "reasonable" value for the missing
term, it will generally do so. [77]
a. UCC: The UCC expressly allows
the court to fill in terms for price, place for delivery, time for
shipment, time for payment, etc., as long as the parties have intended to
make a contract. See § 2-204(3). The UCC also implies a
term requiring good faith in every contract for the sale of goods. § 1-203. [77 - 80]
c. Too
indefinite: But there may be situations where even though the parties
intended to create a binding contract, they have fleshed out the terms of
their deal so little that the court simply cannot meaningfully supply all
of the missing terms. In that case, the court will find the agreement void
for indefiniteness. (But this is rare.) [80 - 81]
2. Agreement to agree: Similarly,
the court will generally supply a missing term if the parties intentionally
leave that term to be agreed upon later, and they then don't agree. See,
e.g., UCC § 2-305(1)(b), which allows the court to
supply a reasonable price term if "the price is left to be agreed by
the parties and they fail to agree...." [81]
Example: A
contracts to make a suit for B, without specifying the type or color of
material to be used. This is probably unenforceable for indefiniteness when
made. But if A begins to make the suit with gray cotton cloth, and B raises
no objection, the indefiniteness will be cured by this part performance.
IX. MISUNDERSTANDING
A. General rule: If the parties have
a misunderstanding about what they are agreeing to, this may prevent them from
having the required "meeting of the minds," and thus prevent a
contract from existing. No contract will be formed if: (1) the parties each
have a different subjective belief about a term of the contract; (2) that term
is a material one; and (3) neither party knows or has reason to know of the
misunderstanding. [83 - 85]
Example: A offers to ship goods to B
on the steamer "Peerless." B accepts. Unknown to both, there are in
fact two steamships by this name. A intends to use the later one; B
subjectively intends to get shipment on the earlier one. Because both are in
subjective disagreement about the meaning of a material term, and neither has
reason to know of the disagreement, there is no contract. [Raffles v.
Wichelhaus]
1. Fault: Conversely, if one party
knows or should know that he has a different understanding as to the meaning
of an ambiguous term than the other, a contract will be formed on the term
as understood by the other (innocent) party.
Example: Same facts as above
example. This time, A knows or should know that there are two Peerlesses,
and knows or should know that B means the earlier one. B doesn't and
shouldn't know that there are two. A contract is formed for shipment on the
earlier (the one understood by B, the "innocent" party).
B. Offeree doesn't understand offer:
Where the offeree fails to understand or read the offer, a similar
"fault" system applies: [84 - 85]
2. Misrepresentation: But if the
offeree's misunderstanding is due to the offeror's misrepresentation of the
terms of the offer, and the offeror knows this, there is a contract on the
terms as understood by the offeree.
Chapter 3
CONSIDERATION
I. INTRODUCTION
A. Definition of consideration: As a
general rule, a contract will not be enforceable unless it is supported by
"consideration." (The few exceptions are treated in "Promises
binding without consideration" below.) A promise is supported by
consideration if: [95]
B. Uses of doctrine: The requirement
of consideration renders unenforceable two main types of transactions: [95 -
97]
II. THE BARGAIN ELEMENT
A. Promises to make gifts: A promise
to make a gift is generally unenforceable, because it lacks the
"bargain" element of consideration. [97 - 103]
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."
1. 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. [97
- 103]
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
pre-condition for her to get the gift. Therefore, his promise is
unenforceable for lack of consideration. [Kirksey v. Kirksey]
a. 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.
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."
2. 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. [103]
B. 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. [101]
1. Nominal amount: 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.
2. 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.
C. Promisee unaware: 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. [102]
D. "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. Thus promises to
pay a pre-existing debt, and promises to pay for services already received,
usually lack the "bargain" element (but these may be binding even
without consideration, as discussed below). [103 - 104]
III. THE "DETRIMENT" ELEMENT
A. 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.) [106]
1. 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.) [106]
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. [110 - 112]
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].
B. Pre-existing 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. [112]
1. Modification: This general rule
means that if parties to an existing contract agree to modify the contract
for the sole benefit for one of them, the modification will usually be
unenforceable at common law, for lack of consideration. Be on the lookout
for this scenario especially in construction cases. [112 - 115]
a. Restatement: The Second
Restatement, and most modern courts, follow this general rule, but they
make an exception where the modification is "fair and equitable in
view of circumstances not anticipated by the parties when the contract was
made."
2. Extra duties: Even under the
traditional pre-existing duty rule, if the party who promises to do what he
is already bound to do assumes the slightest additional duties (or even
different duties), his undertaking of these new duties does constitute the
required "detriment." [115]
3. UCC: For contracts for the sale
of goods, the UCC abolishes the pre-existing duty rule. Section 2-209(1) provides that "an
agreement modifying a contract¼needs no consideration to be binding."
But there must be good faith, and any no-oral-modification clause must be
complied with. [115]
4. Agreement to
accept part payment of debt: Some courts apply the pre-existing duty rule to
render unenforceable a creditor's promise not to require payment by his
debtor of the full debt. These courts also treat as unenforceable a
creditor's promise to allow the debtor extra time to pay. These courts
reason that the debtor already owes the money, and is therefore not
promising to do something he was not already required to do. This is known
as the rule of Foakes v. Beer. [116 - 118]
a. Modern trend: But the modern
trend is to abolish or limit the rule of Foakes v. Beer. For instance, the
UCC, in § 2-209(1), says that "an
agreement modifying a contract within this article needs no consideration
to be binding...." This seems to overrule Foakes v. Beer, and to make
a seller's promise to take partial payment in return for goods
enforceable.
b. Disputed debt:
Also, the rule of Foakes v. Beer applies only to debts where the parties
are in agreement about amount and liability, called "liquidated"
debts. If the debtor in good faith and reasonably disputes his liability,
or the amount of that liability, then a settlement by which the creditor
agrees to take less than he thinks is due is enforceable (even in courts
following the traditional Foakes v. Beer rule).
c. Cashing of
check tendered as settlement: Debtors sometimes send a check for less that
the amount due, and mark it "in full settlement." If the
creditor writes "In protest" on the check, but cashes it, the
UCC holds that the cashing normally constitutes an acceptance by the
creditor of the proposed settlement, and the creditor cannot sue for the
balance. § 3-311. [117]
5. Other settlements: Settlements
of other kinds of suits (e.g., tort suits) will generally be found to meet
the consideration requirement. But if the plaintiff surrenders a claim which
he knows is invalid, this will not be consideration, and the other party
need not pay. [119 - 120]
IV. ILLUSORY, ALTERNATIVE AND IMPLIED
PROMISES
A. Illusory promises: An
"illusory" promise is not supported by consideration, and is
therefore not enforceable. An illusory promise is a statement which appears to
be promising something, but which in fact does not commit the promisor to do
anything at all. [124 - 129]
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.
a. Unfettered right: 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. Implied promises: 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. [128 -
129]
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.
Held, for P - P can be impliedly
found to have promised to use reasonable efforts to market D's designs, thus
furnishing consideration for D's counter-promise. [Wood v. Lucy, Lady Duff Gordon].
Chapter 4
PROMISES BINDING WITHOUT CONSIDERATION
I. PROMISES TO PAY PAST DEBTS
A. General rule: Most states enforce
a promise to pay a past debt, even though no consideration for the promise is
given. Thus promises to pay debts that have been discharged by bankruptcy, or
that are no longer collectible because of the statute of limitations, are
enforceable in most states. [142 - 143]
II. PROMISE TO PAY FOR BENEFITS
RECEIVED
A. Generally: A promise to pay for
benefits or services one has previously received will generally be enforceable
even without consideration. This is especially likely where the services were
requested, or where the services were furnished without request in an
emergency. [143 - 145]
III. OTHER CONTRACTS BINDING WITHOUT
CONSIDERATION
A. Modification of sales contracts:
Under the UCC, a modification of a contract for the sale of goods is binding
without consideration. See § 2-209. [146] (Example: A contracts
to supply 100 widgets to B at $4 a piece. Before shipment, A says, "My
costs have gone up; I'll have to charge you $5." B agrees. Under UCC §
2-209, this modification is enforceable, even though B received no
consideration for promising to pay the higher price.)
1. No-oral-modification clauses:
But a "no oral modifications" clause in a sales contract will
normally be enforced. (Example: On the facts of the above example, if the
original contract between A and B said that any modification must be in
writing, B's promise to pay the higher price would be enforceable only if in
writing.)
B. Option contracts: Recall that
option contracts are sometimes enforceable without consideration. Thus an
offer that purports to be enforceable, and that falsely recites that
consideration was paid for the irrevocability, will be enforced in most
courts. Also, remember that UCC § 2-205 renders enforceable
"firm offers" under certain circumstances. [148]
C. Guaranties: In
most states, a guaranty (that is, a promise to pay the debts of another) will
be enforced without consideration. Generally, the guarantee must be in
writing, and must state that consideration has been paid (though the
consideration does not in fact have to have been paid). [148 - 149]
IV. PROMISSORY ESTOPPEL
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." [151]
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. Actual reliance: The promisee
must actually rely on the promise. (Example: On the facts of the above
example, B must show that without A's promise, B would not have quit his job
and attended college.) [153]
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.) [154]
3. Gratuitous bailments and
agencies: If a person promises to take care of another's property (a
"gratuitous bailment") or promises to carry out an act as another
person's agent (gratuitous agency), the promisor may be held liable under
P.E. if he does not perform at all. (However, courts are hesitant to apply
P.E. to promises to procure insurance for another.) [155]
4. 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 sub-bid temporarily irrevocable. [156]
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. [Grouse v. Group Health Plan]
Example: A, owner
of a shopping mall, promises that it will negotiate a lease for particular
space with B, a tenant. B rejects an offer of space from another landlord. A
then leases the space to one of B's competitors for a higher rent. A court
might apply P.E., by holding that A implicitly promised to use good faith in
the negotiations and breached that promise.
a. Promises of franchise: The use
of P.E. to protect negotiating parties is especially likely where the
promise is a promise by a national corporation to award a franchise to the
other party. (Example: P, a national company that runs a fast food chain,
promises B a franchise. B quits his job and undergoes expensive training
in the restaurant business. If A then refuses to award the franchise, a
court might use P.E. to enforce the promise, at least to the extent of
reimbursing B for his lost job and training expenses.)
C. 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. [161 - 162]
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 equaling profits that B would have made from
the franchise.
Chapter 5
MISTAKE
I. MISTAKE GENERALLY
Example: If Buyer and Seller both
think that a stone is an emerald when it is in fact a topaz, this is a
mistake. But if Buyer and Seller both think that the price of oil will
remain relatively stable over the next five years, and in fact it goes up by
50% per year, this is not a mistake, since it does not relate to existing
fact.
II. MUTUAL MISTAKE
A. Three requirements for avoidance:
Three requirements must be satisfied before the adversely-affected party may
avoid the contract on account of mutual mistake: [169 - 170]
2. Material effect: The mistake
must have a material effect on the "agreed exchange of
performance." (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.)
3. Risk: The adversely-affected
party (the one seeking to avoid the contract) must not be the one on whom
the contract has implicitly imposed the risk of the mistake. Often, the
contract does not make it clear which party is to bear the risk of a certain
type of mistake, so the court allocates this risk in the manner that it
finds to be "reasonable" in the circumstances.
1. Market conditions: 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.) [171]
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.
3. 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 Stradivarius when
in fact it is an almost worthless imitation, this will be a mistake on a
basic assumption, and Buyer can avoid the contract.) [171 - 172]
4. 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). [174]
5. 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. [174]
III. UNILATERAL MISTAKE
A. Modern view: Where the mistake is
unilateral, it is more difficult for the mistaken party to avoid the contract
than in the mutual mistake situation. The mistaken party must make the same
three showings as for mutual mistake (basic assumption, material effect, and
risk on the other party), plus must show either that: [176 - 178]
B. 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. [177 - 178]
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. (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.)
IV. DEFENSES AND REMEDIES
A. Negligence: Where a party seeks to
avoid the contract because of his own (or both parties') mistake, the fact
that the mistake was due to his negligence will ordinarily not prevent relief.
1. Avoidance: The most common
remedy is avoidance of the contract (sometimes called
"rescission"). Here, the court treats the contract as if it has
never been made, and attempts to return each party to the position he was in
just before the contract was signed. (Generally, restitution will be ordered
- each party will return the benefits he has received from the other.)
V. REFORMATION AS REMEDY FOR ERROR IN
EXPRESSION
A. Generally: If the parties orally
agree on a deal, but mistakenly prepare and execute a document which
incorrectly reflects the oral agreement, either party may obtain a court order
for reformation (i.e., a re-writing of the document). [181 - 182]
Example: Seller orally agrees to sell
Blackacre to Buyer for $100,000. Their oral deal includes a provision that
Buyer will also assume an existing mortgage of $50,000. The written agreement
neglects the assumption provision. At either party's request, the court will
reform the document so that it includes the assumption provision.
Chapter 6
PAROL EVIDENCE AND INTERPRETATION
I. PAROL EVIDENCE RULE GENERALLY
A. What the rule does: The parol
evidence rule limits the extent to which a party may establish that
discussions or writings prior to the signed written contract should be taken
as part of the agreement. In some circumstances, the rule bars the fact-finder
from considering any evidence of certain preliminary agreements that are not
contained in the final writing, even though this evidence might show that the
preliminary agreement did in fact take place and that the parties intended it
to remain part of their deal despite its absence from the writing. [186 - 187]
II. TOTAL AND PARTIAL INTEGRATIONS
1. "Integration": A
document is said to be an "integration" of the parties' agreement
if it is intended as the final expression of the agreement. (The parol
evidence rule applies only to documents which are "integrations,"
i.e., final expressions of agreement.)
3. Summary: Putting the two
sub-parts together, the parol evidence rule provides that evidence of a
prior agreement may never be admitted to contradict an integrated writing,
and may furthermore not even supplement an integration which is intended to
be complete.
4. Prior writings and oral
agreements: The parol evidence rule applies to oral agreements and
discussions that occur prior to a signing of an integration. It also applies
to writings created prior to an integration (e.g., draft agreements that
were not intended to be final expressions of agreement). [188]
5. 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.
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.
C. UCC: Section 2-202 of the UCC essentially follows the
common-law parol evidence rule as summarized above. [192 - 193]
III. ROLES OF JUDGE AND JURY
A. Preliminary determinations made by
judge: Nearly all courts hold that the judge, not the jury, decides: (1)
whether the writing was intended as an integration; (2) if so, whether the
integration is "partial" or "total"; and (3) whether
particular evidence would supplement the terms of a complete integration.
[195]
1. Conflicting views: Courts
disagree about how the judge should make these decisions. Two extreme
positions are: (1) the "four corners" rule, by which the judge
decides whether there is an integration, and whether it is total or partial,
by looking solely at the document; and (2) the "Corbin" view, by
which these questions are to be answered by looking at all available
evidence, including testimony, to determine the actual intention of the
parties. [195 - 197]
2. Merger clause: Most contracts
contain a "merger" clause, i.e., a clause stating that the writing
constitutes the sole agreement between the parties. The presence of such a
clause makes it more likely that the court will find the writing to have
been intended as a total integration (in which case not even consistent
additional prior oral or written terms may be shown). [195]
IV. SITUATIONS WHERE PAROL EVIDENCE
RULE DOES NOT APPLY
A. Fraud, mistake or other
voidability: Even if a writing is a total integration, a party may always
introduce evidence of earlier oral agreements to show illegality, fraud,
duress, mistake, lack of consideration, or any other fact that would make the
contract void or voidable. In other words, the parol evidence rule never
prevents the introduction of evidence that would show that no valid contract
exists or that the contract is voidable. [198]
Example: In order to induce Buyer to
buy a rental property, Seller lies about the profitability of the property.
The parties then sign a sale contract that contains a standard
"merger" clause, reciting that the contract constitutes the sole
agreement between the parties. The parol evidence rule will not prevent Buyer
from showing that Seller made fraudulent misrepresentations to induce him to
enter into the contract.
Example: On the facts of the above
example, suppose that the contract stated, "Seller has made no
representations or warranties regarding the profitability of the property,
and Buyer has relied solely on his own investigation as to
profitability." Some courts - though probably a minority - would
prohibit Buyer from showing that Seller in fact made fraudulent
misrepresentations about profitability.
B. Existence of a condition: If the
parties orally agree on a condition to the enforceability of the contract, or
to the duty of one of them, but this condition is then not included in the
writing, courts generally allow proof of this condition despite the parol
evidence rule. [199 - 200]
Example: A and B agree that A will
sell a patent to B for $10,000 if C, an engineer advising B, approves. A and B
sign a written agreement that seems to be complete, except that the contract
does not mention C's approval. Nearly all courts would allow B to prove that
the oral agreement regarding approval was in fact made.
C. Collateral agreements: An oral
agreement that is supported by separate consideration may be demonstrated,
even though it occurred prior to what seems to be a total integration. [200]
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.
D. Subsequent transactions: Recall
that the parol evidence rule never bars evidence that after the signing of the
writing, the parties orally or in writing agreed to modify or rescind the
writing. [200]
V. INTERPRETATION
A. Modern view: Most courts today
allow parties to introduce extrinsic evidence to aid in the interpretation of
a contract, even if the writing is an integration. That is, parties are
generally allowed to introduce evidence of what they subjectively thought the
terms in a writing meant, even if the writing is an integration. [201 - 203]
B. Maxims of interpretation: There
are a number of "maxims" that courts use in deciding which of two
conflicting interpretations of a clause should be followed: [203]
2. All terms made reasonable,
lawful and effective: All terms will be interpreted, where possible, so that
they will have a reasonable, lawful and effective meaning.
4. Negotiated terms control
standard terms: 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"). (Example: A clause that has
been typewritten in as a "rider" to a pre-printed form contract,
or a clause that has been handwritten onto a typewritten, agreement, will
have priority.)
VI. TRADE USAGE, COURSE OF PERFORMANCE,
AND COURSE OF DEALING
A. Definitions: 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: [204 - 206]
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 § 1-205(2). Thus the meaning attached
to a particular term in a certain region, or in a certain industry, would be
admissible.
B. 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. [205 - 206]
1. Contradiction of express terms:
But these customs may not be used to contradict the express terms of a
contract. See UCC § 2-208(2). 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 §§ 2-208(2) and 1-205. [206]
VII. OMITTED TERMS SUPPLIED BY COURT
A. Generally: Courts will generally
supply a missing term (that is, a term as to which the contract documents are
silent) if it is apparent that the parties wanted to bind themselves, and
there is a reasonable way for the court to go about formulating the missing
term. Here are some examples: [206]
3. Termination of dealership or
franchise: Some but not all courts will supply a term to prevent one party
from arbitrarily terminating a franchise or dealership arrangement.
Sometimes, the court will refuse to allow termination except for cause. More
commonly, courts will find an implied requirement of a reasonable notice
prior to termination. [208]
4. Termination of employment
contract: A strong minority of courts now find that an at-will employment
contract contains an implied term prohibiting the employer from terminating
the arrangement in bad faith. In these courts, an employer may not terminate
an at-will arrangement in order to deprive the employee of a pension, to
retaliate for the employee's refusal to commit wrongdoing at the employer's
urging, or for other bad faith reasons. [208 - 211]
Chapter 7
CONDITIONS, BREACH AND OTHER ASPECTS OF PERFORMANCE
I. CONDITIONS GENERALLY
A. Definition of
"condition": An event which must occur before a particular
performance is due is called a "condition" of that performance.
[215]
Example: Seller promises to ship
Buyer 100 widgets. Buyer promises to pay for the widgets within 30 days of
receipt. The parties agree that if the widgets don't meet Buyer's specs, he
may return them and he will not have
to pay for them. It is a condition of Buyer's duty of payment that the widgets
be shipped, and that they meet his specifications. Buyer's duty is said to be
conditional on the shipment of satisfactory widgets.
1. Concurrent: A concurrent
condition is a particular kind of condition precedent which exists only when
the parties to a contract are to exchange performances at the same time.
(Example: A promises to deliver his car to B on a certain date, at which
time B is to pay for the car. Delivery and payment are "concurrent
conditions," since performance by both is to be rendered
simultaneously.) Concurrent conditions are found most frequently in
contracts for the sale of goods and contracts for the conveyance of land.
2. Express and constructive
conditions: If the parties explicitly agree that a duty is conditional upon
the happening of some event, that event is an "express" condition.
If, instead, the happening of an event is made a condition of a duty because
a court so determines, the condition is a "constructive" one (or a
condition "implied in law"). [217 - 218]
Example of express condition: A is
to ship widgets to B, and B agrees to either return them if they don't
satisfy her, or pay for them. The contract states, "B's duty to pay for
the widgets shall be conditional upon her being satisfied with them."
This is an express condition.
Example of constructive condition:
Same facts as above example - A contracts to ship widgets to B, and B agrees
to either return the widgets as unsatisfactory, or pay for them. No language
of condition is used in the agreement. As a matter of common law (or the
UCC), the court will impose a constructive condition: B's duty to pay for
the widgets will be constructively conditioned upon her receiving them and
being satisfied with them.
B. Distinction between conditions and
promises: The fact that an act is a condition does not by itself make it also
a promise. If the act is a condition on the other party's duty, and the act
fails to occur, the other party won't have to perform. If the act is a
promise, and it doesn't occur, the other party can sue for damages. But the
two don't automatically go together. [218 - 220]
Example: Landlord promises Tenant
that Landlord will make any necessary repairs on the leased premises, provided
that Tenant gives him notice of the need for such repairs. Tenant's giving
notice of the needed repairs is an express condition to Landlord's duty to
perform the repairs. But such notice is not a promise by Tenant.
Therefore, if Tenant does not give
the notice, he has not committed any breach of contract, but a condition to
Landlord's duty has failed to occur. Landlord is relieved from having to make
the repairs, but cannot sue Tenant for breach.
1. Distinguishing: To determine
whether a particular act is a condition, a promise, or both, the main factor
is the intent of the parties. Words like "upon condition that"
indicate an intent that the act be a condition; words like "I
promise" or "I warrant" indicate a promise (though as
described below, failure to keep the promise will also generally constitute
the failure of a constructive condition.)
II. EXPRESS CONDITIONS
A. Strict compliance: Strict
compliance with an express condition is ordinarily required. [221 - 224]
Example: A contracts to sell his
house to B for $100,000. The contract provides that B's duty to consummate the
purchase is "conditional upon B's receiving a mortgage for at least
$80,000 at an interest rate no higher than 9%." If the best mortgage B is
able to obtain, after reasonable effort, is at 9.25%, the court will probably
hold that B is not obligated to close, since the condition is an express one,
and strict compliance with express conditions is ordinarily required.
1. Avoidance of forfeiture:
However, courts often avoid applying the "strict compliance" rule
where a forfeiture would result. A forfeiture occurs when one party has
relied on the bargain (e.g., by preparing to perform or by making part
performance), and insistence on strict compliance with the condition would
cause him to fail to receive the expected benefits from the deal.
Example: A contracts to build a
house for B on land owned by B, for a price of $100,000. The contract
provides that "B's duty to pay for the house is expressly conditional
upon the finished house exactly matching the specifications of B's
architect." A builds the house in general accordance with the
specifications, but the living room is six inches shorter than shown on the
plans, a deviation which does not noticeably affect the market value of the
house.
Despite the rule that strict
compliance with an express condition is ordinarily required, the court would
probably hold that strict enforcement here would amount to a forfeiture, and
would therefore hold that the condition was satisfied despite the trivial
defect.
a. Excuse of condition:
Alternatively, a court may find that the fulfillment of the express
condition is "excused" where extreme forfeiture would occur.
This will only be done, however, if the damage to the other party's
expectations from non-occurrence of the condition is relatively minor.
(Example: On the facts of the above example, the damage to B's
expectations from the short living room is very small, so the court would
probably excuse the non-occurrence of the condition.)
B. Satisfaction of a party: If a
contract makes one party's duty to perform expressly conditional on that
party's being satisfied with the other's performance, the court will usually
presume that an objective standard of "reasonable" satisfaction was
meant. [224 - 225]
1. Subjective: But it is the intent
of the parties that controls here: If the parties clearly intend that one
party's subjective satisfaction should control, the court will honor that
intent. This is likely to be true, for instance, where the bargain clearly
involves the tastes of a person. Here, good-faith but unreasonable
dissatisfaction will still count as the non-occurrence of the condition.
C. Satisfaction of third person: If
the duty of performance is expressly conditioned on the satisfaction of some
independent third party (e.g., an architect or other professional), the third
party's subjective judgment usually controls. But this judgment must be made
in good faith. [225]
III. CONSTRUCTIVE CONDITIONS
A. Use in bilateral conditions:
Remember that a constructive condition is a condition which is not agreed upon
by the parties, but which is supplied by the court for fairness. The principal
use of constructive conditions is in bilateral contracts (where each party
makes a promise to the other). [227 - 228]
Example: Contractor agrees to build
a house for Owner for $100,000. The contract provides that Owner will pay
$10,000 upon completion of the foundation, and provides a schedule on which
the work is to proceed. No language of condition is used anywhere in the
document. Contractor builds the foundation on schedule, but Owner without
cause refuses to pay the $10,000 charge.
Owner's fulfillment of his promise
- to pay $10,000 - is a constructive condition of Contractor's duty to
continue with the work. Therefore, Contractor does not have to continue with
the work until Owner pays the $10,000, even though the contract does not
expressly make Contractor's duty of continuation conditional upon Owner's
making the first payment. The court simply supplies this "constructive
condition" for fairness, reasoning that Contractor shouldn't have to
keep doing work if Owner hasn't been keeping his part of the bargain.
B. Order of performance: Be careful
to interpret the contract to determine the order in which the parties'
performances are to occur. [228 - 232]
2. Periodic alternating: The
parties may agree that their performances shall alternate. This is true of
most installment contracts. Here, a series of alternating constructive
conditions arises: each party's obligation to perform his duty is
constructively conditioned on the other's having performed the prior duty.
It's therefore important to decide who was the first to fail to
substantially perform, since that failure of substantial performance is the
non-occurrence of a constructive condition of the other party's subsequent
duty. [228 - 229]
a. Only one party's work requires
time: Where the performance of one party requires a period of time, and
the other's does not, the performance requiring time must ordinarily occur
first, and its performance is a constructive condition to the other
party's performance. This applies to contracts for services - a party who
is to perform work must usually substantially complete the work before he
may receive payment if the parties do not otherwise agree.
b. Sales of goods and land: If
each party's promised performance can occur at the same time as the
other's, the court will normally require that the two occur
simultaneously, in which case the two performances are "concurrent
conditions." This applies to sales of goods and land.
i. Tender of performance:
Courts express this by saying that where the two performances are
concurrent, each party must "tender" (i.e., conditionally
offer) performance to the other. See UCC §§ 2-507(1) and 2-511(1).
Example: Seller
contracts to sell Blackacre to Buyer. The closing is to take place on
July 1, at which time Seller will deliver a deed to the property free
and clear of liens, and Buyer will deliver a certified check for
$100,000. Since each performance can occur simultaneously, the court
will presume that simultaneity is what the parties intended.
Therefore, on
July 1, Seller's duty to deliver the deed will be conditional upon
Buyer's coming forward with the certified check, and Buyer's duty to
come forward with the check will be conditional upon Seller's tendering
the deed. If Seller fails to show up with a proper deed, Buyer will not
be able to sue Seller for breach unless Buyer shows that he tendered the
certified check, i.e., had the check in his possession and arrived at
the place of closing with it.
C. Independent or dependent promises:
In the normal bilateral contract, the court will presume that the promises are
in exchange for each other. That is, the court will treat the promises as
being mutually dependent, so that each party's duty is constructively
conditional upon the other's substantial performance of all previous duties.
[232 - 233]
1. Independent promises: But in a
few situations, circumstances may indicate that the promises are intended to
be independent of each other. Here, the court will not apply the theory of
constructive conditions.
a. Real estate leases: For
instance, promises in the typical real estate lease are generally
construed as being independent of each other. Thus a tenant's promise to
pay rent, and a landlord's return-promise to make repairs, are treated as
independent, so if the landlord does not make the repairs, the tenant
cannot refuse to pay the rent (though he can of course sue for damages).
But a growing minority of courts have rejected this rule of independence.
D. Divisible contracts: A divisible
contract is one in which both parties have divided up their performance into
units or installments, in such a way that each part performance is roughly the
compensation for a corresponding part performance by the other party. If a
contract is found to be divisible, it will for purposes of constructive
conditions be treated as a series of separate contracts. [233 - 236]
1. Significance: If the contract is
found to be divisible, here's the significance: if one party partly
performs, the other will have to make part payment. If the contract is not
divisible, then the non-breaching party won't have to pay anything at all
(at least under the contract).
Example: In a single document,
Contractor agrees to build a deck for Owner and renovate Owner's kitchen.
The contract lists a price of $30,000 for the renovation and $20,000 for the
deck. Payment on the entire contract is due when all work is done.
Contractor completes the deck but never even starts on the kitchen.
If the contract is found to be
divisible into two parts, Owner will be required to pay $20,000 for the deck
even though he never gets the kitchen. If the contract is not divisible,
Contractor will be found to not have substantially performed the whole, and
he will not be able to recover on the contract for the work on the deck
(though he will be able to recover the fair value of what he has done on a
quasi-contract or restitution theory).
2. Test for divisibility: A
contract is divisible if it can be "apportioned into corresponding
pairs of part performances so that the parts of each pair are properly
regarded as agreed equivalents.¼" (Example: On the facts of the above
example, a court would probably find that the parties implicitly agreed that
$20,000 would be an agreed equivalent for the deck and $30,000 for the
kitchen. Therefore, the court would probably find that the contract was
divisible.) [233 - 236]
a. Employment contracts: Most
employment contracts are looked on as being divisible. Usually, the
contract will be divided into lengths of time equal to the time between
payments. Thus if the employee is paid by the week, the contract will be
divided into one-week "sub-contracts"; payment for a particular
week will be constructively conditioned only on the employee's having
worked that week, not on his having fulfilled the entire contract.
b. Fairness: The court will not
find a contract to be divisible if this would be unfair to the
non-breaching party. For instance, even though the contract recites
separate prices for different part performances, requiring the
non-breaching party to pay the full stated price for the part performance
received may deprive him of fair value.
Example: A construction contract
requires Owner to pay one-tenth of the contract price for each of 10 weeks
of estimated work. The first week, Contractor does everything scheduled
for that week, but the scheduling is very light, consisting mainly of site
preparation. If Contractor breaches after the first week, the court will
probably not find the contract divisible, since a finding of divisibility
would require Owner to pay one-tenth of the contract price for performance
that represents less than one-tenth of the full job.
IV. SUBSTANTIAL PERFORMANCE
A. Doctrine generally: Recall that it
is a constructive condition to a party's duty of performance 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. [238]
B. Suspension followed by discharge:
If a party fails to substantially perform, but the defects could be fairly
easily cured, the other party's duty to give a return performance is merely
suspended; the defaulter then has a chance to cure his defective performance.
If, on the other hand, the defect is so substantial that it cannot be cured
within a reasonable time, or if the defaulter fails to take advantage of a
chance to cure, the other party is then completely discharged, and may also
sue for breach. [238]
C. Factors regarding materiality:
Here are some factors that help determine whether a breach is material (i.e.,
whether the breaching party has nonetheless substantially performed): [239 -
241]
2. Part performance: The greater
the part of the performance which has been rendered, the less likely it is
that a breach will be deemed material. Thus a breach occurring at the very
beginning of the contract is more likely to be deemed material than the same
"size" breach coming near the end. [239]
5. Delay: A delay, even a
substantial one, will not necessarily constitute a lack of substantial
performance. The presumption is that time is not "of the essence"
unless the contract so states, or other circumstances make the need for
promptness apparent. (Even if the contract does contain a "time is of
the essence" clause, a short delay will not be deemed
"material" unless the circumstances show that the delay seriously
damaged the other party.) [240 - 241]
D. Material breach in contracts for
the sale of goods: The UCC imposes special rules governing what constitutes
substantial performance by a seller of goods (and thus when a buyer can reject
the goods). [241 - 249]
1. "Perfect tender" rule:
UCC § 2-601 says that as long as the
contract does not involve installments (i.e., multiple deliveries),
"Unless otherwise agreed ... if the goods or tender of delivery fail in
any respect to conform to the contract, the buyer may (a) reject the whole;
or (b) accept the whole; or (c) accept any commercial unit or units and
reject the rest." On its face, this section seems to impose the
"perfect tender" rule - that is, it seems to give the buyer the
right to cancel the contract, and refuse to pay, if the goods deviate from
the contract terms in any respect, no matter how slight. [241]
a. Not so strict: But in reality,
there are loopholes in this "perfect tender" rule. Courts
usually only allow buyers to reject the seller's delivery if the defect is
a substantial one. Also, the buyer must follow strict procedures for
rejecting the delivery, and the seller generally has the right to
"cure" the defect. See below.
2. Mechanics of rejection: The
buyer may "reject" any non-conforming delivery from the seller. As
noted, in theory this right exists if the goods deviate in any respect from
what is required under the contract. But the buyer's right of rejection is
subject to some fairly strict procedural rules: [245 - 246]
b. Must not be
preceded by acceptance: The buyer can only reject if he has not previously
"accepted" the goods. He will be deemed to have
"accepted" them if either: (1) after a reasonable opportunity to
inspect, buyer has indicated
to the seller that the goods are conforming or that he will keep them
despite non-conformity; or (2) buyer fails to make a timely rejection
(though this cannot happen until buyer has had a reasonable inspection
opportunity); or (3) buyer does "any act inconsistent with the
seller's ownership" (e.g., using the goods as part of a manufacturing
process). See § 2-606(1).
3. Revocation of acceptance: Even
if the buyer has "accepted" the goods, if he then discovers a
defect he may be able to revoke his acceptance. If he revokes, the result is
the same as if he had never accepted - he can throw the goods back on the
seller and refuse to pay. [246]
a. Revocation vs. rejection: The
buyer who wants to revoke an acceptance must make a stronger showing of
non-conformity than the buyer who rejects - the revoker must show that the
non-conformity "substantially impairs" the value of the goods,
whereas the rejecter must merely show that the goods fail to conform
"in any respect." On the other hand, a buyer probably gets more
time to revoke than to reject.
a. Beyond contract: Even after
the time for performance under the contract has passed, the seller has a
limited right to cure: he gets additional time to cure once the time for
delivery under the contract has passed, if he reasonably thought that
either: (1) the goods, though non-conforming, would be acceptable to the
buyer; or (2) the buyer would be satisfied with a money allowance. See UCC § 2-508(2).
5. Installment contracts: The Code
is more lenient to sellers under installment contracts (i.e., contracts
calling for several deliveries) than in single delivery contracts. In the
case of an installment contract, "the buyer may reject any installment
which is non-conforming if the non-conformity substantially impairs the
value of that installment and cannot be cured...." § 2-612(2). So a slight non-conformity
in one installment does not allow the buyer to reject it, as he could in a
single-delivery contract. [245]
Example: Seller
contracts to deliver a computer, as well as a customized disk drive to
work in the computer. Buyer's application requires both parts to work
successfully. Seller delivers a defective disk drive and fails to cure.
Buyer can probably cancel the whole contract, since the defect in the disk
drive substantially impairs the value of the whole contract, including the
computer, to him.
V. EXCUSE OF CONDITIONS
A. Introduction: In some instances,
the non-occurrence of a condition is "excused," so that the other
party nonetheless must perform. [251]
B. Hindrance: Where one party's duty
is conditional on an event, and that same party's wrongful conduct prevents
the occurrence of the condition, the non-occurrence of the condition is
excused, and the party must perform despite the non-occurrence. [251 - 253]
Example: P agrees to live with D,
his grandmother, and to care for her for the rest of her life, in return for
D's promise to leave P $100,000 in D's will. P lives with D for seven years,
at the end of which D unreasonably forces P to leave the house. Five years
later, D dies. P will be able to recover the $100,000, even though he did
not live with D for the rest of her life. The reason is that the
non-occurrence of the condition - caring for D for the rest of her life -
was excused by D's failure to cooperate.
C. Waiver: A party who owes a
conditional duty may indicate that he will not insist upon the occurrence of
the condition before performing. A court will often take the party at his
word, and enforce that party's willingness to forego the benefit of the
condition. In this event, the party is said to have waived the condition. [253
- 257]
Example: Insurer insures Owner's
house for fire; Insurer's duty to pay a claim is expressly conditional upon
notice by Owner within seven days of any fire. Owner gives notice three
weeks after a fire. Insurer sends an adjuster, attempts to make a
settlement, and otherwise behaves as if it is not insisting on strict
compliance with the notice provision. This continuation of performance will
probably be found to be a waiver of the timely-notice condition.
a. Right to damages not lost:
When a party continues his own performance after breach, or otherwise
waives a condition, he has not necessarily lost his right to recover
damages for breach of the condition. [256]
VI. REPUDIATION AND PROSPECTIVE
INABILITY TO PERFORM
A. General effect of prospective
breach: If a party indicates that he will subsequently be unable or unwilling
to perform, this will act as the non-occurrence of a constructive condition,
in the same way as a present material breach does. In other words, the other
party has the right to suspend his own performance. [260]
1. Distinction: Where the party
indicates that he will refuse to perform, this is called an
"anticipatory repudiation" of the contract. If he indicates that
he would like to perform but will be unable to do so, this is an indication
of "prospective inability to perform" but not repudiation;
however, the consequence is still that the other party may suspend
performance. [260]
B. Insolvency or financial inability:
If a party is insolvent or otherwise financially incapable of performing, this
will entitle the other party to stop performance.
1. Cancellation: If the prospective
inability or unwillingness to perform is certain or almost certain, the
other party can not only suspend her performance, but can actually cancel
the contract. But where it is not so clear whether the first party will be
unable or unwilling to perform, the other party may only suspend
performance.
C. Right to adequate assurance of
performance: If a party's conduct or words don't constitute an outright
repudiation, but merely suggest that that party may not perform, the other
party may demand assurances that the first party will perform. If the first
party fails to provide these assurances, this failure will itself be
considered a repudiation, entitling the innocent party to cancel. [261 - 264]
1. UCC: Thus UCC § 2-609(1) provides that "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." [261]
Example: Buyer
places two orders (separate contracts) with Seller, one for shipment on July
1 and the other for shipment on September 1. Each shipment is to be paid for
within 30 days. Seller ships the first order promptly, and by August 28 the
bill is almost one month past due.
Seller may in
writing demand assurances that Buyer will pay for both the first order and
the second order in a timely fashion. If Buyer fails to respond, Seller may
cancel the second contract, and sue for breach of both. But if Buyer
furnishes reasonable assurances - as by demonstrating that non-payment of
the first invoice was a clerical omission, and immediately rectifying it -
Seller must reinstate the second contract.
Chapter 8
ANTICIPATORY REPUDIATION AND OTHER ASPECTS OF BREACH
I. 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. All states except
Massachusetts allow the victim of such an anticipatory repudiation to sue
before the repudiator's time for performance has arrived. This is sometimes
called the rule of Hochster v. De La Tour. [271]
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 occurs whenever a party clearly indicates that he
cannot or will not perform his contractual duty. [272 - 274]
1. Statement: Sometimes, the
repudiation takes the form of a 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. (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.) [272 - 273]
2. Voluntary actions: The
repudiation may occur by means of an act by the promisor that makes his
performance impossible. (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.) [273]
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. [273]
a. Insolvency: The promisor's
insolvency usually is not considered to be the type of anticipatory
repudiation that allows the other party to sue immediately for breach. 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.
II. OTHER ASPECTS OF REPUDIATION
A. Repudiation after performance is
due: Similar rules apply where a party's time for performance becomes due, and
the party then repudiates (i.e., he indicates by word or deed that he cannot
or will not perform). Here, even though the repudiation is not
"anticipatory," the other party may cancel the contract and bring an
immediate suit for breach, just as in the anticipatory situation. [275]
B. Retraction of repudiation: A
repudiation (whether anticipatory or occurring after the time for performance)
may normally be retracted until some event occurs to make the repudiation
final.
C. Mitigation required: After a
repudiation occurs, the repudiatee may not simply ignore the repudiation and
continue the contract, if this would aggravate her damages. That is, the
repudiatee must mitigate her damages by securing an alternative contract, if
one is reasonably available. If she does not do this, she cannot recover the
damages that could have been avoided. [276 - 277]
D. Repudiation ignored, then sued on:
Most courts hold that the repudiatee may insist on performance, at least for a
while, rather than canceling the contract. Then, if the repudiator fails to
retract the repudiation, the repudiatee may sue without being held to have
waived any rights. [277]
E. Unilateral obligation to pay
money: If the repudiatee does not owe any performance at the time of the
repudiation, he is generally not permitted to bring an immediate suit for
anticipatory repudiation; instead, he must wait until the time for the other
party's performance is due. The reason is that the ordinary rule allowing
immediate suit is designed to give the innocent party a chance to avoid having
to render his own performance; where the innocent party does not owe any
performance, the rationale does not apply. [278 - 279]
Example: The tycoon Donald Tramp
contracts to repay to Bank a $100 million loan, repayment to occur July 1.
On June 1, Tramp declares publicly, "I won't be paying Bank back on
July 1. Let 'em sue me." Because Bank does not owe any further
performance under the contract (it's already made the loan), Bank may not
sue Tramp until July 1 arrives and the payment is not made.
2. Installments: This also means
that if a debtor fails to pay a particular installment of a debt, and says
that he will not make later payments, the creditor cannot bring suit for
those later installments until they fall due. But lenders ordinarily avoid
this problem by inserting an "acceleration clause" into the loan
agreement, by which failure to pay one installment in a timely manner causes
all later installments to become immediately due; such acceleration clauses
are enforceable.
F. UCC damages for repudiation: Pay
special attention to damages suffered by a buyer under a contract for the sale
of goods, where the seller has anticipatorily repudiated the contract. UCC § 2-713(1) says that "the measure
of damages for...repudiation by the seller is the difference between the
market price at the time when the buyer learned of the breach and the contract
price, together with any incidental and consequential damages." [279 -
280]
Chapter 9
STATUTE OF FRAUDS
I. INTRODUCTION
A. Nature of Statute of Frauds: Most
contracts are valid despite the fact that they 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 Statute of Frauds is pretty much identical from
state to state. [284 - 285]
B. Five categories: There are five
categories of contracts which, in almost every state, fall with the Statute of
Frauds and must therefore be in writing: [285]
II. SURETYSHIP
A. General rule: A promise to pay the
debt or duty of another is within the Statute of Frauds, and is therefore
unenforceable unless in writing. [285 - 289]
B. Main purpose rule: If the
promisor's chief purpose in making his promise of suretyship is to further his
own interest, his promise does not fall within the Statute of Frauds. This is
called the "main purpose" rule. [289 - 290]
Example: Contractor contracts to
build a house for Owner. In order to obtain the necessary supplies, Contractor
seeks to procure them on credit from Supplier. Supplier is unwilling to look
solely to Contractor's credit. Owner, in order to get the house built, orally
promises Supplier that if Contractor does not pay the bill, Owner will make
good on it. Because Owner's main purpose in giving the guarantee is to further
his own economic interest - getting the house built - his promise does not
fall within the suretyship provision, and is therefore not required to meet
the Statute of Frauds. So it is enforceable even though oral.
III. THE MARRIAGE PROVISION
A. Contract made upon consideration
of marriage: A promise for which the consideration is marriage or a promise of
marriage is within the Statute. [291 - 292]
Example: Tycoon says to Starlet, his
girlfriend, "If you will promise to marry me, I'll transfer to you title
to my Malibu beach home even before our marriage." Starlet replies,
"It's a deal." No document is signed. If Tycoon changes his mind,
Starlet cannot sue to enforce either the promise of marriage or the promise to
convey the beach house, since the consideration for both of these promises was
her return promise to marry Tycoon. Conversely, if Starlet changes her mind,
Tycoon cannot sue for breach either.
1. Exception for mutual promises to
marry: But if an oral contract consists solely of mutual promises to marry
(with no ancillary promises regarding property transfers), the contract is
not within the Statute of Frauds, and is enforceable even though oral. That
is, an ordinary oral engagement is an enforceable contract.
IV. THE LAND CONTRACT PROVISION
A. 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. [292
- 294]
Example: O, 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, O cannot sue for breach.
Conversely, if O refuses to make the conveyance even though A tenders the
money, A cannot sue O for breach.
B. 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. [293
- 294]
2. 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.)
V. THE ONE-YEAR PROVISION
A. 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. [296]
1. 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.)
B. 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. [296 - 298]
Example: O orally promises A that O
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.
C. Impossibility or other excuse: 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. [297 - 298]
1. 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:
a. 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.
b. 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.
c. 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).
D. 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. [298]
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.
E. 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. [299]
F. 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 Statute of Frauds 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. [299]
VI. CONTRACTS FOR THE SALE OF GOODS
A. 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. [301 - 302]
B. Exceptions: Even
if a sales contract is for more than $500, it is exempted from the Statute of
Frauds requirement in three situations: [301 - 302]
1. 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).
2. 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).
3. Goods accepted
or paid for: Finally, no writing is required "with respect to goods for
which payment has been made and accepted or 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 Statute of Frauds
defense.)
VII. SATISFACTION BY A MEMORANDUM
A. General requirements for: Even if
there is no signed "contract," a signed "memorandum"
summarizing the agreement may be enough to meet the Statute of Frauds. A
memorandum satisfies the Statute 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." [304 - 307]
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 against the other.
[305]
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. UCC: Under the UCC, a writing
satisfies the Statute if it is "sufficient to indicate that a contract
for sale has been made between the parties and [is] signed by the party
against whom enforcement is sought...." § 2-201(2). [305 - 307]
1. Omissions: Even if the writing
contains a mistake as to a term, there will often be enough to satisfy the
Statute, under the UCC. For instance, a mistake on price or quantity, or
even description of the item, will not be fatal (but plaintiff may only
recover for the quantity actually stated in the memorandum). Contrast this
with non-UCC cases, where a major mistake is likely to invalidate the
memorandum.
2. Confirmation: Under the UCC,
there is one situation in which a memorandum will be enforceable even
against a party who does not sign it: if the deal is between merchants, one
merchant who receives a signed confirmation from the other party will
generally be bound, unless the recipient objects within 10 days after
receiving the confirmation.
Example: Buyer and Seller are both
merchants (i.e., they deal in goods of the kind in question). Buyer
telephones Seller to order 1,000 widgets at $10 apiece. Immediately after
receiving the order, Seller sends a written confirmation, correctly listing
the quantity and price. Assume that this confirmation constitutes a
memorandum which would be enforceable by Buyer against Seller. Unless Buyer
objects in writing within 10 days after receiving the memo, he will be bound
by it, just as if he had signed it.
VIII. ORAL RESCISSION AND MODIFICATION
A. Oral rescission: Where a contract
is in writing, it can be orally rescinded (i.e., orally cancelled) even though
the original was required to be in writing because of the Statute. That is, a
rescission does not have to satisfy the Statute of Frauds, in non-UCC cases.
Generally, this is true even if the original written agreement contains a
"no oral modifications or rescissions" clause. [309]
1. Sale of goods: But a contract
for the sale of goods can alter this result. "A signed agreement which
excludes modification or rescission except by a signed writing cannot be
otherwise modified or rescinded...." § 2-209(2). (But even where such a
"no oral modifications or rescissions" clause is present, if one
party relies to his detriment on an oral rescission, this will probably be
binding as a "waiver" of the other party's right to rely on the
no-oral-rescissions clause.) [309]
1. General rule: 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. [309]
3. Modification of contracts under
UCC: Contracts under the UCC work pretty much the same way: if the contract
as modified would (if it were an original contract) have to meet the Statute
of Frauds, the modification must be in writing. Also, a written "no
oral modifications" clause is generally effective, just as is a
"no oral rescissions" clause. [310]
IX. RESTITUTION, RELIANCE AND ESTOPPEL
A. Quasi-contractual recovery: A
plaintiff who has rendered part performance under an oral agreement falling
within the Statute of Frauds may recover in quasi-contract for the value of
benefits he has conferred upon the defendant.
Example: Landlord orally agrees to
rent Blackacre to Tenant for two years, at a rent of $1,000 per month. After
Tenant has occupied the premises for two months, Tenant moves out. Even though
the agreement is unenforceable because it is for an interest in land and must
therefore be in writing, Landlord can recover the reasonable value of Tenant's
two-month occupancy.
1. Not limited by contract price:
The plaintiff's quasi-contract recovery is not limited to the pro-rata
contract price, in most courts. (Example: On the facts of the above example,
if Landlord can show that the fair market value of a lease for Blackacre is
$2,000 a month, he may recover this amount times two months, even though the
pro-rata lease amount is only $1,000 per month.)
B. Promissory estoppel: Instead of a
quasi-contract suit (which will generally protect only the plaintiff's
restitution or reliance interest), a plaintiff 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. [311 - 313]
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 non-compliance 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
defendant has intentionally and falsely told the plaintiff 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. [311 - 312]
Chapter 10
REMEDIES
I. INTRODUCTION
A. Distinction: Distinguish between a
suit brought on the contract, and a suit brought off the contract, i.e., in
quasi-contract. [320]
1. Suit on the contract: Where the
parties have formed a legally enforceable contract, and the defendant (but
not the plaintiff) has breached the contract, the plaintiff will normally
sue "on the contract." That is, he will bring a suit for breach of
contract, and the court will look to the contract to determine whether there
has indeed been a breach, and for help in calculating damages.
2. Quasi-contract: But in other
circumstances, the plaintiff will bring a suit in
"quasi-contract." Here, the plaintiff is not really asking for
enforcement of the contract; instead, she is usually asking for damages
based on the actual value of his performance, irrespective of any price set
out in the contract. Situations where a quasi-contract recovery may be
available include:
II. EQUITABLE REMEDIES
A. Two types: Sometimes the court
will award "equitable remedies" instead of the usual remedy of money
damages. There are two types of equitable relief relevant to contract cases:
(1) specific performance; and (2) injunctions. [321 - 326]
1. Specific performance: A decree
for specific performance orders the promisor to render the promised
performance. (Example: A contracts to sell Blackacre to B on a stated date
for a stated price. A then wrongfully refuses to make the conveyance. A
court will probably award specific performance. That is, it will order A to
make the conveyance.)
Example: D signs a contract with P,
his employer, providing that D will not work for any competitor in the same
city for one year after termination. D then quits and immediately goes to
work for a competitor. If P sues on the non-compete, a court will probably
enjoin D from working for the competitor for the year.
B. Limitations on equitable remedies:
There are three important limits on the willingness of the court to issue
either a decree of specific performance or an injunction: [322 - 324]
1. Inadequacy of damages: Equitable
relief for breach of contract will not be granted unless damages are not
adequate to protect the injured party. Two reasons why damages might not be
adequate in a contracts case are: (1) because the injury cannot be estimated
with sufficient certainty; or (2) because money cannot purchase a substitute
for the contracted-for performance. (Example of (2): Each piece of land is
deemed "unique", so an award of damages for breach by the vendor
in a land sale contract will not be adequate, and specific performance will
be decreed). [322 - 324]
3. Difficulty of enforcement:
Finally, the court will not grant equitable relief where there are likely to
be significant difficulties in enforcing and supervising the order.
(Example: Courts usually will not grant specific performance of a personal
service contract, because the court thinks it will not be able to supervise
defendant's performance to determine whether it satisfies the contract.)
[323 - 324]
C. Land-sale contracts: The most
common situation for specific performance is where defendant breaches a
contract under which he is to convey a particular piece of land to the
plaintiff. [324]
1. Breach by buyer: Courts also
often grant specific performance of a land-sale contract where the seller
has not yet conveyed, and it is the buyer who breaches. (Example: A
contracts to sell Blackacre to B. If A fails to convey, a court will order
him to do so in return for the purchase price. If B fails to come up with
the purchase price, the court will order him to pay that price and will then
give him title.)
2. 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
without other reasonable means of making a living.
E. Sale of goods: Specific
performance will sometimes be granted in contracts involving the sale of
goods. This is especially likely in the case of output and requirements
contracts, where the item is not in ready supply. [326]
Example: P, a utility, contracts with
D, a pipeline company, for D to supply all of P's requirements for natural gas
for 10 years at a stated price. In a time of tight energy supplies, a court is
likely to find that damages are not adequate to redress D's breach, because no
other vendor will enter a similar fixed-price, long-term contract; therefore,
the court will probably grant a decree of specific performance ordering D to
continue with the contract.
III. VARIOUS DAMAGE MEASURES
A. Three types: There are three
distinct kinds of interests on the part of a disappointed contracting party
which may be protected by courts: [327]
1. Expectation: In most breach of
contract cases, the plaintiff will seek, and receive, protection for her
"expectation interest." Here, the court attempts to put the
plaintiff in the position he would have been in had the contract been
performed. In other words, the plaintiff is given the "benefit of her
bargain," including any profits she would have made from the contract.
2. Reliance: Sometimes the
plaintiff receives protection for his reliance interest. Here, the court
puts the plaintiff in as good a position as he was in before the contract
was made. To do this, the court usually awards the plaintiff his
out-of-pocket costs incurred in the performance he has already rendered
(including preparation to perform). When reliance is protected, the
plaintiff does not recover any part of the profits he would have made on the
contract had it been completed.
a. When used: The reliance
interest is used mainly: (1) when it is impossible to measure the
plaintiff's expectation interest accurately (e.g., when profits from a new
business which the plaintiff would have been able to operate cannot be
computed accurately); and (2) when the plaintiff recovers on a promissory
estoppel theory.
3. Restitution: Finally, courts
sometimes protect the plaintiff's "restitution interest." That is,
the court forces the defendant to pay the plaintiff an amount equal to the
benefit which the defendant has received from the plaintiff's performance.
Restitution is designed to prevent unjust enrichment.
a. When used: The restitution
measure is most commonly used where: (1) a non-breaching plaintiff has
partly performed, and the restitution measure is greater than the contract
price; and (2) a breaching plaintiff has not substantially performed, but
is allowed to recover the benefit of what he has conferred on the
defendant.
Note: In contract actions, all
three of these measures are used at least some of the time. In
quasi-contract actions, expectation damages are almost never awarded, but
reliance and restitution damages frequently are. (For instance, reliance
damages are often used in promissory estoppel cases where the suit is
really in quasi-contract, and restitution is used by materially-breaching
plaintiffs who are in effect suing in quasi-contract.)
IV. EXPECTATION DAMAGES
A. Defined: Expectation damages are
the usual measure of damages for breach of contract. The court tries to put
the plaintiff in the position he would have been in had the contract been
performed by the defendant. The plaintiff should end up with a sum equal to
the profit he would have made had the contract been completed. [328 - 329]
Example: P holds the copyright for a
novel and publishes it in hardback. It grants D the exclusive right to publish
the paperback edition, but "not sooner than October 1985." D ships
the paperback edition to stores in September 1985 and paperback sales soar,
eroding the sale of the hardback edition. P is entitled to expectation damages
equal to the difference between the profit it did make in September 1985 and
the profit it would have made had D not shipped the paperback edition one
month too early. [U.S. Naval Institute v.
Charter Communications, Inc.]
B. Formula for
calculating: P's expectation damages are equal to the value of D's promised
performance (generally the contract price), minus whatever benefits P has
received from not having to complete his own performance. [329 - 332]
Example: Contractor
agrees to build a house for Owner for $30,000. The contract says that after
Contractor has done half the work, he shall receive $15,000. Contractor does
half the work, and demands payment. Owner wrongfully refuses. At this point,
assume that it would cost Contractor $10,000 to complete the house (for
materials, labor, etc.). Contractor's expectation damages are equal to the
contract price ($30,000), minus what would have been Contractor's cost of
completion ($10,000). Thus Contractor will recover $20,000.
2. Cost of completion or decrease
in value: Where defendant has defectively performed, plaintiff normally can
recover the cost of remedying defendant's defective performance. But if the
cost of remedying defects is clearly disproportionate to the loss in market
value from the defective performance, plaintiff will only recover the loss
in market value. [329 - 330]
Example: Contractor contracts to
build a house for Owner, with Reading pipe to be used. After the house is
completely built, it is discovered that Contractor used Cohoes pipe rather
than Reading pipe; the two are of virtually the same quality. Owner will
be allowed to recover (or to subtract from the unpaid contract balance)
only the difference in value between the two pipes (a negligible sum), not
the much greater cost of ripping out the walls and all of the existing
piping to make the replacement. [Jacob & Youngs v. Kent]
C. "Reasonable certainty":
The plaintiff may only recover for losses which he establishes with
"reasonable certainty." Mainly, this means that a plaintiff who
claims that he would have made profits had the defendant not breached must
show not only that there would have been profits, but also the likely amount
of those profits. [332 - 334]
Example: Contractor contracts to
build a house for Owner for $100,000. After Contractor has done about half
the work, Owner repudiates. If Contractor cannot demonstrate what his cost
of completion would have been, he will be unable to recover expectation
damages, and will have to be content with either reliance or restitution
damages.
V. RELIANCE DAMAGES
A. Generally: Reliance damages are
the damages needed to put the plaintiff in the position he would have been in
had the contract never been made. Therefore, these damages usually equal the
amount the plaintiff 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. The main situations where reliance damages are awarded are: [335
- 337]
1. Profit too speculative: Where
expectation damages cannot be computed because plaintiff's lost profits are
too speculative or uncertain. (For instance, where defendant's breach
prevents plaintiff from developing a new business, profits are probably too
speculative to be computed.) [336]
2. Vendee in land contract: Where
the plaintiff is the vendee under a land contract, and the defendant fails
to convey. Some states do not allow expectation damages in this situation,
so plaintiff can recover his reliance damages (e.g., the down payment, plus
any expenses reasonably incurred.) [336]
3. Promissory estoppel: Where
plaintiff successfully brings an action based on promissory estoppel. Here,
the suit is usually not truly on the contract, but is rather in
quasi-contract. The court is trying to reduce injustice, so it gives
plaintiff a "half-way" measure, less than expectation damages, but
better than nothing. [337]
B. Limits on amount of reliance
recovery: The plaintiff's reliance damages are sometimes limited to a sum
smaller than the actual expenditures: [338]
2. Recovery limited to profits:
Also, most courts do not allow reliance damages to exceed expectation
damages. However, the defendant has to bear the burden of proving what
plaintiff's profit or loss would have been. [338]
C. Cost to plaintiff, not value to
defendant: When reliance damages are awarded, they are usually calculated
according to the cost to the plaintiff of his performance, not the value to
the defendant. [339]
VI. RESTITUTION
A. Generally: 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.
[340]
1. When used: The main uses of the
restitution measure are as follows: (1) a non-breaching 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. [340 - 341]
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. [341]
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).
1. 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. [341]
C. Losing contract: Restitution may
even be awarded where P has partly performed, and would have lost money had
the contract been completed. [342] (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.)
VII. SUBSTANTIAL PERFORMANCE AS A BASIS
FOR SUIT ON THE CONTRACT
A. Substantial performance generally:
Where one party substantially performs (i.e., does not materially breach), the
other is not relieved of his duties. If the latter refuses to perform, the
substantially performing party has an action for breach of contract. [343]
1. Expectation damages: Putting it
more simply, a party who substantially performs may sue for ordinary
(expectation) damages for breach of contract, if the other party fails to
perform. The other party has a set-off or counterclaim for the damages he
has suffered from the plaintiff's failure to completely perform. [343]
Example: Contractor contracts to
paint Owner's house for $10,000, with performance to be complete by April 1.
There is no "time of the essence" clause, and no reason to believe
that April 1 completion is especially important. Contractor finishes work on
April 3. Owner refuses to pay. Contractor will be able to bring suit on the
contract, and to recover expectation damages (the profit he would have
made). Owner is not entitled to refuse to pay, and must simply be content
with a counterclaim for damages (probably nominal ones) due to the late
completion.
B. Divisible contracts: If the
contract is divisible into separate pairs of "agreed equivalents," a
party who has substantially performed one of the parts may recover on the
contract for that part. That's true even though he has materially breached
with respect to the other portions. [345]
VIII. SUITS IN QUASI-CONTRACT
A. Where allowed: There are a number
of situations where recovery "on the contract" is not possible or
allowed: (1) situations where there was no attempt even to form a contract,
but the plaintiff deserves some measure of recovery anyway; (2) cases where
there was an attempt to form a contract, but the contract is unenforceable
because of Statute of Frauds, impossibility, illegality, etc.; (3) cases where
there is an enforceable contract, but the plaintiff has materially breached,
and therefore may not recover on the contract; and (4) cases where the
defendant has breached but the plaintiff is not entitled to damages on the
contract. In all of these situations, the plaintiff will often be allowed to
recover in "quasi-contract." [345]
B. No contract attempted: The courts
sometimes award P a recovery where no contract was even attempted. The most
common example is where P supplies emergency services to D, without first
forming a contract to do so. (Example: P, a doctor, sees D lying unconscious
in the street, and gives D CPR. The court will probably allow P to recover the
fair market value of her services, in an action in quasi-contract.) [345]
C. Unenforceable contracts: The
parties may attempt to form a binding contract which turns out to be
unenforceable or avoidable. This may happen because of the Statute of Frauds,
mistake, illegality, impossibility, or frustration of purpose. In any of these
cases, the court will usually let P sue in quasi-contract, and recover either
the value of the services performed (restitution) or P's reasonable
expenditures (reliance). [346]
D. Breaching plaintiff: A plaintiff
who has materially breached may normally bring a quasi-contract suit, and
recover his restitution interest, less the defendant's damages for the breach.
This is sometimes called a recovery in "quantum meruit" ("as
much as he deserves"). [347]
Example: P agrees to work for D for
one year, payment of the $20,000 salary to be made at the end. P works for six
months, then unjustifiably quits. P cannot recover "on the
contract," because he has not substantially performed. But he will
probably be allowed to recover in quasi-contract, for the fair value of the
benefits he has conferred on D. The court will estimate these benefits (which
will probably be one-half of the $20,000 annual salary), and will subtract the
damage to D of P's not performing the second six months.
1. Construction cases:
Quasi-contract recovery by a breaching plaintiff is most often found in
construction cases. Here, the builder gets to recover the value to the owner
of the work done, even where the work does not constitute substantial
performance of the contract. [347]
2. Limited to pro-rata contract
price: When a defaulting plaintiff sues in quasi-contract for his
restitution interest, recovery is almost always limited to the pro-rata
contract price, less the defendant's damages for breach. [348]
Example: Contractor agrees to build
a house for Owner for $100,000. The contract expressly provides that all
walls will be insulated with non-asbestos-based insulation. Contractor
instead knowingly installs asbestos-based insulation, in order to save
$2,000 in material costs. Even though the resulting house has substantial
value, many courts will not permit Contractor to recover anything at all, on
the grounds that his breach was not only material but "willful,"
i.e., intentional and done for Contractor's financial advantage.
4. UCC gives partial restitution to
breaching buyer: The UCC gives a breaching buyer a right to partial
restitution with respect to any deposit made to the seller before the buyer
breached. Under § 2-718(2), the seller can only keep
20% of the total contract price or $500, whichever amount is smaller - the
balance must be refunded to the breaching buyer. [350]
IX. FORESEEABILITY
A. General rule: The "rule of
Hadley v. Baxendale" limits the damages which courts will award for
breach of contract. The "rule" says that courts will not award
consequential damages for breach unless the damages fall into one of two
classes: [352 - 353]
Example: P operates a mill, which
has suspended operations because of a broken shaft. He brings the shaft to
D, a carrier, to have it brought to another city for repairs. D knows that
the item to be carried is a shaft of P's mill, but does not know that the
mill is closed because of the broken shaft. D negligently delays delivery,
causing the mill to stay closed for extra days. P sues for the profits lost
during these extra days.
Held, P cannot recover for these
lost profits. The lost profits were not foreseeable to a reasonable person
in D's position, nor was D on notice of the special fact that the mill was
closed due to the broken shaft. [Hadley v. Baxendale]
B. Parties may allocate risks
themselves: The rule of Hadley may always be modified by express agreement of
the parties. For instance, if P puts D on notice of the special facts, this
may cause damages to be awardable which would not otherwise be. Alternatively,
the parties can simply agree that even unforeseen consequential damages shall
be compensable. [353]
X. AVOIDABLE DAMAGES
A. General rule: 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 lose the right to collect damages, not
in the sense that P has breached some obligation.) [356]
Example: P agrees to work as an
employee of D for a two-year period, at an annual salary of $50,000. After two
weeks on the job, P is wrongfully fired. P must make reasonable efforts to get
another job. If he does not, the court will subtract from his recovery the
amount which it believes P could have earned at an alternative job with
reasonable effort. Thus if the court believes that P could have lined up a
$40,000-a-year job, P will only be allowed to recover at the rate of $10,000
per year for the remainder of the contract.
1. Reasonableness: The "duty
to mitigate" only requires the plaintiff to make reasonable efforts to
mitigate damages. For instance, P does not have to incur substantial expense
or inconvenience, damage his reputation, or break any other contracts, in
order to mitigate. [356 - 357]
B. Sales contracts: Here's what the
UCC says about an aggrieved buyer or seller's obligation to mitigate: [357 -
358]
1. Buyer: If the seller either
fails to deliver, or delivers defective goods which the buyer rejects, the
buyer must "cover" for the goods if he can reasonably do so - he
may not recover for those damages (e.g., lost profits) which could have been
prevented had he covered. See UCC § 2-715(2)(a) (defining
"consequential damages" to include only those losses "which
could not reasonably be prevented by cover or otherwise..."). (If buyer
does not cover when he could have done so, he will still be entitled to the
difference between the market price at the time of the breach and the
contract price, but he'll lose the ability to collect consequential damages
that he might otherwise have gotten.) [357 - 358]
2. Seller: The
seller has much less of a duty to mitigate, when it is the buyer who
breaches by wrongfully rejecting the goods or repudiating before delivery.
The seller can choose between reselling the goods (and collecting the
difference between resale price and contract price), or not reselling them
(and recovering the difference between market price and unpaid contract
price); seller may also be able to recover lost profits. [358]
C. Losses incurred in avoiding
damages: If the aggrieved party tries to mitigate his damages, and incurs
losses or expenses in doing so, he may recover damages for these losses or
expenses. As long as plaintiff acted reasonably in trying to mitigate, it does
not matter whether his attempt was successful. [360]
XI. NOMINAL AND PUNITIVE DAMAGES
A. Nominal damages: Where a right of
action for breach exists, but no harm has been done or is provable, P may get
a judgment for nominal damages. That is, he may recover a small sum that is
fixed without regard to the amount of harm he has suffered. [363]
1. Tort: But if the breach of
contract also constitutes a tort, punitive damages are recoverable.
(Example: D, a car dealer, sets back the odometer on a used car before
selling it to P. D then falsely claims that the car is "new." P
will probably be able to recover punitive damages, because seller's act,
although it was part of a contract, also constitutes the independent tort of
fraud.) [363 - 364]
a. Bad faith as tort: Many courts
now regard a party's bad faith conduct in connection with a contract as
being itself a tort, for which punitive damages may be awarded. For
instance, if a party breaches voluntarily, in order to make a better deal
elsewhere, the court may find that this conduct constitutes bad faith
punishable by punitive damages. [363]
i. Insurance company refusal to
settle: If an insurance company refuses in bad faith to settle a claim
that is covered by a policy it wrote, courts are quite likely to hold
that the insured has suffered a tort, and can recover punitive damages
against the insurer.
XII. LIQUIDATED DAMAGES
A. Definition: A "liquidated
damages clause" is a provision, placed in the contract itself, specifying
the consequences of breach. (Example: Contractor contracts to paint Owner's
house for $10,000. In the basic contract, the parties agree that for every day
after the deadline that Contractor finishes, the price charged by him will be
reduced by $100. This provision is a liquidated damages clause.) [364]
B. General rule: Courts will enforce
liquidated damages provisions, but only if the court is satisfied that the
provision is not a "penalty." That is, the court wants to be
satisfied that the clause really is an attempt to estimate actual damages,
rather than to penalize the party for breach by awarding "damages"
that are far in excess of the ones actually suffered. Therefore, in order to
be enforceable, the liquidated damage clause must always meet one, and
sometimes two, requirements: [365]
C. Reasonableness of amount: All
courts refuse to enforce liquidated damages clauses that do not provide for a
"reasonable" amount. [365 - 367]
3. Blunderbuss clause: A
"blunderbuss" clause stipulates the same sum of money as
liquidated damages for breach of any covenant, whether trivial or important.
Where the actual damage turns out to be trivial, most courts will not
enforce a blunderbuss clause (or will interpret the clause as not applying
to trivial breaches). [367]
a. Major loss: But if the breach
turns out to be a major one (so that the liquidated amount is reasonable
in light of the actual loss), courts are split on whether the blunderbuss
should be enforced. The modern view is to enforce the blunderbuss where
the actual loss is roughly equal to the damages provided in the clause.
D. UCC rules: The UCC basically
follows the common-law rule on when a liquidated damages clause should be
awarded. The UCC follows the modern view, by which the party seeking
enforcement of the clause will succeed if the sum is reasonable viewed either
as of the time the contract is made or viewed in light of the actual breach
and actual damages. See UCC § 2-718(1) (clause enforceable if
"reasonable in the light of the anticipated or actual harm caused by the
breach..."). [368]
XIII. DAMAGES IN SALES CONTRACTS
A. Where goods not accepted: If the
buyer has not accepted the goods (either because they weren't delivered, or
were delivered defective, or because the buyer repudiated), the UCC gives
well-defined rights to the injured party: [371 - 375]
a. Cover: The most important is
her right to "cover," i.e., to buy the goods from another
seller, and to recover the difference between the contract price and the
cover price from the seller. § 2-712(2). The buyer's purchase of
substitute goods must be "reasonable," and must be made "in
good faith and without unreasonable delay." § 2-712(1). [373]
b.
Contract/market differential: If
the buyer does not cover (either because she can't, or decides she doesn't
want to), she can instead recover the contract/market differential, i.e.,
the difference between the contract price and the market price "at
the time when the buyer learned of the breach...." § 2-713(1). [373 - 374]
i. Time of breach: Typically,
the buyer "learns of the breach" (setting the time for
measuring the market price) at the time the breach in fact occurs
(either through non-delivery or through receipt of defective goods). But
if the breach takes the form of a repudiation in advance of the time for
performance, most courts hold that the market price is to be measured as
of the time the buyer learns of the repudiation. (See prior discussion.)
ii. Probably not available to
covering buyer: Probably the buyer may recover the contract/market
differential only where she did not cover. This means that if the market
price declines between the time the buyer learns of the breach and the
time he covers by buying substitute goods, the buyer can't get a
windfall - limiting him to the contract/market differential puts him in
the same position he would have been in had the contract been fulfilled,
not a better one.
i. Consequential: Consequential
damages include the profits which the buyer could have made by reselling
the contracted-for goods had they been delivered. But remember that
these profits must be proved with appropriate certainty, and must be
shown to have been reasonably foreseeable at the time of the contract.
[374]
ii. Incidental damages:
"Incidental" damages include such items as transportation
expenses, storage expenses, and other small but direct expenses
associated with the breach and buyer's attempts to cover for it. [374]
d. Rejection: All of the above
are judicial remedies. But the buyer who receives non-conforming goods can
also exercise the self-help remedy of rejecting the goods. The buyer thus
throws the goods back on the seller and cancels the contract. (Observe
that where the buyer has actually made a losing contract, rejection lets
him escape his bad bargain.) [374 - 375]
2. Seller's damages for breach:
Where it is the buyer who breaches, by wrongfully refusing to accept the
goods (or by repudiating the contract before shipment is even made), the
seller has several possible remedies: [375 - 382]
a. Contract/resale differential:
Normally, the seller will resell the goods to a third party. Assuming that
the resale is made in good faith and in a "commercially
reasonable" manner, seller may recover the difference between the
resale price and the contract price, together with incidental damages.
[375]
b. Contract/market differential:
If the seller does not resell the goods, he may recover from the breaching
buyer the difference between the market price at the time and place for
delivery, and the unpaid contract price, together with incidental damages.
§ 2-708(1). (Probably a seller who
has resold the goods may not use this contract/market differential, but
must use the contract/resale differential.) [377]
c. Lost profits:
The contract/resale differential (for a reselling seller) and the
contract/market differential (for a non-reselling seller) may not make the
seller whole. Where this is the case, § 2-708(2) lets the seller recover
his lost profits instead of using either of these differentials. [378]
i. "Lost volume"
seller: Most importantly, this means that the "lost volume"
seller may recover the profit he has lost by reason of the breach. In
the usual case of a seller who has resold the item, a "lost
volume" seller is one who (1) had a big enough supply that he could
have made both the contracted-for sale and the resale; (2) probably
would have made the resale anyway as well as the original sale had there
been no breach; and (3) would have made a profit on both sales. [378]
Example: Auto Dealer sells cars
made by Smith Motors. Auto Dealer can get as much inventory from Smith
as Auto Dealer can sell. Auto Dealer contracts to sell a particular 1999
Thunder Wagon to Consumer for $10,000. Consumer repudiates just before
delivery. Auto Dealer resells the car for the same $10,000 price to X, a
walk-in customer.
The traditional contract/resale
differential (here, $0) would not make Auto Dealer whole, since he could
have sold cars to both consumer and X and made a profit on each.
Therefore, Auto Dealer can recover from Consumer the profit he would
have made had the contract with Consumer been fulfilled. Auto Dealer is
on these facts a "lost volume" seller.
i. Accepted goods: First, if
the buyer has "accepted" the goods, the seller may sue for the
entire contract price (though the buyer has a counterclaim for damages
for non-conformity). (Example: Buyer orders 10 widgets at $50 each from
Seller. Seller ships the goods late, but Buyer keeps the goods for 30
days without saying anything. Buyer will be held to have
"accepted" the goods, and Seller can therefore sue for the
entire contract price, $500. But Buyer may counterclaim for the damages
he has actually suffered due to the late delivery.) [380]
ii. Risk of loss: Second, if
the risk of loss has passed to the buyer, and the goods are lost in
transit, the seller may sue for the entire contract price. (Example: As
per the contract, Seller ships goods "F.O.B. Seller's plant."
The goods are destroyed while on the trucking company's truck. Seller
can sue for the whole price; Buyer's remedy is against the trucker.)
[380]
iii. Unresaleable goods:
Lastly, if the seller has already earmarked particular goods as being
ones to be supplied under the contract, and the buyer rejects them or
repudiates before delivery, seller may recover the entire contract price
if he is unable to resell them on some reasonable basis. Most commonly,
this applies to perishable goods and custom-made goods. [380]
e. Incidental damages: A seller
who pursues and achieves one of the four above remedies (resale,
contract/market differential, lost profits, action for price) may also
recover "incidental damages." These include such items as
transportation charges, storage charges, and other charges relating to the
seller's attempt to deal with the goods after the buyer's breach. See § 2-710. [381]
B. Accepted goods: If the buyer has
accepted the goods (and has not rightfully revoked this acceptance), then the
remedies given to buyer and seller are different: [382]
1. Seller's action for price: If
the buyer has accepted the goods, the seller may recover the full contract
price. (But if the goods are non-conforming, Buyer may counterclaim for
breach of warranty.) [382]
a. Breach of warranty: Most
importantly, buyer may sue for breach of warranty. These may be either
express warranties or warranties implied by the UCC. The measure of
damages for breach of warranty is "the difference at the time and
place of acceptance between the value of the goods accepted and the value
they would have had if they had been as warranted, unless special
circumstances show proximate damages of a different amount." § 2-714(2). [382]
b. Non-warranty damages: Buyer may
also be able to recover for non-warranty damages. For instance, damages
resulting from seller's delay in shipping the goods, or his breach of an
express promise to repair defective goods, may be recovered on top of or
instead of breach-of-warranty damages. [383]
Chapter 11
CONTRACTS INVOLVING MORE THAN TWO PARTIES
I. ASSIGNMENT AND DELEGATION GENERALLY
A. Assignment distinguished from
delegation: Be sure to distinguish assignment from delegation: [394]
3. Combination: Frequently, an
existing party will both assign and delegate. That is, she will both
transfer her rights to a third person, and appoint the latter to perform her
duties. But don't presume that where there is an assignment, there is
necessarily a delegation, or vice versa - there will often be just an
assignment, or just a delegation.
II. ASSIGNMENT
A. Present transfer: An assignment is
a present transfer of one's rights under a contract. Thus a promise to
transfer one's rights in the future is not an assignment, even though it may
be a contract. [394]
B. Terminology: An assignment is a
three-part transaction. The "assignor" assigns to the
"assignee" the performance due the assignor from the
"obligor." (Example: Contractor contracts to paint Owner's house for
$10,000. Contractor then assigns to Bank Contractor's right to receive the
$10,000 when due. Contractor is the assignor, Bank is the assignee, and Owner
is the obligor.)
C. UCC rules: The UCC applies to many
assignments, even ones not involving contracts for the sale of goods. In
general, if a party assigns his right to receive payment under a contract as
security financing, Article 9 of the UCC applies to the terms of the
assignment. [395 - 396]
Example: Contractor contracts to
paint Owner's house for $10,000. Contractor assigns his right to receive
payment to Bank, in return for a present payment of $9,500. Even though there
is no contract for the sale of goods, Article 9 of the UCC applies to this
assignment, and governs such items as whether the assignment must be in
writing, the rights of Bank against Owner if Owner does not pay, etc.
D. Writing: At common law, an
assignment of contract rights does not have to be in writing. However, many
states have statutes requiring certain types of assignments to be in writing.
[396]
1. Article 9: In particular, where
a party assigns to a third person his right to receive payment, in a
financing-type transaction covered by Article 9 of the UCC, the assignment
is not enforceable against either the assignor or the obligor unless the
assignor has signed a document called a "security interest." See § 9-203.
E. Gratuitous assignments: A
"gratuitous assignment" is an assignment that is in the nature of a
gift, i.e., one in which the assignor receives nothing of value in return.
Gratuitous assignments are generally enforceable, just like ones given for
value. [396]
1. Revocability: But gratuitous
assignments, unlike ones given for value, are automatically revoked if the
assignor: (1) dies; (2) makes a subsequent assignment of the same right to a
different person; or (3) gives notice to either the assignee or the obligor
that the assignment has been revoked. [396]
i. Delivery of symbolic
document: This can happen if the contract right being assigned is
evidenced by a document that commonly symbolizes the right, and that
document is delivered to the assignee. (Example: Insured, who owns an
insurance policy on his own life, delivers the policy to Friend, with
the words, "I am assigning you this policy." At that moment,
the assignment becomes irrevocable, even though it was gratuitous.)
F. What rights may be assigned: All
contract rights are assignable, unless they fall within a small number of
exceptions, most of which are noted below: [397 - 399]
a. Personal services contract:
This happens most commonly in certain personal services contracts. If
there is a special relationship of trust or confidence between the
parties, for instance, assignment will usually not be allowed. (Example:
Star, a movie star, hires Secretary for a below-market wage, which
Secretary agrees to take because she wants to work closely with Star. Star
probably cannot assign the contract to Friend, thus requiring Secretary to
work for Friend for the same wages, because the assignment would
materially alter Secretary's duties.)
Example: Contractor contracts to
paint Owner's house for $10,000, with half the payment to be made before the
job starts. Contractor then assigns all of his payment rights to Friend, to
discharge a prior bill. A court might reason that since Contractor now
stands to get no money, the chance that Owner will pay $5,000 and not
receive performance is sufficiently great that the assignment should not be
allowed.
G. Contract terms prohibiting
assignment: Normally, if the contract itself contains a clause prohibiting
assignment, the courts will enforce the clause. But there are a number of
important exceptions. [399]
c. Ban on assigning "the
contract": If the anti-assignment clause states that "the
contract" may not be assigned (as opposed to stating that
"rights under the contract may not be assigned"), the contract
will be interpreted to bar only delegation, not assignment.
H. Assignee vs. obligor: As a general
rule, the assignee "stands in the shoes of his assignor." That is,
with a few exceptions, he takes subject to all defenses, set-offs and
counterclaims which the obligor could have asserted against the assignor. This
is the most important single rule to remember about assignment. [402 - 409]
Example: Contractor contracts to
paint Owner's house for $10,000. Contractor assigns his right to payment to
Wife, to satisfy an alimony obligation. If Owner fails to make payment, Owner
may raise against Wife any defense, counterclaim or set-off that Owner could
have raised against Contractor. Thus if the work was not done in a
merchantable manner, Owner may raise this defense against Wife just as he
could have raised it against Contractor.
1. Effect if obligor gives
performance to assignor: Once the obligor has received notice of the
assignment (from either the assignor or assignee), she cannot thereafter pay
(or otherwise give her performance to) the assignor. If she does, she won't
be able to use the defense of payment against the assignee. But if the
obligor pays the assignor or otherwise gives him the required performance
before she has received notice of the assignment, she may use this as a
defense against the assignee. [403]
Example:
Contractor contracts to paint Owner's house for $10,000, does the work,
then assigns his right to payment to Bank. Before Owner receives notice of
the assignment, Owner and Contractor can together agree to modify the
contract, and this will be binding on Bank. For instance, they may agree
to reduce the contract price.
Example: Same facts as above
example. Now, assume that Contractor has already finished painting the
house, and that Bank has notified Owner of the assignment. At this
juncture, any attempt by Owner and Contractor to lower the contract price
will not be binding on Bank.
3. "Waiver of defenses"
clause: Many contracts contain "waiver of defenses" clauses, by
which one party agrees that if the other assigns the contract, the former
will not raise against the assignee defenses which he could have raised
against the assignor. Most commonly, the buyer of goods on credit agrees
that the seller may assign the installment contract, and that the buyer will
not assert against the assignee (usually a bank or finance company) defenses
which the buyer might have against the seller. The enforceability of such
"waiver of defenses" clauses depends mostly on whether the
transaction is a consumer one. [404 - 406]
a. "Real" defenses: A
waiver-of-defenses clause is never effective as to so-called
"real" defenses. "Real" defenses include: (1) infancy,
incapacity, or duress; (2) illegality of the original contract; and (3)
misrepresentation that induced the buyer to sign the contract without
knowledge of its essential terms ("fraud in the essence"). See UCC § 9-206(1). [405]
i. Commercial contracts: By
contrast, the FTC regulation does not apply to commercial contracts. So
a businessperson who, say, buys goods on installment may not raise
defenses such as breach of the implied warranty of merchantability
against the assignee, typically a financing institution. [406]
4. Counterclaims, set-offs, and
recoupment by the obligor: Most states (and the UCC) follow these rules for
determining when the obligor may assert a counterclaim, set-off or
recoupment in a suit brought against him by the assignee: [406 - 408]
a. Claim relates to assigned
contract: If the obligor's claim against the assignor is related to the
same contract that has been assigned to the assignee, the obligor may use
this claim whether it arose prior to or subsequent to the obligor's
receipt of notice of the assignment. See UCC § 9-318(1). This is called a
"recoupment." It may only be used to reduce the assignee's
claim, not to yield an affirmative recovery for the obligor. [406]
Example:
Contractor agrees to paint Owner's house for $10,000. Contractor assigns
to Bank on July 1, and Bank notifies Owner of the assignment on July 2. If
Contractor has done the work in a slightly improper or late way (whether
the defect occurred before or after the July 2 notice), Owner may assert
this as a defense in any suit brought by Bank for the money, and Bank's
recovery will be diminished by this amount. (But no affirmative recovery
by Owner will be allowed even if the damages aggregate more than $10,000).
b. Claim
unrelated to assigned contract: If the obligor's claim against the
assignor is not related to the contract which has been assigned, the
obligor may assert this claim against the assignee only if the claim
accrued before the obligor received notice of the assignment. This is
called a "set-off." Like recoupment, a set-off may not yield
affirmative recovery. [407]
Example: Same
facts as above two examples. Assume that Owner also has a claim against
Bank for lending him money at a rate in violation of state usury laws.
Assuming that the claim is allowed to be part of the same suit under state
practice rules, this claim can not only wipe out any recovery by Bank as
assignee of the Contractor-Owner contract, but also may yield an
affirmative recovery for Owner. But no claim by Owner relating to the
Owner-Contractor contract may yield an affirmative recovery, since only
dealings directly between the obligor (Owner) and the assignee/plaintiff
(Bank) may yield such a recovery.
I. Rights of successive assignees of
the same claim: Where there are two assignees of the same claim, and assuming
that both assignees gave value and the later one did not know about the first,
here is the way most states treat their relative rights: [409 - 410]
1. Restatement rule: In
transactions not governed by Article 9 of the UCC, the Restatement
"four horsemen" rule is applied by most states. The subsequent
assignee loses to the earlier assignee, unless the subsequent one did one of
four things: (1) he received payment or other satisfaction of the
obligation; (2) he obtained a judgment against the obligor; (3) he obtained
a new contract from the obligor by novation; or (4) he possessed a writing
of a type customarily accepted as a symbol or evidence of the right assigned
(e.g., a bank book or insurance policy). [409]
2. UCC: In transactions governed by
Article 9 of the UCC (most assignments of the right to receive money in
return for financing), rights of successive assignees are governed by a
filing system. In general, the assignee who files first has priority,
regardless of whether he received his assignment first, and regardless of
whether he gave notice of the assignment to the obligor first. [409]
J. Rights of assignee against
assignor: If the obligor is unable to perform, or in some other way the
assignee doesn't obtain the value he expected from the contract, the assignee
may be able to recover against the assignor. [410]
1. Gratuitous assignments: If the
assignment was a gratuitous one, the assignee probably will not be able to
recover against his assignor. Exceptions exist where the assignor interferes
with the assignee's ability to collect the performance, or where the
assignor makes a subsequent assignment. But in the more common case where
the obligor simply fails to perform, the assignee has no claim against the
assignor under a gratuitous assignment. [410]
2. Assignments made for value: But
it is quite different if the assignment was made for value. Every assignor
for value is held to have made a series of implied warranties to the
assignee. If these warranties turn out not to be accurate, the assignee may
sue the assignor for damages. These warranties are: [410 - 411]
b. Claim is valid and
unencumbered: That the assigned claim is a valid one, not subject to any
limitations or defenses other than those that have been disclosed.
(Example: Contractor agrees to paint Owner's house for $10,000. Contractor
performs the work sloppily, giving Owner a partial defense. Contractor
then assigns to Bank his right to be paid. Regardless of whether
Contractor knows, at the time of assignment, that Owner has a defense,
Contractor breaches his implied warranty to Bank if he does not disclose
to Bank Owner's defense of non-performance.) [411]
d. No warranty of solvency or
willingness to perform: But the assignor does not warrant that the obligor
is solvent, or that he will be willing or able to perform. Thus if the
obligor turns out to be unwilling or unable to perform, the assignee has
no recourse against the assignor. (Example: Same facts as above example.
If Contractor does the work properly, but Owner goes broke, or simply
refuses to pay, Bank cannot sue Contractor.) [411]
e. Sub-assignees not covered:
Unless the assignor indicates otherwise, his warranties do not extend to
any sub-assignee, i.e., one who receives the assignment from the assignee.
[411]
f. Rules of construction: All of
the above rules on warranties are generally common-law, rather than
statutory. Most states treat them as rules of construction, which may be
varied by showing that the parties intended a different result. [411]
III. DELEGATION OF DUTIES
A. Definition: Recall that
"delegation" refers to duties under a contract, not to rights. If a
party to a contract wishes to have another person perform his duties, he
delegates them. [413]
B. Continued liability of delegator:
When the performance of a duty is delegated, the delegator remains liable.
[413]
Example: Owner contracts with
Contractor for Contractor to paint Owner's house for $10,000. Contractor
delegates his duties to Painter. If Painter fails to perform in the manner
required by the original Owner-Contractor contract, Owner may sue Contractor
for breach, just as if Contractor had improperly performed the work herself.
C. Non-delegable duties: In general,
a duty or performance is delegable, unless the obligee has a substantial
interest in having the delegator perform. [413 - 416]
1. Particular skills: Contracts
which call for the promisor's use of his own particular skills are normally
not delegable. Thus contracts involving artistic performances, the
professional services of a lawyer or doctor, etc., are not delegable.
Similarly, contracts in which there are duties of close personal supervision
may not be delegated. [413]
3. Agreement of parties: The
parties have complete freedom to determine whether duties may be delegated.
This cuts both ways: they may agree that duties which would otherwise be
delegable may not be delegated, or conversely that duties normally thought
to be too personal may in fact be delegated. [415]
b. Promise: If the delegatee has
promised to perform, the delegatee may or may not be liable to the
obligee. That is, the obligee may or may not be a third party beneficiary
of the delegatee's promise. This is normally a question of intent of the
parties - if delegator and delegatee intend that the obligee get the
benefit of the delegatee's promise, then the obligee may sue the
delegatee.
Example: Contractor promises
Owner that Contractor will paint Owner's house for $10,000. Contractor
gets too busy to perform, but wants to make sure that Owner is not
inconvenienced by a bad or tardy performance. Contractor therefore
delegates performance to Painter, under terms that permit Painter to keep
the $10,000 fee when earned. Painter expressly promises to perform the
work. A court would probably hold that Owner was an intended third party
beneficiary of Painter's promise, so that Owner may sue Painter (not just
Contractor) if Painter fails to perform.
3. Assignment of "the
contract": If a party purports to "assign the contract" to a
third person, this language will normally be interpreted to constitute a
promise by the assignee to perform, and the obligee will normally be
interpreted to be an intended beneficiary of this promise. [416 - 418]
b. UCC: The UCC, in § 2-210(4), follows the common-law rule: "An
assignment of 'the contract' or of 'all my rights under the contract' ...
is an assignment of rights and unless the languages or circumstances ...
indicate the contrary, it is a delegation of performance of the duties of
the assignor and its acceptance by the assignee constitutes a promise by
him to perform those duties. This promise is enforceable by either the
assignor or the other party to the original contract." [417]
i. Security: But if a general
assignment is made for the purpose of giving collateral to the assignee
in return for a loan, the lender will not normally be deemed to have
undertaken to perform the assignor's duties. (Example: On fact of the
above examples, if Contractor assigns "the contract" to Bank,
in return for a loan of $9,000, Bank has not promised to paint the
house, and may not be sued by Owner if the house does not get painted.)
[417]
IV. THIRD PARTY BENEFICIARIES
A. Introduction: A third party
beneficiary is a person whom the promisee in a contract intends to benefit.
[421]
Example: Contractor agrees to paint
Owner's 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.
B. When beneficiary may sue: The most
important question about third party beneficiaries is: When may the third
party beneficiary 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.
[423]
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.
b. Intended beneficiary: 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. [423]
Example: Tycoon contracts with
Painter 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.
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.
3. Public contracts: 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. (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])
[425]
4. Mortgage assumptions: In a fact
pattern involving one party taking over another's mortgage payments,
distinguish between two situations: (1) the mortgagor sells the property
"subject to" the mortgage, in which case the purchaser does not
promise to pay off the mortgage, though he bears the risk of losing the
property if the mortgage payments are not made; and (2) the purchaser
"assumes" the mortgage, in which case he makes himself personally
liable for repayment (so that the mortgagee may not only foreclose but also
obtain a deficiency judgment against the purchaser). These two scenarios
have different third party beneficiary consequences: [426 - 427]
a. Assumption: If the purchaser
has assumed the mortgage, the mortgagee (i.e., the lender) is a creditor
beneficiary of the assumption agreement between seller and buyer. The
mortgagee may therefore sue the purchaser to compel him to make the
mortgage payments. If the purchaser then sells to a sub-purchaser who also
assumes, the lender may sue either the purchaser or the sub-purchaser if
payments are not made. [426]
b. Subject to: Where the
mortgagor sells to a purchaser who takes "subject to" the
mortgage, the mortgagee cannot sue that purchaser, since the purchaser has
incurred no liability. But if this non-assuming purchaser sells to a
sub-purchaser who does assume, courts are split on whether the mortgagee
can recover personally against the assuming sub-purchaser. [427]
C. Discharge or modification by the
original parties: The modern view is that the original parties' power to
modify the contract terminates if the beneficiary, before he receives
notification of the discharge or modification, does any of three things: (1)
materially changes his position in justifiable reliance on the promise; (2)
brings suit on it; or (3) manifests assent to it at the request of either of
the original parties. [427]
D. Defenses against the beneficiary:
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
promisor-defendant may defend on the ground that the promisee never rendered
the performance which he promised under the contract, i.e., that the promisee
breached. [428]
Example: Contractor agrees to paint
Owner's 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.
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.
1. Beneficiary v. promisee: When
the beneficiary sues the promisor, the beneficiary does not waive his right
to later sue the promisee. (Example: Same facts as above example. Friend
sues Owner, but recovers only $4,000 because Owner shows that Contractor did
not perform the house-painting work correctly. Friend may now sue Contractor
for the remaining $4,000 due.) [429]
a. Creditor beneficiary: This is
most important where the third party is a creditor beneficiary. Here, most
courts let the promisee-debtor recover from the promisor the amount which
the promisor promised that he would pay the creditor (at least where the
promisee has already paid the debt to the creditor).
Chapter 12
IMPOSSIBILITY, IMPRACTICABILITY & FRUSTRATION
I. INTRODUCTION
A. Nature of the problem: The parties
may be discharged from performing the contract if: (1) performance is
impossible; (2) because of new events, the fundamental purpose of one of the
parties has been frustrated; or (3) performance is not impossible but is much
more burdensome than was originally expected ("impracticable"). If a
party is "discharged" from performing for such a reason, he is not
liable for breach of contract. [438]
B. Risk allocation: The doctrines of
impossibility, impracticability and frustration apply only where the parties
themselves did not allocate the risk of the events which have rendered
performance impossible, impracticable or frustrated. Thus the parties are
always free to agree explicitly that certain contingencies will or will not
render the contract impossible, etc., and these understandings will be honored
by the courts. [439]
1. Question to ask: Therefore, in
evaluating a problem that seems to involve impossibility, frustration, etc.,
always ask, "Did the parties expressly allocate the risk?" If they
did, this allocation controls regardless of the general doctrines discussed
here.
II. IMPOSSIBILITY OF PERFORMANCE
A. 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. [440]
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.
B. Three classes: There are three
main types of impossibility: (1) destruction of the subject matter; (2)
failure of the agreed-upon means of performance; and (3) death or incapacity
of a party. [440]
1. Destruction of subject matter:
If performance involves particular goods, a particular building, or some
other tangible item, which through the fault of neither party is destroyed
or otherwise made unavailable, the contract is discharged. The discharge
will occur only where the particular subject matter is essential to the
performance of the contract. [440 - 445]
a. 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. [441]
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 left-over 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. [442]
i. General rule: The general
UCC section applicable here is § 2-615(a), which provides that
unless otherwise agreed, "delay in delivery or non-delivery ... is
not a breach of [seller's] duty under a contract for sale if performance
as agreed has been made impracticable by the occurrence of a contingency
the non-occurrence of which was a basic assumption on which the contract
was made...." [443]
ii. Destruction
of identified goods: If a contract calls for the delivery of a
particular identified unique good, and that good is destroyed before the
"risk of loss" has passed to the buyer, the contract will be
discharged. (Example: A contracts to sell to B a painting hanging on A's
wall. If the painting is destroyed before the delivery process starts,
this will normally be before "risk of loss" has passed to B,
and both parties will be discharged.) [444]
iii. Goods not
identified at time of contracting: Usually, sale contracts call for
goods to be taken from the seller's general inventory, not for
particular identified goods. Where such unidentified goods are to be
shipped by seller, and are destroyed in transit, the result depends on
whether the contract is a "shipment" contract or a
"destination" contract. In a "shipment" contract,
where the seller's only obligation is to deliver the goods to the
carrier (the contract usually says, "F.O.B. seller's plant" in
this case), the risk of loss passes to the buyer as soon as the seller
delivers the goods to the carrier; if the carrier loses the goods, the
buyer bears the loss and must pay the purchase price, and sue the
carrier. But if the contract is a "destination" contract
("F.O.B. buyer's place of business"), the risk of loss does
not pass to the buyer until the carrier actually delivers; here, the
seller cannot use the impossibility defense if the goods are destroyed
while in transit. [445]
2. Impossibility of intangible but
essential mode of performance: If an essential but intangible aspect of the
contract becomes impossible, the contract may be discharged, just as where
the "subject matter" is destroyed. [445 - 448]
Example: Seller contracts to
deliver 100 widgets to Buyer at a stated price; both parties understand that
Seller will get the widgets from Widget Co., with whom Seller has a
long-term supply contract. If Widget Co. breaches or goes bankrupt, a court
might hold that an essential intangible aspect of Seller's ability to
perform has been nullified, and might let Seller use the impossibility
defense.
a. Impossibility due to failure
of third persons: Where a middleman contracts to supply goods that he will
be procuring from some third party, and the third party cannot or will not
supply the goods to the middleman, the middleman's ability to use the
impossibility defense depends on the precise situation: [446 - 448]
ii. Seller unable to make
contract: Similarly, if the seller-buyer contract contemplates that the
seller will procure the goods from a given supplier, and that supplier
is unwilling to contract to sell the items to the seller, the seller
generally may not use impossibility. [446]
iii. Where seller's supply
contract is breached: But if the contract contemplates that seller will
make a particular supply contract, and seller does make a contract with
this supplier, many courts will allow the impossibility defense if the
supplier breaches. [447]
iv. Supplier excused by
impossibility: Similarly, if the seller makes a contract with his
supplier, and the supplier is excused by virtue of his own
impossibility, the seller will probably also be discharged. [447]
3. Non-essential mode of
performance: 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.)
a. Death or illness of a third
party: A contract may similarly be discharged by virtue of the death or
illness of some third person, who is necessary to performance of the
contract even though he is not himself a party to it. (Example: Impresario
contracts with Arena Co. to have Singer appear in a concert at Arena Co.
If Singer develops laryngitis the day of the concert, the Arena-Impresario
contract will be discharged by reason of impossibility, even though Singer
is not directly a party.) [448]
b. Temporary impossibility: If
events render performance of the contract only temporarily impossible,
this will normally merely suspend the duty of performing until the
impossibility ends. But if after the temporary impossibility is over,
performance would be much more burdensome, then suspension will turn into
discharge. [450]
III. IMPRACTICABILITY
A. Modern view of impracticability:
Modern courts generally equate "extreme impracticability" with
"impossibility." In other words, if due to changed circumstances,
performance would be infeasible from a commercial viewpoint, the promisor may
be excused just as he would be if performance were literally impossible. [450
- 452]
1. UCC: The UCC deals with
impracticability this way: § 2-615(a) provides that the seller's
non-delivery is excuse "if performance as agreed has been made
impracticable by the occurrence of a contingency the non-occurrence of which
was a basic assumption on which the contract was made...." Complete
cutoffs of supplies (e.g., because of war, crop failure due to drought,
strike, etc.) will often be found to be covered by 2-615, thus relieving the seller.
[452]
2. Cost increases:
Most impracticability cases relate to extreme cost increases suffered by
sellers who have signed fixed-price contracts. Here, while it is
theoretically possible for the seller of goods or services to escape the
contracts on the grounds of impracticability, sellers generally lose. The
reason is that such sellers are generally found to have implicitly assumed
the risk of cost increases, when they signed a fixed-price contract. This is
true both in services contracts and in sales contracts governed by the UCC.
It is especially likely that the seller will lose where the cost increase
was foreseeable. [452]
Example: Oil Co.
contracts to sell to Utility oil for 10 years at a price of $10 per barrel.
Due to increased price discipline by OPEC, Oil Co.'s cost per barrel jumps
from $9 to $29. A court will probably hold that Oil Co. cannot escape the
contract on grounds of impracticability, because: (1) Oil Co. implicitly
assumed the risk of price increases by agreeing to a fixed-price contract;
and (2) disturbances in the supply of oil, with consequent price increases,
were reasonably foreseeable to Oil Co. at the time it signed.
IV. FRUSTRATION OF PURPOSE
A. Frustration generally: Where a
party's purpose in entering into the contract is destroyed by supervening
events, most courts will discharge him from performing. This is the doctrine
of "frustration of purpose." [453]
1. Distinguish from impossibility:
Be sure to distinguish frustration of purpose from impossibility. In
frustration cases, the person seeking discharge is not claiming that he
"cannot" perform, in the sense of inability. Rather, she is
claiming that it makes no sense for her to perform, because what she will
get in return does not have the value she expected at the time she entered
into the contract.
Example: P rents his apartment to D
for a two-day period, at a very high rate. As known to P, D's purpose is to
view the coronation of the new king. The coronation is cancelled because of
the king's illness. Held, D is discharged from performing because his
purpose in entering the contract has been frustrated. [Krell v. Henry]
B. Factors to be considered: The two
main factors courts have looked to, in deciding whether to apply the doctrine
of frustration, are: [454]
1. Foreseeability: The less
foreseeable the event which thwarts the promisor's purpose, the more likely
the court is to allow the frustration defense. (Example: In Krell, it was
quite unlikely, at the time of the contract, that the king would be too sick
to be crowned.)
V. RESTITUTION AND RELIANCE WHERE THE
PARTIES ARE DISCHARGED
A. Generally: Where the contract is
discharged because of impossibility, impracticability or frustration, the
courts generally try to adjust the equities of the situation by allowing
either party to recover the value he has rendered to the other, and sometimes
even the expenditures made in preparation. [459]
B. Restitution: Courts generally
allow one who has been discharged by impossibility or frustration to recover
in quasi-contract for restitution, i.e., for the value of the benefit
conferred on the other party. [460]
1. Time for measuring benefit:
Usually, the benefit is measured just before the event causing the
discharge. (Example: Contractor contracts to paint Owner's house for
$10,000. After half the work is done, the house burns down. A court will
first discharge both parties from the contract. It will then probably
measure the benefit conferred by Contractor on Owner as of the moment just
before the fire; if it concludes that $5,000 "worth" of work had
been done as of that moment, it will award this amount to Contractor.) [460]
2. Pro-rata contract price: Where
the performance has been partly made, recovery will normally be limited to
the pro-rata contract price, if such a pro-rating can be sensibly done. But
if the reasonable value to the other party is less than the pro-rata
contract price, this lesser value will be awarded. [460]
C. Reliance: Occasionally, if
restitution will not "avoid injustice," the court will protect the
parties' reliance interests instead. This might allow a party to recover his
expenditures made in preparation for performance. [460]
Chapter 13
MISCELLANEOUS DEFENSES
I. ILLEGALITY
A. Generally: In general, if a
contract is found to be "illegal," the court will refuse to enforce
it. [467]
B. Kinds of illegal contracts: Here
are some of the kinds of contracts frequently found to be illegal and thus
unenforceable: (1) "gambling" or "wagering" contracts; (2)
lending contracts that violate usury statutes; (3) the pursuit of
"maintenance" and "champerty," arrangements by which one
person improperly finances another's lawsuit; and (4) the performance of
services without a required license or permit. [467]
1. Non-compete covenants: A very
important type of possibly illegal contract is a covenant not to compete. In
general, if a non-compete agreement is unreasonably broad, it will be held
to be illegal and not enforced. [468]
a. Sale of business: If the
seller of a business is selling its "good will," his ancillary
promise that he will not compete in the same business as the purchaser
will be upheld, provided that it is not unreasonably broad either
geographically or in duration. [468]
b. Employment contracts:
Employment agreements often include a clause by which the employee agrees
not to compete with his employer if he leaves the latter's employ. Such
covenants are closely scrutinized by courts, and will be enforced only if
they are designed to safeguard either the employer's trade secrets or his
customer list. Even where these objectives are being pursued, the
non-compete will be struck down if it is unreasonably broad as to
geography or duration. [468]
i. Divisibility: If a
non-compete is overly broad, most courts today will enforce it up to
reasonable limits. Some courts apply the "blue pencil" rule,
by which the clause will be enforced only if it can be narrowed by
striking out certain portions (so that a ban on competing in "Ohio
and Pennsylvania" could be modified by striking out "and
Pennsylvania," but a ban lasting for "20 years" could not
be modified by reducing it to "five years," since this would
require redrafting, not merely striking). Most courts today, however, do
not follow the blue pencil rule, and will "redraft" the
non-compete to bring it back to within reasonable limits. [469]
2. Cohabitation: Many courts refuse
to enforce cohabitation agreements, i.e., agreements regarding property
division entered into by couples who are living together without marriage.
But a growing minority of courts now enforce such living-together
arrangements, at least where they do not explicitly trade sex for money.
[470 - 471]
C. Enforceability: As a general rule,
neither party to an illegal contract may enforce it. This is not an ironclad
rule. In general, contracts that are still wholly executory are less likely to
be enforced by the court than those that have been at least partly performed.
[471]
1. Wholly executory: If the
contract is completely executory (i.e., neither party has rendered any
performance), there are only a few situations where the court will allow one
party to recover damages for breach: [471]
a. Ignorance of facts: Where one
of the parties is justifiably unaware of the facts which make the contract
illegal, and the other is not, the former may usually recover. (Example:
Owner hires Electrician to perform electrical work; Owner does not know
that Electrician is unlicensed. Owner may enforce the contract, even if he
discovers the illegality before any work is done or payments made.) [471]
b. Wrongful purpose: Where only
one party has a wrongful purpose, the other may recover for breach, at
least if the wrongful purpose does not involve a crime of serious moral
turpitude. (Example: A sells diamonds to B knowing that B plans to smuggle
them into an Eastern Bloc country, where such importation is not allowed.
A may recover for breach before money or goods changes hands, even if A
knew of the proposed smuggling at the time of signing.) [471]
c. Statute directed at one party:
If the statute is designed to protect one party, the person for whose
protection the statute is designed may enforce the contract or sue for its
breach. (Example: A agrees to sell stock to B, in violation of Blue Sky
laws. B, as an investor whom the statute is designed to protect, may
enforce the contract.) [472]
2. Partly- or fully-performed
illegal contracts: Where one or both parties have partly or fully performed,
the courts are more willing to enforce the contract or at least grant a
quasi-contractual remedy. The three above situations will generally lead to
enforcement as in the wholly-executory situation. Also:
Example: Where a contractor fails
to obtain a permit or license, and the permit or license is merely a
revenue-raising rather than public-protection mechanism, the contractor
may be able to recover the value of the work he has done.
b. Pari delicto: If one party,
although blameworthy, is much less guilty than the other party, he may use
the doctrine of "pari delicto" to gain enforcement. This may
only be used where the plaintiff is not guilty of serious moral turpitude
(but may be used even by a plaintiff who knew of the illegality). [472]
Example: If Bank lends money to
Contractor for Contractor to build a house, even though Bank knows that
Contractor is not licensed, there is a good chance that Bank will be held
not to be "in pari delicto," and will thus be permitted to
recover on the loan. But if Bank financed a cocaine deal, Bank's conduct
would be found to be of serious moral turpitude, so the pari delicto
doctrine would not apply, and Bank could not recover.
Example: Owner contracts to have
Plumber supply a bathtub, and to install the bathtub. Plumber does not
have a license. A court might hold that Plumber cannot recover that
portion of the contract attributable to services, but might still allow
Plumber to recover for the value of the tub he supplied.
II. DURESS
A. Generally: The defense of duress
is available if D can show that he was unfairly coerced into entering into the
contract, or into modifying it. Duress consists of "any wrongful act or
threat which overcomes the free will of a party." [475]
1. Subjective standard: A
subjective standard is used to determine whether the 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
unusually timid, and was in fact coerced, he may use the defense.
B. Ways of committing: Here are some
of the acts or threats that may constitute duress: (1) violence or threats of
it; (2) imprisonment or threats of it; (3) wrongful taking or keeping of a
party's property, or threats to do so; and (4) threats to breach a contract or
commit other wrongful acts. [475]
1. 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.
C. 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. If, by contrast, the request for modification is due to unforeseen
difficulties, the duress defense will probably fail. [476]
III. MISREPRESENTATION
A. 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 plaintiff.
[477]
3. Fact, not opinion: The
misrepresentation must be one of fact, rather than of opinion. (Example: A
salesman's statement, "This is a very reliable little car," is
probably so clearly opinion, or "puffing," that the buyer cannot
rescind for misrepresentation by showing that the car in fact breaks down a
lot. But, "This car gets 30 miles per gallon in city driving," is
an assertion of fact, so it can serve as the basis for a misrepresentation
claim.) [477]
C. 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 will support an action: [478]
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. [478]
2. Positive concealment: If a party
takes positive action to conceal the truth, this will be actionable even
though it is not verbal. (Example: To conceal termite damage, Seller
plasters over wooden beams in the house he is selling.) [478]
3. 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. [478]
4. 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. [479]
5. Failure to correct mistake: 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."
(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.) [479]
IV. UNCONSCIONABILITY AND ADHESION
CONTRACTS
A. Adhesion contracts: "Adhesion
contract" is an imprecise term used to describe a document containing
non-bargained clauses that are in fine print, complicated, and/or
exceptionally favorable to the drafter. [481]
2. Tickets and other "pseudo
contracts": Refusal to enforce what the court finds to be a
"adhesion contract" is especially likely where the transaction is
one in which the non-drafter does not even realize that he is entering into
a contract at all. Parking-garage tickets, tickets for trains or planes, and
tickets to sporting events, are examples: there is often contractual
language in fine print on the back of the ticket, but the purchaser does not
understand that by buying the ticket she is agreeing to the printed
contractual terms. [483]
a. Refusal to enforce: The
language printed on the ticket will generally be enforced only if: (1) the
purchaser signs or somehow manifests assent to the terms of the ticket;
and (2) the purchaser has reason to believe that such tickets are
regularly used to contain contractual terms like those in fact on the
ticket. Even if the ticket is found to be generally enforceable, the court
will strike unreasonable terms.
B. Unconscionability: 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. See UCC § 2-302(1). [484]
1. No definition: 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
refuse to enforce it. [484]
a. Procedural: 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). [485]
i. 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. [485 - 486]
ii. 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. [486 - 488]
V. CAPACITY
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.
[488]
B. Infants: Until a person reaches
majority, any contract which he enters into is voidable at his option. The age
of majority is a matter of statute, and in most states is now 18. (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.) [488 - 491]
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. [489]
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. [489 - 490]
iii. 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.
a. Where infant is defendant: If
the infant is a defendant to a breach-of-contract suit brought by the
non-infant, the latter will not be allowed to recover profits he would
have made, or any other contract damages. But he will have a limited right
of restitution, the right to require the defendant infant to return the
goods or other value if he still has them. [490]
b. Where infant is plaintiff: If
the infant is a plaintiff who is suing to recover money already paid by
him, the court will require the infant to return any value which he has,
and will in fact subtract from the infant's recovery any value obtained
and dissipated. (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.) [490]
4. Lies about age: If the infant
lies about his age, all courts let the other party avoid the contract on
grounds of fraud. In other words, the infant who falsely claims adulthood
loses his power to ratify the contract. [491]
C. Mental incompetents: 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 incompetence if either: (1) he doesn't understand the
contract; or (2) he understands it, but acts irrationally, and the other
person knows he is acting irrationally. [491 - 493]
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. [492]
Chapter 14
WARRANTIES
I. WARRANTIES GENERALLY
A. Types: Under the UCC, a seller may
make several warranties that are of importance: (1) an express warranty; (2)
an implied warranty of merchantability; and (3) a warranty of fitness for a
particular purpose. If the seller breaches any of these warranties, the buyer
may bring a damage action for breach of warranty, which can be viewed as a
special type of breach-of-contract action. [498]
II. EXPRESS WARRANTIES
A. Definition: An express warranty is
an explicit (not just implied) promise or guarantee by the seller that the
goods will have certain qualities. See UCC § 2-313(1)(a): "Any affirmation of
fact or promise made by the seller to the buyer which relates to the goods and
becomes part of the basis of the bargain creates an express warranty that the
goods shall conform to the affirmation or promise." [499]
3. Puffing: If the seller is
clearly "puffing," or expressing an opinion, he will not be held
to have made a warranty. [500] (Example: A used-car salesperson's statement
that, "This is a top-notch car," will probably be held to be mere
puffing, not an express warranty of anything. But the statement, "This
car will do 30 m.p.g. in city driving," is specific enough to amount to
an express warranty.)
III. IMPLIED WARRANTY OF
MERCHANTABILITY
A. Generally: The most important
warranty given in the UCC is the implied warranty of merchantability. UCC § 2-314(1) provides: "Unless
excluded or modified ... a warranty that goods shall be merchantable is
implied in a contract for their sale if the seller is a merchant with respect
to goods of that kind." [500]
B. Meaning of
"merchantable": There is no precise definition of
"merchantable." The most important meaning is that the goods must be
"fit for the ordinary purposes for which such goods are used." § 2-314(2)(c). (Example: Dealer sells a new
car to Buyer. Due to a manufacturing defect, the car cannot go more than 25
m.p.h. Since cars are generally sold and used for high-speed highway driving,
this would be a breach of the implied warranty of merchantability, even though
Dealer never expressly promised any particular speed.) [501]
C. Always given
unless disclaimed: The implied warranty of merchantability is always given by
a merchant seller, unless it is expressly excluded by a disclaimer that meets
stringent formal requirements imposed by the Code.
IV. WARRANTY OF FITNESS FOR PARTICULAR
PURPOSE
A. Generally: Depending on the
circumstances, a seller may be found to have impliedly warranted that the
goods are fit for a particular purpose. UCC § 2-315 provides that "where the
seller at the time of contracting has reason to know any particular purpose
for which the goods are required and that the buyer is relying on the seller's
judgment to select or furnish suitable goods, there is ... an implied warranty
that the goods shall be fit for such purpose." [501]
B. Elements: The
buyer must prove three things to recover for breach of this implied warranty:
(1) that the seller had reason to know the buyer's purpose; (2) that the
seller had reason to know that the buyer was relying on the seller's skill or
judgment to furnish suitable goods; and (3) that the buyer did in fact rely on
the seller's skill or judgment. [501]
1. Use of trade name: If the buyer
insists on a particular brand of goods, he is not relying on the seller's
skill or judgment, so no implied warranty of fitness for a particular
purpose arises. [502]
V. PRIVITY
A. Definition: Two persons are
"in privity" with each other if they contracted with each other.
[502]
B. When privity is necessary: UCC § 2-318, stating when privity is
necessary for a UCC breach-of-warranty action, actually has three separate
alternatives. Each has been adopted in some states. [503]
1. Alternative A: Alternative A
extends the seller's warranty (express or implied) only to a member of the
buyer's family or household, or a house guest, and only where it is
foreseeable that the person may use and be injured by the goods. A person
other than the buyer thus cannot recover in states adopting Alternative A
unless he is physically injured, and is a relative or house guest of the
buyer. [503]
2. Alternative B: Alternative B
covers any person, even if not a relative or house guest of the buyer, who
may reasonably be expected to use or be affected by the goods. But, as with
Alternative A, only personal injury is covered. [503]
3. Alternative C: Alternative C is
the broadest: it extends the warranty to all persons who may be expected to
use or be affected by the goods. Most importantly, it covers property and
economic damage as well as personal injury, and may even cover intangible
economic loss. [503]
VI. DISCLAIMERS OF WARRANTY
B. Express warranties: The seller is
basically free to disclaim express warranties, as long as he does so in a
clear and reasonable way. However, this rarely happens - since nothing forces
the seller to make an express warranty in the first place, he will usually
have no reason to disclaim it after making it. [503]
C. Implied warranties: Disclaimers of
the two implied warranties (merchantability and fitness for particular
purpose) are tightly limited by the Code: [504 - 505]
a. Merchantability: A disclaimer
of the warranty of merchantability must mention the word
"merchantability." § 2-316(2). The disclaimer does not
have to be in writing, but if it is in writing, it must be
"conspicuous." In other words, the disclaimer cannot be buried
in the fine print of the
contract. (Usually, capital letters, bold face type, bigger type, or a
different color type are used to meet the "conspicuous"
requirement where the disclaimer is written.) [504]
b. Fitness for a particular
purpose: A disclaimer of the warranty of fitness for a particular purpose
must be in writing, and must also be conspicuous. (But it does not need to
use any particular words, in contrast to a disclaimer of the warranty of
merchantability.) (Example: The following language, if in writing and
conspicuous, would suffice: "There are no warranties which extend
beyond the description on the face hereof.") [504]
b. Examination of sample or
model: If the buyer is asked to examine a sample or model, or the goods
themselves, there is no implied warranty with regard to defects which an
examination ought to have revealed. UCC § 2-316(3)(b). (Example: Buyer buys a
floor sample T.V. from Dealer. If inspection of the cabinetry would have
shown a dent, Buyer cannot claim that the dent is a violation of the
implied warranty of merchantability.)
c. Course of
dealing: An implied warranty can be excluded or modified by course of
dealing, course of performance, and usage of trade. (Example: The dealings
of the parties on prior contracts might create a "course of
performance" to the effect that the goods are bought "as
is" in return for a lower price.)
D. Magnuson-Moss: A federal law, the Magnuson-Moss FTC Act, provides that where a
written warranty is made to a consumer, the warrantor may not "disclaim
or modify" any implied warranty. So if the maker or seller of a consumer
good wants to give an express warranty in writing, he must also give the two
implied warranties. [506]
VII. MODIFYING CONTRACT REMEDIES
A. UCC limits: Instead of disclaiming
warranties, the seller may try to limit the buyer's remedies for breaches of
warranty or other contract breaches. (Example: Seller may insert a clause that
Buyer's remedies are limited to repair or replacement of defective goods or
parts, with no consequential damages.) But the UCC limits the seller's right
to do this "remedy meddling" in two ways. [506 - 507]
Example: Seller sells yarn to
Buyer, knowing that Buyer will dye the yarn and use it in products. Seller
limits the warranty to repair or replacement of defective yarn. Buyer then
spends a great deal of labor knitting the yarn into expensive sweaters,
which fall apart due to poor quality yarn. A court might hold that here,
repair or replacement of yarn that has already been expensively knitted into
sweaters would be a useless remedy, in which case the basic Code remedy of
money damages for breach of the implied warranty of merchantability would
re-enter the contract.
2. Unconscionability: Second, the
court will refuse to enforce a damage limitation if it finds that this is
unconscionable. According to § 2-713(3): (1) barring consequential
damages for personal injury will virtually always be unconscionable; but (2)
limiting damages where the loss is commercial will generally not be
unconscionable. [507]
Chapter 15
DISCHARGE OF CONTRACTS
I. RESCISSION
A. Mutual rescission: As long as a
contract is executory on both sides (i.e., neither party has fully performed),
the parties may agree to cancel the whole contract. This is a "mutual
rescission." [510]
B. Unilateral rescission: Where one
of the parties to a contract has been the victim of fraud, duress, mistake, or
breach by the other party, he will generally be allowed to cancel the
contract, terminating his obligations under it. Some courts call this a
"unilateral rescission." But it is better to say that the innocent
party may "cancel" or "terminate." [511]
II. ACCORD AND SATISFACTION
A. Executory accord generally: An
executory accord is an agreement by the parties to a contract under which one
promises to render a substitute performance in the future, and the other
promises to accept that substitute in discharge of the existing duty.
(Example: Debtor owes Creditor $1,000 due in 30 days. Creditor promises Debtor
that if Debtor will pay $1,100 in 60 days, Creditor will accept this payment
in discharge; Debtor promises to make the $1,100 payment in 60 days. The new
agreement is an executory accord.) [511]
B. Consequences: Executory accords
are enforceable. However, an accord does not discharge the previous
contractual duty as soon as the accord is made; instead, no discharge occurs
until the terms of the accord are performed. Once the terms of the accord are
performed, there is said to have been an "accord and satisfaction."
[511 - 512]
1. Failure to perform accord: If a
party fails to perform under the terms of the executory accord, the other
party may sue for breach of the original agreement, or breach of the accord,
at her option. (Example: On the facts of the above example, if Debtor fails
to make the $1,100 payment, Creditor may sue for either $1,000 plus damages
for failure to get the money in 30 days, or $1,100 plus damages for failure
to get the money in 60 days.) [512]
III. SUBSTITUTED AGREEMENT
A. Nature of substituted agreement: A
"substituted agreement" is similar but not identical to an executory
accord. Under a substituted agreement, the previous contract is immediately
discharged, and replaced with a new agreement. (Example: On the facts of the
above example, if the new agreement were be found to be a substituted
agreement rather than an executory accord, and Debtor then failed to make the
payment in 60 days, Creditor would only be able to sue on the new promise, not
the old promise.) [512 - 514]
1. Distinguishing: In determining
whether a given agreement is a substitute agreement or executory accord, an
important factor is whether the claim is a disputed one as to liability or
amount - if the debtor in good faith disputes either the existence of the
debt or its amount, the presumption is that there is a substituted
agreement. If the amount and obligation are undisputed, the presumption will
be that there is an executory accord. [513]
a. Level of formality: Another
important factor in distinguishing substituted agreements from executory
accords is the level of formality: the more deliberate and formalized the
agreement, the more likely it is to be a substituted agreement. For
instance, an oral agreement is very likely to be an accord, not a
substituted agreement, because of its informality. [513]
B. Writing: If the substituted
agreement would have to satisfy the Statute of Frauds were it an original
contract, the substituted agreement must be in writing. (Some states also
require the substituted agreement to be in writing if the original is in
writing, even where neither falls within the Statute of Frauds.) [514]
IV. NOVATION
A. Definition: A "novation"
occurs where the obligee under an original contract (the person to whom the
duty is owed) agrees to relieve the obligor of all liability after the duty is
delegated to some third party. A novation thus substitutes for the original
obligor a stranger to the original contract, the delegatee. [514]
Example: Contractor agrees to paint
Owner's house for $10,000. Contractor does not have enough time to get the job
done, so with Owner's consent he recruits Painter to do the job instead. If
Owner agrees to release Contractor from liability, the result is a novation:
Painter steps into the shoes of Contractor, and only Painter, not Contractor,
owes a duty to Owner.
B. Consent: The obligee must consent
to the novation. But the obligor, who is being discharged, need not consent.
(Example: On the facts of the above example, Owner must consent to the
novation, but Contractor need not consent, at least to the delegation/release
aspect of it.) [514]
V. ACCOUNT STATED
A. Generally: Where a party who has
sold goods or services to another sends a bill, and the buyer holds the bill
for an unreasonably long time without objecting to its contents, the seller
will be able to use the bill as the basis for a suit on an "account
stated." The invoice is not dispositive proof that that amount is owing,
but the burden of proving that the invoice is wrong shifts to the buyer. [515]
VI. RELEASES
A. Generally: Where a contract is
executory only on one side, the party who has fully performed may give up his
rights by virtue of a release, a document executed by him discharging the
other party. [515]
B. Formal requirements: In most
states, a release must either be supported by consideration, or by a statutory
substitute (e.g., a signed writing). [515]
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