Ch. 8-10 Terms & Reading PDF

[Chapter Introduction] 1. 2. 3. 4. 5. - As Ralph Waldo Emerson observed in the chapter-opening quotation, people tend to act in their own self-interest, and this influences the terms they seek in their contracts. Contract law must therefore provide rules to determine which contract terms...

[Chapter Introduction] 1. 2. 3. 4. 5. - As Ralph Waldo Emerson observed in the chapter-opening quotation, people tend to act in their own self-interest, and this influences the terms they seek in their contracts. Contract law must therefore provide rules to determine which contract terms will be enforced. A contract is based on a promise---a declaration by a person (the promisor) that binds the person to do or not to do a certain act. As a result, the person to whom the promise is made (the promisee) has a right to expect or demand that something either will or will not happen in the future. Like other types of law, contract law reflects our social values, interests, and expectations at a given point in time. It shows what kinds of promises our society thinks should be legally binding. Contract law also distinguishes between promises that create only moral obligations (such as a promise to take a friend to lunch) and promises that are legally binding (such as a promise to pay for items ordered online). In this chapter, we introduce you to the law of contracts and examine two of the requirements for a valid contract---agreement and consideration. We conclude the chapter with a discusson of e-contracts. **[An Overview of Contract Law]** Before we look at the numerous rules that courts use to determine whether a particular promise will be enforced, it is necessary to understand some fundamental concepts of contract law. In this section, we describe the sources and general function of contract law and introduce the objective theory of contracts. [Sources of Contract Law] The common law governs all contracts except when it has been modified or replaced by statutory law, such as the Uniform Commercial Code (UCC), or by administrative agency regulations. Contracts relating to services, real estate, employment, and insurance, for instance, generally are governed by the common law of contracts. Contracts for the sale and lease of goods, however, are governed by the UCC to the extent that the UCC has modified general contract law. [The Function of Contracts] No aspect of modern life is entirely free of contractual relationships. You acquire rights and obligations, for instance, when you borrow funds, buy or lease a house, obtain insurance, form a business, or purchase goods or services. Contract law is designed to provide stability and predictability, as well as certainty, for both buyers and sellers in the marketplace. Contract law assures the parties to private agreements that the promises they make will be enforceable. Clearly, many promises are kept because the parties involved feel a moral obligation to keep them or because keeping a promise is in their mutual self-interest. Nevertheless, in business agreements, the rules of contract law are often followed to avoid potential disputes. By supplying procedures for enforcing private agreements, contract law provides an essential condition for the existence of a market economy. Without a legal framework of reasonably assured expectations within which to make long-run plans, businesspersons would be able to rely only on the good faith of others. Duty and good faith are usually sufficient to obtain compliance with a promise. When price changes or adverse economic factors make contract compliance costly, however, these elements may not be enough. Contract law is necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief. [The Definition of a Contract] A contract is an agreement that can be enforced in court. It is formed by two or more parties who agree to perform or to refrain from performing some act now or in the future. If the contractual promise is not fulfilled, the party who made it is subject to the sanctions of a court. That party may be required to pay damages for failing to perform the contractual promise. In a few instances, the party may be required to perform the promised act. [The Objective Theory of Contracts] In determining whether a contract has been formed, the element of intent is of prime importance. In contract law, intent is determined by what is referred to as the objective theory of contracts. Under this theory, a party's intention to enter into a contract is judged by outward, objective facts as interpreted by a reasonable person, rather than by the party's secret, subjective intentions. Objective facts may include: 1. 2. 3. Case Example 8.1: [Elements of a Contract] The many topics that will be discussed in the following chapters on contract law require an understanding of the basic elements of a valid contract and the way in which a contract is created. Also important is an understanding of the types of circumstances in which even legally valid contracts will not be enforced. [Requirements of a Valid Contract] 1. 2. 3. 4. [Case 8.1: Credible Behavioral Health, Inc. v. Johnson] Court of Appeals of Maryland, 466 Md. 380, 220 A.3d 303 (2019). [Defenses to the Enforceability of a Contract] 1. 2. [Types of Contracts] There are many types of contracts. They may be categorized based on legal distinctions as to their formation, performance, and enforceability. In addition, courts occasionally impose contractual obligations on parties who have not entered into an express contract. [Bilateral versus Unilateral Contracts. ] [Formal versus Informal Contracts]. 1. 2. 3. [Contract Performance] 1. 2. 3. 4. **[Agreement]** We have seen that the first essential element for contract formation is agreement. The parties must agree on the terms of the contract and manifest to each other their mutual assent (agreement) to the same bargain. Ordinarily, agreement is evidenced by two events: an offer and an acceptance. [Offer] Focus Question 2: What three elements are necessary for an effective offer? An offer is a promise or commitment to perform or refrain from performing some specified act in the future. Three elements are necessary for an offer to be effective: 1. 2. 3. Once an effective offer has been made, the offeree's acceptance of that offer creates a legally binding contract (providing the other essential elements for a valid and enforceable contract are present). [Intention of the Offer] Classic Case 8.2: Lucy v. Zehmer Decision: Yes. The agreement to sell the farm was binding. [When Intent May Be Lacking] 1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 1. 2. 1. 2. 3. 4. [Acceptance] An acceptance is a voluntary act by the offeree that shows assent, or agreement, to the terms of an offer. The offeree's act may consist of words or conduct. The acceptance must be unequivocal and must be communicated to the offeror. Generally, only the person to whom the offer is made or that person's agent can accept the offer and create a binding contract. (See this chapter's Adapting the Law to the Online Environment feature for a discussion of how parties can sometimes inadvertently accept a contract via e-mail or text messages.) [Adapting the Law to the Online Environment] [Unequivocal Acceptance] **[Consideration]** We turn next to the second requirement that must be met if a valid contract is to be formed---consideration. Consideration usually is defined as the value given in return for a promise. Often, consideration is broken down into two parts: 1. 2. [Legally Sufficient Value] Focus Question 3: What are the two elements of consideration? To be legally sufficient, consideration must be something of value in the eyes of the law. The "something of legally sufficient value" may consist of any of the following: 1. 2. 3. Consideration in bilateral contracts normally consists of a promise in return for a promise. In a contract for the sale of goods, for instance, the seller promises to ship specific goods to the buyer, and the buyer promises to pay for those goods when they are received. Each of these promises constitutes consideration for the contract. In contrast, unilateral contracts involve a promise in return for a performance. [Bargained-for Exchange] The second element of consideration is that it must provide the basis for the bargain struck between the contracting parties. The item of value must be given or promised by the promisor (offeror) in return for the promisee's promise or performance. This element of bargained-for exchange distinguishes contracts from gifts. [Adequacy of Consideration] Adequacy of consideration involves "how much" consideration is given. Essentially, adequacy of consideration concerns the fairness of the bargain. On the surface, when the items exchanged are of unequal value, fairness would appear to be an issue. Normally, however, a court will not question the adequacy of consideration based solely on the comparative value of the things exchanged. Under the doctrine of freedom of contract, courts leave it up to the parties to decide what something is worth, and parties are usually free to bargain as they wish. If people could sue merely because they had entered into an unwise contract, the courts would be overloaded with frivolous suits. Occasionally, an exception may be made to the general rule just discussed. A large disparity in the amount or value of the consideration exchanged may raise a red flag for a court to look more closely at the bargain. Shockingly inadequate consideration can indicate that fraud, duress, or undue influence was involved. [Agreements That Lack Consideration] Sometimes, one or both of the parties to a contract may think that they have exchanged consideration when in fact they have not. Here, we look at some situations in which the parties' promises or actions do not qualify as contractual consideration. [Promissory Estoppel] Focus Question 4: In what circumstances might a promise be enforced despite a lack of consideration? Sometimes, individuals rely on promises, and their reliance may form a basis for a court to infer contract rights and duties. Under the doctrine of promissory estoppel (also called detrimental reliance), a person who has reasonably and substantially relied on the promise of another can obtain some measure of recovery. Promissory estoppel allows a party to recover on a promise even though it was made without consideration. Under this doctrine, a court may enforce an otherwise unenforceable promise to avoid an injustice that would otherwise result. 1. 2. 3. 4. 5. If these requirements are met, a promise may be enforced even though it is not supported by consideration. In essence, the promisor (the offeror) will be estopped (barred or prevented) from asserting lack of consideration as a defense. Promissory estoppel is similar in some ways to the doctrine of quasi contract that was discussed in a previous chapter. In both situations, a court acts in the interests of equity and imposes contract obligations on the parties to prevent unfairness even though no actual contract exists. The difference is that with quasi contract, no promise was made at all. In contrast, with promissory estoppel, an otherwise unenforceable promise was made and relied on. **[E-Contracts]** Numerous contracts are formed online. An electronic contract, or e-contract, must meet the same basic requirements (agreement, consideration, contractual capacity, and legality) as a paper contract. Disputes concerning e-contracts, however, tend to center on contract terms and whether the parties voluntarily agreed to those terms. Online contracts may be formed not only for the sale of goods and services, but also for licensing. The "sale" of software generally involves a license, or a right to use the software, rather than the passage of title (ownership rights) from the seller to the buyer. As you read through the following subsections, keep in mind that although we typically refer to the offeror and the offeree as a seller and a buyer, in many online transactions these parties would be more accurately described as a licensor and a licensee. [Online Offers] Sellers doing business via the Internet can protect themselves against contract disputes and legal liability by creating offers that clearly spell out the terms that will govern their transactions if the offers are accepted. All important terms should be conspicuous and easy to view. 1. 2. 3. 4. 5. 6. 7. 8. 9. [Online Acceptances] The Restatement (Second) of Contracts states that parties may agree to a contract "by written or spoken words or by other action or by failure to act."Footnote The Uniform Commercial Code (UCC), which governs sales contracts, has a similar provision. Section 2--204 of the UCC states that any contract for the sale of goods "may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." The courts have used these provisions in determining what constitutes an online acceptance. Click-On Agreements Focus Question 5: How do click-on and shrink-wrap agreements differ? The courts have concluded that the act of clicking on a box labeled "I accept" or "I agree" can indicate acceptance of an online offer. The agreement resulting from such an acceptance is often called a click-on agreement (sometimes, a click-on license or click-wrap agreement). Generally, the law does not require that the parties have read all of the terms in a contract for it to be effective. Therefore, clicking on a box that states "I agree" to certain terms can be enough to bind a party to these terms. The terms may be contained on a website through which the buyer is obtaining goods or services, or they may appear on the screen of a computer, smartphone, or other device when software is downloaded from the Internet. In the following case, a lottery entrant claimed that the lottery breached its contract with him when it denied him the prize. The lottery acknowledged that he had accepted its offer to contract when he entered the contest online, and that his ticket had won the drawing. But it asserted that he was disqualified because he had failed to comply with the terms of the contract---that is, the rules of the contest. Case 8.3: Bailey v. Kentucky Lottery Corp. [Federal Law on E-Signatures and E-Documents] An e-signature has been defined as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record."Footnote Electronic documents can be signed in a number of ways. Thus, e-signatures include encrypted digital signatures, names (intended as signatures) at the ends of e-mail messages, and "clicks" on a Web page if the clicks include some means of identification. Under the Electronic Signatures in Global and National Commerce Act (E-SIGN Act),Footnote no contract, record, or signature may be "denied legal effect" solely because it is in electronic form. An electronic signature is as valid as a signature on paper, and an e-document can be as enforceable as a paper one. For an e-signature to be enforceable, however, the contracting parties must have agreed to use electronic signatures. For an electronic document to be valid, it must be in a form that can be retained and accurately reproduced. The E-SIGN Act does not apply to all types of documents. Contracts and documents that are exempt include court papers, divorce decrees, evictions, foreclosures, health-insurance terminations, prenuptial agreements, and wills. Also, the only agreements governed by the UCC that fall under this law are those covered by Articles 2 and 2A and UCC 1--107 and 1--206. Despite these limitations, the E-SIGN Act significantly expanded contracting online. [The Uniform Electronic Transactions Act] The National Conference of Commissioners on Uniform State Laws and the American Law Institute promulgated the Uniform Electronic Transactions Act (UETA) in 1999. The UETA has been adopted, at least in part, by forty-eight states. The primary purpose of the UETA is to remove barriers to e-commerce by giving the same legal effect to electronic records and signatures as is given to paper documents and signatures. As mentioned, the UETA broadly defines an e-signature as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record."Footnote A record is "information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable \[visual\] form." The UETA does not create new rules for electronic contracts. Rather, it establishes that records, signatures, and contracts may not be denied enforceability solely due to their electronic form. Under the UETA, if an electronic record or signature is the act of a particular person, the record or signature may be attributed to that person. If someone types their name at the bottom of an e-mail purchase order, for instance, that name will qualify as a "signature" and be attributed to the person whose name appears. An electronic record is considered sent when it is properly directed to the intended recipient in a form readable by the recipient's computer system. Once the electronic record leaves the control of the sender or comes under the control of the recipient, the UETA deems it to have been sent. An electronic record is considered received when it enters the recipient's processing system in a readable form---even if no individual is aware of its receipt. Like the E-SIGN Act, the UETA does not apply to all writings and signatures. It covers only electronic records and electronic signatures relating to a transaction. A transaction is defined as an interaction between two or more parties relating to business, commercial, or governmental activities. As mentioned, the act specifically does not apply to wills or testamentary trusts or to transactions governed by the UCC (other than those covered by Articles 2 and 2A). In addition, the provisions of the UETA allow the states to exclude its application to other areas of law. CHAPTER 9 -- CAPACITY, LEGALITY, AND ENFORCEABILITY **[Chapter Introduction]** Focus Questions The four Focus Questions below are designed to help improve your understanding. After reading this chapter, you should be able to answer the following questions: 1. 2. 3. 4. "Liberty of contract is not an absolute concept. It is relative to many conditions of time and place and circumstance." Benjamin Cardozo 1870--1938 (Associate justice of the United States Supreme Court, 1932--1938) Courts generally tend to enforce contracts, and much of the law is devoted to aiding the enforceability of contracts. Nevertheless, as indicated in the chapter-opening quotation, "liberty of contract" is not absolute. In other words, not all people can make legally binding contracts at all times. Contracts entered into by persons lacking the capacity to do so may be voidable. Similarly, contracts calling for the performance of an illegal act are illegal and thus void---they are not contracts at all. In addition, an otherwise valid contract may still be unenforceable if the parties have not genuinely agreed (voluntarily consented) to its terms or if it is not in the proper form. The lack of voluntary consent and proper form are both defenses to the enforcement of a contract. For instance, if a contract is required by law to be in writing (proper form), and there is no written evidence of the contract, it may not be enforceable. The latter part of this chapter examines the kinds of contracts that require a writing. **[Contractual Capacity]** Contractual capacity is the legal ability to enter into a contractual relationship. Courts generally presume the existence of contractual capacity, but in some situations, capacity is lacking or may be questionable. A person who has been determined by a court to be mentally incompetent, for instance, cannot form a legally binding contract. In other situations, a party may have the capacity to enter into a valid contract but may also have the right to avoid liability under it. For instance, minors---or infants, as they are commonly referred to in the law---usually are not legally bound by contracts. In this section, we look at the effect of youth, intoxication, and mental incompetence on contractual capacity. [Minors] Focus Question 1: Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract? Today, in almost all states, the age of majority (when a person is no longer a minor) for contractual purposes is eighteen years.Footnote In addition, some states provide for the termination of minority on marriage. Minority status may also be terminated by a minor's emancipation, which occurs when a child's parent or legal guardian relinquishes the legal right to exercise control over the child. Normally, minors who leave home to support themselves are considered emancipated. Several jurisdictions permit minors to petition a court for emancipation. The general rule is that a minor can enter into any contract that an adult can, provided that the contract is not one prohibited by law for minors (such as a contract involving the sale of alcoholic beverages or tobacco products). A contract entered into by a minor, however, is voidable at the option of that minor, subject to certain exceptions (to be discussed shortly). To exercise the option to avoid a contract, a minor need only manifest (clearly show) an intention not to be bound by it. The minor "avoids" the contract by disaffirming it. [Parents' Liability] [Intoxicated Persons] Intoxication is a condition in which a person's normal capacity to act or think is inhibited by alcohol or some other drug. A contract entered into by an intoxicated person can be either voidable or valid (and thus enforceable). If the person was sufficiently intoxicated to lack mental capacity and the other party had reason to know it, then the transaction may be voidable at the option of the intoxicated person, even if the intoxication was purely voluntary. The intoxicated person has the option of disaffirming the contract while intoxicated or for a reasonable time after becoming sober. If, despite intoxication, the person understood the legal consequences of the agreement, the contract is enforceable. (Note that an intoxicated person may ratify a contract expressly or impliedly after becoming sober.) Courts look at objective indications of intoxication to determine if a person possessed or lacked the required capacity. It is difficult to prove that a person's judgment was so severely impaired that the person could not comprehend the legal consequences of entering into a contract. Therefore, courts rarely permit contracts to be avoided due to intoxication. [Mentally Incompetent Persons] Contracts made by mentally incompetent persons can be void, voidable, or valid. If a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the person, any contract made by that person is void---no contract exists. Only the guardian can enter into a binding contract on behalf of the mentally incompetent person. If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed, the contract is voidable in most states. A contract is voidable if the person was unaware of entering into the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences. In such situations, the contract is voidable (or can be ratified) at the option of the mentally incompetent person but not at the option of the other party. A contract entered into by a mentally ill person (whom a court has not previously declared incompetent) may also be valid if the person had capacity at the time the contract was formed. Some people who are incompetent due to age or illness have lucid intervals---temporary periods of sufficient intelligence, judgment, and will. During such intervals, they will be considered to have legal capacity to enter into contracts in the majority of states. **[Legality]** Legality is the fourth requirement for a valid contract to exist. For a contract to be valid and enforceable, it must be formed for a legal purpose. A contract to do something that is prohibited by federal or state statutory law is illegal and, as such, is void from the outset and thus unenforceable. Additionally, a contract to commit a tortious act (such as engage in fraudulent misrepresentation) or to commit an action that is contrary to public policy is illegal and unenforceable. [Contracts Contrary to Statute] Statutes often prescribe the terms of contracts. Some statutes set forth rules specifying which terms and clauses may be included in certain contracts and which are prohibited. Others prohibit certain contracts on the basis of their subject matter, the status of the contracting parties, or other factors. Next, we examine several ways in which contracts may be contrary to statute. [Contracts Contrary to Public Policy] Although contracts involve private parties, some are not enforceable because of the negative impact they would have on society. These contracts are said to be contrary to public policy. Examples include a contract to commit an immoral act, such as selling a child, and a contract that prohibits marriage (such as a contract to pay someone not to marry one's daughter). Business contracts that may be contrary to public policy include contracts in restraint of trade and unconscionable contracts or clauses. [Unconscionable Contracts or Clauses] [The Effect of Illegality] In general, an illegal contract is void---that is, the contract is deemed never to have existed, and the courts will not aid either party. In most illegal contracts, both parties are considered to be equally at fault---in pari delicto.Footnote If the contract is executory, neither party can enforce it. If it has been executed, neither party can recover damages. The courts usually are not concerned if one wrongdoer in an illegal contract is unjustly enriched at the expense of the other. The main reason for this hands-off attitude is a belief that a plaintiff who has broken the law by entering into an illegal bargain should not be allowed to obtain help from the courts. Another justification is the hoped-for deterrent effect: a plaintiff who suffers a loss because of an illegal bargain will presumably be deterred from entering into similar illegal bargains in the future. There are exceptions to the general rule that neither party to an illegal bargain can sue for breach and neither party can recover for performance rendered. We look at these exceptions here. **[Voluntary Consent]** As noted earlier, lack of voluntary consent is a defense to the enforcement of a contract. Voluntary consent may be lacking because of mistake, fraudulent misrepresentation, undue influence, or duress. Generally, parties who demonstrate that they did not genuinely agree to the terms of a contract can choose either to carry out the contract or to rescind (cancel) it and thus avoid the entire transaction. [Mistakes] We all make mistakes, so it is not surprising that mistakes are made when contracts are created. In certain circumstances, contract law allows a contract to be avoided on the basis of mistake. It is important to distinguish between mistakes of fact and mistakes of value or quality. Only a mistake of fact makes a contract voidable. Also, the mistake must involve some material fact---a fact that a reasonable person would consider important when determining a course of action. Mistakes of fact occur in two forms---unilateral and bilateral (mutual). A unilateral mistake is made by only one of the contracting parties, whereas a mutual mistake is made by both. We look at these two types of mistakes next and illustrate them graphically in Exhibit 9--2. [Unilateral Mistakes] A unilateral mistake occurs when only one party is mistaken as to a material fact. Generally, a unilateral mistake does not give the mistaken party any right to relief from the contract. In other words, the contract normally is enforceable against the mistaken party. 1. 2. [Fraudulent Misrepresentation] Focus Question 3: What are the elements of fraudulent misrepresentation? Although fraud is a tort, the presence of fraud also affects the authenticity of the innocent party's consent to a contract. When an innocent party is fraudulently induced to enter into a contract, the contract usually can be avoided because that party has not voluntarily consented to the terms.Footnote Normally, the innocent party can either rescind the contract or enforce it and seek damages for any harms resulting from the fraud. Generally, fraudulent misrepresentation refers only to misrepresentation that is consciously false and is intended to mislead another. That is, the person making a fraudulent misrepresentation knows or believes that the assertion is false or knows that there is no basis (stated or implied) for the assertion.Footnote Typically, fraud involves the following elements: 1. 2. 3. 4. At issue in the following case was the effect of a merger clause---which contained the "entire agreement of the parties"---on an allegation that the contract has been procured by fraud. Scienter clearly exists if a party knows that a fact is not as stated. [Justifiable Reliance on the Misrepresentation] [Undue Influence] Undue influence arises from relationships in which one party can greatly influence another party, thus overcoming that party's free will. A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable.Footnote [Duress] Agreement to the terms of a contract is not voluntary if one of the parties is forced into the agreement. The use of threats to force a party to enter into a contract constitutes duress, as does the use of blackmail or extortion to induce consent. Duress is both a defense to the enforcement of a contract and a ground for rescission of a contract. To establish duress, there must be proof of a threat to do something that the threatening party has no right to do. Generally, for duress to occur, the threatened act must be wrongful or illegal, and it must render the person who receives the threat incapable of exercising free will. A threat to exercise a legal right, such as the right to sue someone, ordinarily does not constitute duress. **[The Writing Requirement]** Focus Question 4: What types of contracts must be in writing to be enforceable? Another defense to the enforceability of a contract is form---specifically, some contracts must be in writing. All states require certain types of contracts to be in writing or evidenced by a written memorandum or an electronic record. In addition, the party or parties against whom enforcement is sought must have signed the contract, unless certain exceptions apply (as discussed later in this chapter). In this text, we refer to these state statutes collectively as the Statute of Frauds. The following types of contracts are said to fall "within" or "under" the Statute of Frauds and therefore require a writing: 1. 2. 3. 4. 5. The actual name of the Statute of Frauds is misleading because it does not apply to fraud. Rather, in an effort to prevent fraud, the statute denies enforceability to certain contracts that do not comply with its requirements. The name derives from an English act passed in 1677 that was titled "An Act for the Prevention of Frauds and Perjuries." [Contracts Involving Interests in Land] A contract calling for the sale of land is not enforceable unless it is in writing or evidenced by a written or electronic memorandum. Land is real property and includes all physical objects that are permanently attached to the soil, such as buildings, fences, trees, and the soil itself. The Statute of Frauds operates as a defense to the enforcement of an oral contract for the sale of land. The Statute of Frauds also requires written evidence of contracts for the transfer of other interests in land, such as mortgage agreements and leases. Similarly, an agreement that includes an option to purchase real property must be in writing for the option to be enforced. The issue in the following case was whether a contract for a sale of land met this requirement. [The One-Year Rule] Contracts that cannot, by their own terms, be performed within one year from the day after the contract is formed must be in writing to be enforceable. The reason for this rule is that the parties' memory of their contract's terms is not likely to be reliable for longer than a year. [Collateral Promises] A collateral promise, or secondary promise, is one that is ancillary (subsidiary) to a principal transaction or primary contractual relationship. In other words, a collateral promise is one made by a third party to assume the debts or obligations of a primary party to a contract if that party does not perform. Any collateral promise of this nature falls under the Statute of Frauds and therefore must be in writing to be enforceable. [Promises Made in Consideration of Marriage] A unilateral promise to make a monetary payment or to give property in consideration of marriage must be in writing. The same rule applies to a prenuptial agreement---an agreement made before marriage that defines each partner's ownership rights in the other partner's property. [Contracts for the Sale of Goods] The Uniform Commercial Code (UCC) includes Statute of Frauds provisions that require written evidence or an electronic record of a contract for the sale of goods priced at \$500 or more. (This low threshold amount may be increased in the future.) A writing that will satisfy the UCC requirement need only state the quantity term (six thousand boxes of cotton gauze, for instance). The contract will not be enforceable for any quantity greater than that set forth in the writing. Other agreed-on terms can be omitted or even stated imprecisely in the writing, as long as they adequately reflect both parties' intentions. A written memorandum or series of communications (including e-mail) evidencing a contract will suffice, provided that the writing is signed by the party against whom enforcement is sought. [Exceptions to the Statute of Frauds] Exceptions to the applicability of the Statute of Frauds are made in certain situations. We describe those situations in the following subsections. [Sufficiency of the Writing or Electronic Record] A written contract will satisfy the writing requirement of the Statute of Frauds, as will a written memorandum or an electronic record that evidences the agreement and is signed by the party against whom enforcement is sought. The signature need not be placed at the end of the document but can be anywhere in the writing. A signature can consist of a typed name or even just initials rather than the full name. CHAPTER 10 -- CONTRACT PERFORMANCE, BREACH, AND REMEDIES **[Chapter Introduction]** Focus Questions: The five Focus Questions below are designed to help improve your understanding. After reading this chapter, you should be able to answer the following questions: 1. 2. 3. 4. 5. "Men keep their engagements when it is to the advantage of both not to break them." Solon Sixth Century b.c.e. (Athenian legal reformer) Certainly, events often occur that may affect our performance or our ability to perform contractual duties. Just as rules are necessary to determine when a legally enforceable contract exists, so also are they required to determine when one of the parties can justifiably say, "I have fully performed, so I am now discharged from my obligations under this contract." Additionally, the parties to a contract need to know what remedies are available to them if one party decides that they do not want to, or cannot, perform as promised. Suppose that Daren Liotta is having a new office built for his orthodontic practice. He contracts with Bryan Phillips, doing business as Desert Sun Landscaping, to build a fountain in front of the new office for \$14,000. Desert Sun installs the fountain while the office building is under construction. Three weeks later, the fountain stops working properly. Desert Sun repairs the problem, which Phillips claims was caused by dirt and debris coming from the office construction. The fountain continues to have problems, however. Within a month, the concrete slab underneath it irreparably cracks, and a pipe leading to the spray nozzles becomes loose. Liotta hires another landscaping business to remove the defective fountain. Can Liotta sue Phillips for breach of contract? If he sues and is successful, can he recover the \$14,000 he paid for the fountain, as well as the cost of removing it? These are some of the legal issues we consider in this chapter. **[Third Party Rights]** Once it has been determined that a valid and legally enforceable contract exists, attention can turn to the rights and duties of the parties to the contract. A contract is a private agreement between the parties who have entered into it, and traditionally these parties alone have rights and liabilities under the contract. This principle is referred to as privity of contract. A third party---one who is not a direct party to a particular contract---normally does not have rights under that contract. There are exceptions to the rule of privity of contract. One exception allows a party to a contract to transfer the rights or duties arising from the contract to another person through an assignment (of rights) or a delegation (of duties). Another exception involves a third party beneficiary contract---a contract in which the parties to the contract intend that the contract benefit a third party. [Assignments and Delegations] In a bilateral contract, the two parties have corresponding rights and duties. One party (the obligee) has a right to require the other to perform some task, and the other (the obligor) has a duty to perform it. The transfer of contractual rights to a third party is known as an assignment. The transfer of contractual duties to a third party is known as a delegation. An assignment or a delegation occurs after the original contract was made. [Assignments] 1. 2. 3. 4. 1. 2. 3. 4. [Third Party Beneficiaries] Another exception to the doctrine of privity of contract arises when the contract is intended to benefit a third party. When the original parties to the contract agree that the contract performance should be rendered to or directly benefit a third person, the third person becomes an intended third party beneficiary of the contract. As the intended beneficiary of the contract, the third party has legal rights and can sue the promisor directly for breach of the contract. The law distinguishes between intended beneficiaries and incidental beneficiaries. An incidental beneficiary is a third person who receives a benefit from a contract even though that person's benefit is not the reason the contract was made. Because the benefit is unintentional, an incidental beneficiary cannot sue to enforce the contract. Only intended beneficiaries acquire legal rights in a contract. Exhibit 10--2 graphically illustrates the distinction between intended and incidental beneficiaries.  [Performance and Discharge] The most common way to discharge, or terminate, contractual duties is by the performance of those duties. The duty to perform under any contract may be conditioned on the occurrence or nonoccurrence of a certain event, or the duty may be absolute. As shown in Exhibit 10--3, in addition to performance, a contract can be discharged in numerous other ways, including discharge by agreement of the parties and discharge by operation of law. [Conditions of Performance] In most contracts, promises of performance are not expressly conditioned or qualified. Instead, they are absolute promises. They must be performed, or the parties promising the acts will be in breach of contract. In some situations, however, contractual promises are conditioned. A condition is a qualification in a contract based on a possible future event. The occurrence or nonoccurrence of the event will trigger the performance of a legal obligation or terminate an existing obligation under a contract.Footnote If the condition is not satisfied, the obligations of the parties are discharged. Three types of conditions can be present in a contract: conditions precedent, conditions subsequent, and concurrent conditions. [Discharge by Performance] As noted earlier, the great majority of contracts are discharged by performance. The contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised. Performance can also be accomplished by tender. Tender is an unconditional offer to perform by a person who is ready, willing, and able to do so. Therefore, a seller who places goods at the disposal of a buyer has tendered delivery and can demand payment according to the terms of the agreement. A buyer who offers to pay for goods has tendered payment and can demand delivery of the goods. Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. If the other party then refuses to perform, the party making the tender can consider the duty discharged and sue for breach of contract. There are two basic types of performance---complete performance and substantial performance. 1. 2. 3. 1. 2. [Discharge by Agreement] Any contract can be discharged by agreement of the parties. The agreement can be contained in the original contract, or the parties can form a new contract for the express purpose of discharging the original contract. 1. 2. 3. 4. [Discharge by Operation of Law] Under specified circumstances, contractual duties may be discharged by operation of law. These circumstances include material alteration of the contract, an applicable statute of limitations, bankruptcy, impossibility or impracticability of performance, and frustration of purpose. 1. 2. 3. **[Damages]** A breach of contract entitles the nonbreaching party to sue for monetary damages. Damages are designed to compensate a party for harm suffered as a result of another's wrongful act. In the context of contract law, damages compensate the nonbreaching party for the loss of the bargain. Often, courts say that innocent parties are to be placed in the position they would have occupied had the contract been fully performed [Types of Damages] There are basically four broad categories of damages: 1. 2. 3. 4. [Compensatory Damages] 1. 2. 3. [Mitigation of Damages] In most situations, when a breach of contract occurs, the injured party is held to a duty to mitigate, or reduce, the damages suffered. Under this doctrine of mitigation of damages, the required action depends on the nature of the situation. For instance, some states require a landlord to use reasonable means to find a new tenant if a tenant abandons the premises and fails to pay rent. If an acceptable tenant becomes available, the landlord is required to lease the premises to this tenant to mitigate the damages recoverable from the former tenant. The former tenant is still liable for the difference between the amount of the rent under the original lease and the rent received from the new tenant. If the landlord has not taken reasonable steps to find a new tenant, a court will likely reduce any award by the amount of rent the landlord could have received had this step been taken. [Liquidated Damages versus Penalties] A liquidated damages provision in a contract specifies that a certain dollar amount is to be paid in the event of a future default or breach of contract. (Liquidated means determined, settled, or fixed.) Liquidated damages differ from penalties. Although a penalty also specifies a certain amount to be paid in the event of a default or breach of contract, it is designed to penalize the breaching party, not to make the innocent party whole. Liquidated damages provisions normally are enforceable. In contrast, if a court finds that a provision calls for a penalty, the agreement as to the amount will not be enforced, and recovery will be limited to actual damages. 1. 2. [Waiver of Breach] Under certain circumstances, a nonbreaching party may be willing to accept defective performance of the contract. This knowing relinquishment of a legal right---that is, the right to require satisfactory and full performance---is called a waiver. Businesspersons often waive breaches of contract to obtain whatever benefit is still possible out of a contract. When a waiver of a breach of contract occurs, the party waiving the breach cannot take any later action on it. In effect, the waiver erases the past breach, and the contract continues as if the breach had never occurred. Of course, the waiver of breach extends only to the matter waived and not to the whole contract. [Contract Provisions Limiting Remedies] A contract may include provisions stating that no damages can be recovered for certain types of breaches or that damages will be limited to a maximum amount. A contract may also provide that the only remedy for breach is replacement, repair, or refund of the purchase price. In addition, a contract may provide that one party can seek injunctive relief if the other party breaches the contract. Provisions stating that no damages can be recovered are called exculpatory clauses. Provisions that affect the availability of certain remedies are called limitation-of-liability clauses. **[Equitable Remedies]** Focus Question 4: What equitable remedies can a court grant, and in what circumstances will a court consider granting them? Sometimes, damages are an inadequate remedy for a breach of contract. In these situations, the nonbreaching party may ask the court for an equitable remedy. Equitable remedies include rescission and restitution, specific performance, and reformation. [Rescission and Restitution] As previously discussed,.Frescission is essentially an action to undo, or cancel, a contract---to return nonbreaching parties to the positions that they occupied prior to the transactionootnote When fraud, mistake, duress, undue influence, lack of capacity, or failure of consideration is present, rescission is available. Rescission may also be available by statute.Footnote The failure of one party to perform under a contract entitles the other party to rescind the contract. The rescinding party must give prompt notice to the breaching party. Generally, to rescind a contract, both parties generally must make restitution to each other by returning goods, property, or funds previously conveyed.Footnote If the property or goods can be returned, they must be. If the property or goods have been consumed, restitution must be made in an equivalent dollar amount. Essentially, restitution involves the recapture of a benefit conferred on a defendant who has been unjustly enriched by that benefit. Restitution may be required when a contract is rescinded, but the right to restitution is not limited to rescission cases. Because an award of restitution basically returns something to its rightful owner, a party can seek restitution in actions for breach of contract, tort actions, and other types of actions. [Specific Performance] The equitable remedy of specific performance calls for the performance of the act promised in the contract. This remedy is attractive to a nonbreaching party because it provides the exact bargain promised in the contract. It also avoids some of the problems inherent in a suit for monetary damages, such as collecting a judgment and arranging another contract. Moreover, the actual performance may be more valuable (to the promisee) than the monetary damages. Normally, however, specific performance will not be granted unless the party's legal remedy (monetary damages) is inadequate.Footnote For this reason, contracts for the sale of goods rarely qualify for specific performance. Monetary damages ordinarily are adequate in sales contracts because substantially identical goods can be bought or sold in the market. Only if the goods are unique will a court grant specific performance. For instance, paintings, sculptures, and rare books and coins are often unique, and monetary damages will not enable a buyer to obtain substantially identical substitutes in the market. [Reformation] Reformation is an equitable remedy used when the parties have imperfectly expressed their agreement in writing. Reformation allows a court to rewrite the contract to reflect the parties' true intentions. [Incorrect Written Statement of the Parties' Oral Agreement] **[Recovery Based on Quasi Contract]** Focus Question 5: What remedy is available if a court imposes a quasi contract? In some situations, when no actual contract exists, a court may step in to prevent one party from being unjustly enriched at the expense of another party. As previously discussed, quasi contract is a legal theory under which an obligation is imposed in the absence of an agreement. The legal obligation arises because the law considers that the party accepting the benefits has made an implied promise to pay for them. Generally, when one party has conferred a benefit on another party, justice requires that the party receiving the benefit pay the reasonable value for it. The party conferring the benefit can recover in quantum meruit, which means "as much as one deserves." [When Quasi Contract Is Used] Quasi contract allows a court to act as if a contract exists when there is no actual contract or agreement between the parties. Therefore, if the parties have entered into a contract concerning the matter in controversy, a court normally will not impose a quasi contract. A court can also use the doctrine when the parties entered into a contract that is unenforceable for some reason. Quasi-contractual recovery is often granted when one party has partially performed under a contract that is unenforceable. Quasi contracts provide an alternative to suing for damages and allow the party to recover the reasonable value of the partial performance. Depending on the case, the amount of the recovery may be measured either by the benefit received or by the detriment suffered. [The Requirements of Quasi Contract] To recover on a quasi contract theory, the party seeking recovery must show the following: 1. 2. 3. 4. Applying these requirements to Example 10.27, Ericson can sue in quasi contract because all of the conditions for quasi-contractual recovery have been fulfilled. Ericson conferred a benefit on Petro Industries by building the oil derrick. Ericson built the derrick with the reasonable expectation of being paid. He did not intend to act as a volunteer. Petro Industries would be unjustly enriched if it was allowed to keep the derrick without paying Ericson for the work. Therefore, Ericson should be able to recover in quantum meruit the reasonable value of the oil derrick that was built, which is ordinarily equal to the fair market value. VOCABULARY CH 8 [Acceptance]: The act of voluntarily agreeing, through words or conduct, to the terms of an offer, thereby creating a contract. In negotiable instruments law, a drawee's signed agreement to pay a draft when it is presented. [Agreement]: A mutual understanding or meeting of the minds between two or more individuals regarding the terms of a contract Bilateral contract: A type of contract that arises when a promise is given in exchange for a return promise [Browse- wrap term]: Terms or conditions of use presented when an online buyer downloads a product but to which the buyer does not have to agree before installing or using the producT [Click-on Agreement]: An agreement that arises when an online buyer clicks on "I agree" or otherwise indicates assent to be bound by the terms of an offer. [Consideration]: The value given in return for a promise or performance in a contractual agreement [Contract]: A set of promises constituting an agreement between parties, giving each a legal duty to the other and the right to seek a remedy for the breach of the promises or duties [Counteroffer]: An offeree's response to an offer in which the offeree rejects the original offer and at the same time makes a new offer [E-contract]: A contract that is formed electronically [E-signature]: An electronic sound, symbol, or process attached to or logically associated with a record and adopted by a person with the intent to sign the record [Estopped]: Barred, impeded, or precluded [Executed contract]: A contract that has been fully performed by both parties [Executory contract]: A contract that has not yet been fully performed [Express contract]: A contract in which the terms of the agreement are stated in words, oral or written [Forbearance]: The act of refraining from an action that one has a legal right to undertake [Formal contract]: An agreement that by law requires a specific form for its validity [Implied contract]: A contract formed in whole or in part from the conduct of the parties [Informal contract]: A contract that does not require a specific form or method of creation to be valid [Mailbox rule]: A common law rule that acceptance takes effect, and thus completes formation of the contract, at the time the offeree sends or delivers the acceptance via the communication mode expressly or impliedly authorized by the offeror [Mirror image rule]: A common law rule that requires that the terms of the offeree's acceptance adhere exactly to the terms of the offeror's offer for a valid contract to be formed [Objective theory of contracts]: The view that contracting parties shall be bound only by terms that can be objectively inferred from promises made [Offer]: A promise or commitment to perform or refrain from performing some specified act in the future [Offeree]: A person to whom an offer is made [Offeror]: A person who makes an offer [Option contract]: A contract under which the offeror cannot revoke the offer for a stipulated time period (because the offeree has given consideration for the offer to remain open) [Past consideration]: Something given or some act done in the past, which cannot ordinarily be consideration for a later bargain [Promise]: A declaration that binds a person who makes it (the promisor) do or not do a certain act [Promisee]: A person to whom a promise is made [Promisor]: A person who makes a promise [Promissory estoppel]: A doctrine that can be used to enforce a promise when the promisee has justifiably relied on the promise and when justice will be better served by enforcing the promise [Quantum meruit]: A Latin phrase meaning "as much as one deserves." The expression describes the extent of compensation owed under a quasi contract [Quasi contract]: An obligation or contract imposed by law (a court), in the absence of an agreement, to prevent the unjust enrichment of one party [Record]: Information that is either inscribed on a tangible medium or stored in an electronic or other medium and is retrievable in visual form [Rescission]: A remedy whereby a contract is canceled and the parties are returned to the positions they occupied before the contract was made [Revocation]: The withdrawal of a contract offer by the offeror. Unless an offer is irrevocable, it can be revoked at any time prior to acceptance without liability [Shrink- wrap agreement]: An agreement whose terms are expressed in a document located inside a box in which goods (usually software) are packaged [Unenforceable contract]: A valid contract rendered unenforceable by some statute or law [Unilateral contract]: A type of contract that results when an offer can be accepted only by the offeree's performance [Valid contract]: A contract that results when the elements necessary for contract formation (agreement, consideration, capacity, and legality) are present [Voidable contract]: A contract that may be legally avoided at the option of one or both of the parties [Void contract]: A contract having no legal force or binding effect CH 9 [Adhesion contract]: A standard-form contract in which the stronger party dictates the terms [Age of majority]: The age (eighteen years, in most states) at which a person is granted by law the rights and responsibilities of an adult [Bilateral mistake]: A mistake that occurs when both parties to a contract are mistaken about the same material fact [Collateral promise]: A secondary promise to a primary transaction, such as a promise made by one person to pay the debts of another if the latter fails to perform. A collateral promise normally must be in writing to be enforceable [Contractual capacity]: The capacity required by the law for a party who enters into a contract to be bound by that contract [Covenant not to compete]: A contractual promise of one party to refrain from conducting business similar to that of another party for a certain period of time and within a specified geographical area [Disaffirmance]: The legal avoidance, or setting aside, of a contractual obligation [Emancipation]: In regard to minors, the act of being freed from parental control [Employment contract]: A contract between an employer and an employee in which the terms and conditions of employment are stated [Exculpatory clause]: A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault [Innocent misrepresentation]: A misrepresentation that occurs when a person makes a false statement of fact that the person believes is true [Latent defect]: A defect that is not obvious or cannot readily be ascertained [Necessaries]: Necessities required to maintain a standard of living, such as food, shelter, clothing, and medical attention [Negligent misrepresentation]: A misrepresentation that occurs when a person makes a false statement of fact because the person did not exercise reasonable care or use the skill and competence required by the person's business or profession [Prenuptial agreement]: An agreement made before marriage that defines each partner's ownership rights in the other partner's property. Prenuptial agreements must be in writing to be enforceabl [Ratification]: The acceptance or confirmation of an act or agreement that gives legal force to an obligation that previously was not enforceable [Reformation]: A court-ordered correction of a written contract so that it reflects the true intentions of the parties [Scienter]: Knowledge on the part of a misrepresenting party that material facts have been falsely represented or omitted with an intent to deceive [Statute of Frauds]: A state statute that requires certain types of contracts to be in writing to be enforceable [Unconscionable]: Unscrupulous or grossly unfair. An unconscionable contract or clause is void on the basis of public policy because one party was forced to accept terms that are unfairly burdensome and that unfairly benefit the other party [Undue influence]: Persuasion that is less than actual force but more than advice and that induces a person to act according to the will or purposes of the dominating party [Unilateral mistake]: A mistake that occurs when one party to a contract is mistaken as to a material fact [Usury]: Charging an illegal rate of interest [Voluntary consent]: Knowledge of and genuine assent to the terms of a contract CH 10 [Accord and satisfaction]: An agreement between two parties to accept performance that is different from what was promised in the original contract. After the performance has been completed, the obligation is discharged [Anticipatory repudiation]: An assertion or action by a party indicating that the party will not perform a contractual obligation [Assignment]: The transfer of a contractual right to a third party [Breach of contract]: The failure, without legal excuse, of a promisor to perform the obligations of a contract [Commercial impracticability]: A doctrine that may excuse the duty to perform a contract when performance becomes much more difficult or costly due to forces that neither party could have controlled or foreseen at the time the contract was formed [Concurrent conditions]: Conditions that must occur or be performed at the same time---they are mutually dependent. No obligations arise until these conditions are simultaneously performed [Condition]: A qualification, provision, or clause in a contractual agreement, the occurrence or nonoccurrence of which creates, suspends, or terminates the obligations of the contracting parties [Condition precedent]: A condition in a contract that must be met before a party's promise becomes absolute [Condition subsequent]:A condition in a contract that, if it occurs, operates to terminate a party's absolute promise to perform [Consequential damages]: Foreseeable damages that result from a party's breach of contract but are caused by special circumstances beyond the contract itself [Delegation]: The transfer of a contractual duty to a third party [Discharge]: The termination of an obligation. In contract law, discharge occurs when the parties have fully performed their contractual obligations or when events, conduct of the parties, or operation of law releases the parties from performance. In bankruptcy proceedings law, the termination of a debtor's obligation to pay their debts [Frustration of purpose]: A court-created doctrine under which a party to a contract will be relieved of their duty to perform when the objective purpose for performance no longer exists due to reasons beyond that party's control [Impossibility of performance]: A doctrine under which a party to a contract is relieved of the duty to perform when performance becomes objectively impossible or totally impracticable [Intended beneficiary]: A third party for whose benefit a contract is formed. an intended beneficiary can sue the promisor if the contract is breached [Liquidated damages]: An amount, stipulated in a contract, that the parties to the contract believe to be a reasonable estimation of the damages that will occur in the event of a breach [Mitigation of damages]: The requirement that a plaintiff do whatever is reasonable to minimize the damages caused by the defendant's breach of contract [Mutual rescission]: An agreement between the parties to cancel their contract, releasing them from further contractual obligations. The object is to restore the parties to the positions they would have occupied had no contract ever been formed [Novation]: The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated [Penalty]: A sum specified in a contract not as a measure of compensation for its breach but rather as a punishment for a default. The agreement as to the amount will not be enforced, and recovery will be limited to the actual damages [Performance]: In contract law, the fulfillment of duties arising under a contract with another; the normal way of discharging contractual obligations [Privity of contract]: a common law principle that states that only parties to a contract can be held responsible for or benefit from the contract\'s terms, third parties cannot enforce or be bound by the terms of a contract [Release]: An agreement in which one party gives up the right to pursue a legal claim against another party [Reformation]: is a legal remedy that allows a court to modify or rewrite a contract to reflect the intentions of the parties involved [Restitution]: An equitable remedy under which persons are restored to their original position prior to loss or injury, or placed in a position they would have been in had the breach not occurred [Specific performance]: An equitable remedy in which a court orders the parties to perform as promised in the contract. This remedy normally is granted only when the legal remedy (monetary damages) is inadequate [Tender]: An unconditional offer to perform an obligation by a person who is ready, willing, and able to do so [Third party beneficiary]: One for whose benefit a promise is made in a contract but who is not a party to the contract [Waiver]: An intentional, knowing relinquishment of a legal right