Contracts PDF

Contracts By Jessica R. Nelson Navajo Nation Department of Justice P.O. Drawer 2010 Window Rock, Navajo Nation (AZ) 86515 Updated (Feb. 2015): Harriet McConnell Greenberg Traurig, LLP 1200 17th Street Suite 2400...

Contracts By Jessica R. Nelson Navajo Nation Department of Justice P.O. Drawer 2010 Window Rock, Navajo Nation (AZ) 86515 Updated (Feb. 2015): Harriet McConnell Greenberg Traurig, LLP 1200 17th Street Suite 2400 Denver, CO 80202 1  I. DEFINITION - WHAT IS A CONTRACT? A. Contract Generally, a contract is a promise to do something or a set of promises that is legally enforceable by the parties. If the party promising to perform fails to keep the promise (a breach), the law will provide a remedy to the non-breaching party. 1. Express Contract. An express contract is an agreement formed either verbally or through writing (the promises are formed by language). Example: P promises to clean X’s yard in return for X’s promise to pay P $50.00. Note: For example, an insurance policy is a type of contract. Benalli v. First Natl Ins. Co. of America, 7 Nav. R. 329 (Nav. Sup. Ct. 1998) (“An insurance policy is nothing more than a contract,” and “construction of an insurance policy is governed by the law of contracts.”) Under Navajo Law, a personnel manual provided to an employee is also a contract. Smith v. Navajo Nation Dept. of Head Start, 8 Nav. R. 709 (Nav. Sup. Ct. 2005). Most states do not recognize these manuals as contracts, although the cases are mixed. 2. Implied Contract. An implied contract is an agreement that is at least partially based on conduct or actions. Example: P stops at the hair salon and goes in to get a haircut. There is a contract for purchase and the sale of a haircut. 3. Unilateral Contract. When a party accepts an offer by performing a stipulated act. There is an exchange of an act for a promise. Example: P loses his dog. P places an advertisement in the newspaper that offers a reward for the return of his lost dog. Acceptance of this contract is made by finding the dog and returning it to P. P will then pay the reward in exchange. 4. Bilateral Contract. When a party accepts an offer by promising to do a stipulated act. There is an exchange of promises. Example: P promises to pay X, a pet detective, $100.00 in return for X’s promise to search one week for his missing dog. B. Quasi-contract Generally, a quasi-contract is formed when there is no real contract at all, but one party has conferred a benefit on another party. A quasi-contract is utilized as an equitable remedy to avoid “unjustly enriching” the other party. The party obtaining the benefit must pay the other party the value of the benefit conferred (an amount equal to the unjust enrichment). 2 Example: P is hired to paint X’s house. Instead of painting X’s house. P mistakenly begins to paint D’s house. D sees P painting his house and, since his house needs repainting, D does not notify P of his mistake. Thus, P has conferred a benefit on D and P reasonably expects to be paid for his efforts. D would realize unjust enrichment if P was not compensated for painting D’s house. A quasi-contract is formed to prevent D from realizing unjust enrichment. II. APPLICABLE LAW Look to the surrounding circumstances to determine what the applicable law is. Does the contract concern the sales of goods? A. Common Law Generally, you will apply the common law of contracts, unless it is a sale of “goods” situation. B. Uniform Commercial Code (Article 2) Article 2 of the U.C.C. applies to contracts that primarily concern sales of “goods.” Look for the following factors: 1. Type of Transaction (sale) 2. Subject matter of Transaction (tangible property, personal property) Example 1: Owner contracts to sell his record collection to Collector for $250.00. Does Article 2 govern the sale of the collection? Yes, the contract is for a sale of goods. Example 2: The Navajo Nation hires a Lawyer to work on litigation issues. Does Article 2 of the Uniform Commercial Code apply to her employment contract? No, apply common law for her service, as there is not a sale of goods. (But remember that there are special laws about contracts with attorneys in the Rules of Ethics. Always think about other areas of law that might apply to your contract.) Example 3: Owner contracts with Painter to paint his kitchen cabinets. Does U.C.C. Article 2 govern this contract if the $3,000.00 contract price covers the supplies and painting? In this situation, there are both goods and services to be provided by the Painter. Although the sale of goods are covered by Article 2 of the U.C.C. and the services are governed by common law, look to the most important part of the contract. In this situation, the services provided by Painter are the most important part of the contract. Therefore, apply common law (for services). III. FORMATION OF A CONTRACT A. Elements 3 Look for three (3) main elements when determining if there is a valid and legally enforceable contract. All three (3) elements must be present to have an enforceable contract. 1. Mutual Assent. There must be Offer and Acceptance. 2. Consideration. Each party to the contract must provide something to the other parties. 3. No Defenses to the Formation of the Contract. Defenses to formation of the contract may include: i. Lack of capacity; ii. Against public policy; iii. Illegality; iv. Unconscionable; v. Fraud; vi. Duress; vii. Mistake; or viii. Statute of Frauds. Example: P offers to sell his 1990 Camaro for $1,000.00. X says, “I accept.” As long as there are no defenses to the contract like mistake, lack of capacity, or illegality then the contract is enforceable. Note: Navajo Case Law. “The general requirements for the formation of a contract are five in number: 1) It must be made by competent parties; 2) The parties must expressly assent to their ‘meeting of minds,’ in a form required by the law of the jurisdiction; 3) It must be supported by sufficient consideration (requiring a mutuality of obligation, but by rare exception); 4 It must not, at the time of its making, be obviously impossible to perform (unless the risk of impossibility is assumed); and 5) It must not be against public policy.” Hood v. Bordy, 6 Nav. Rep. 349,350 (Nav. Sup. Ct. 1991). B. Offers 1. Offers. An offeror (party that is extending the offer) must state a promise, undertaking, or commitment to enter into a contract; it must be definite and certain in its terms; and must be communicated to the offeree (person to whom the offer is extended). a. Test. Whether a reasonable person in the position of the offeree (party to whom the offer is extended) would believe that his or her assent to the offeror (party that is extending the offer) creates a contract. b. Surrounding Words, Conduct, and Context. Words and conduct are very important, so pay attention to what the parties said and did. Look at the surrounding circumstances, the prior relationship of the parties, the method of 4  communication, the custom in the industry and the degree of definiteness and certainty of terms. 2. Terms. As a general rule, an offer is not required to contain all material terms, although enough of the essential terms should be given to make it enforceable. Look for certain exceptions: a. Quantity term. The only term that must always be provided in a contract is the quantity. Sometimes this is a number – six widgets – but it can also be a particular service – fix my car. But there must be some provision specifying how much the parties are obligated to each other. Two other examples: i. Requirements contracts/output contracts. Generally, a contract for the sale of goods can state the quantity of goods to be delivered under the contract in terms of the buyer’s requirements or the seller’s output. A buyer may increase his demands under a requirement contract as long as the increase in is line with prior increase demands. Example: “I will buy your entire crop,” or “I will supply all the coal you need to keep your power plant running.” Example: For the past five (5) years, Buyer has increased his demand for corn each year by 1,000 bushels. However, in year six (6), if Buyer increases his demand by 6,000 bushels, his request would not be reasonable. ii. Exclusivity. Although there is not a certain quantity amount mentioned, a commitment of exclusivity is a valid contract. Example: Buyer agrees to buy corn from Seller, and only Seller, for ten (10) years. b. Sale of Real Estate. At common law, the price and description of the land for sale is required. Example: Seller offers to sell his estate “Blackacre” to Buyer. Seller does not mention an asking price. An offer does not exist because the Seller must state both the price and description of land. c. Sale of Goods Under the Uniform Commercial Code (U.C.C.). No price requirement is necessary for there to be an effective contract under the U.C.C. Example: Owner offers to sell her bicycle to Buyer. No mention is made as to price. The U.C.C. applies in this instance, because the transaction involves a sale of goods (the bicycle). Therefore, it is a valid offer under the U.C.C., as no price requirement is necessary. 5  d. Employment. The Navajo Nation law of employments contracts is very different from state law and will be covered in a different section of the Bar Review. 3. Advertisements. As a general rule, an advertisement is not considered an offer, unless it is specific as to quantity and who may accept. Example: Store publishes an advertising stating, “One (1) four-wheel ATV left, worth $450.00, selling price is $50.00. First come, first serve.” This would be considered an offer because it states 1) the quantity, and 2) who may accept the offer. 4. Vagueness. If a material term is vague or ambiguous, there is no an offer under either common law or the U.C.C. Example: Seller offers to sell her stereo for a “reasonable” price. Is this an offer? No. The price is described vaguely. Look for words such as “fair,” “appropriate,” or “good.” Vague terms usually indicate that the parties are still trying to work things out or negotiating. 5. Death of an Offer. There are generally four (4) methods of terminating an offer. a. Lapse of Time. Offers die within a reasonable time. If the offer does not specify how long the offer will be kept open, use a reasonable standard. Example: P writes a letter to X and offers to sell X his stereo for $100. P fails to state how long the offer will be kept open. Can X accept P’s offer one year later? No, it is not likely that you can accept an offer after several years have passed, or even if several months have passed. b. Revocation. If the offeror terminates an offer, it is called a “revocation.” Revocation generally occurs when the offeror expresses to the offeree his/her wish to revoke the offer or when the offeror acts inconsistently with a willingness to go through with the offer and the offeree is aware of it. Example 1: On October 12, Seller offers to sell her brand-new red mountain bike to Buyer for $100. That night at dinner, Seller changes her mind and decides she does not want to sell her bike to Buyer after all. Can Buyer still accept Seller's offer? Yes, because Buyer (offeree) is not aware that Seller (offeror) changed her mind. Seller has not told Buyer yet. Example 2: On October 12, Seller offers to sell her mountain bike to Buyer for $100. Seller changes her mind about selling to Buyer and on October 13, Seller offers the bike to Teacher. Teacher buys the bike from 6 Seller. Can Buyer still accept the offer from October 12? Yes, because Buyer is unaware of the sale to Teacher. She can still accept the offer. Example 3: What if Buyer sees Teacher riding away from Seller’s house on the red mountain bike on October 13 and Teacher tells Buyer that she just bought the bike from Seller. Can Buyer still accept the offer? No, the offer is dead, and Buyer is aware of it. i. Offeror may revoke his offer though the same method in which he extended the offer. Example: If Seller places an offer in the paper, he may revoke the public offer by publishing a second advertisement in the paper revoking the first offer. ii. If a revocation of an offer is sent through the mail, the revocation is generally not effective until it is received. iii. An offeror cannot revoke an offer once it has been accepted by the offeree. iv. There are four (4) situations when an offer may not be revoked: (a) If the offeror promises to keep the offer open, and that promise is supported by consideration. This is a special type of contract known as an option contract. (b) The U.C.C. allows an offeror in a sale of goods contract to make a “firm offer.” These offers may last for up to three months, must in writing and signed with a promise to keep the offer open, and they must involve a transaction where one party is a merchant. (c) An offer cannot be revoked if there has been detrimental reliance by the offeree that is reasonably foreseeable. Note: Navajo Case Law. In a case where a government agent acts to cause a contracting party to rely on a contract and does little or nothing to warn the contracting party of the legal dangers involved, the contracting party will be allowed to recover consequential damages for detrimental reliance. Dana & Associates v. Navajo Housing Authority, 1 NAV. R. 325, 329 (Ct. of Ap. 1978. (d) In an offer to enter into a unilateral contract, the start of performance makes that offer irrevocable for a reasonable period of time to complete the performance. 7  c. Rejection. Words or Conduct of Offeree that Reject the Offer i. If the offeree terminates the offer, it is called a “rejection.” Rejection occurs when the offeror clearly rejects or refuses the offer. ii. A counteroffer is a rejection. Example: Seller offers his car to Buyer for $5,000. Buyer says, “I will give you $3,000.” Seller refuses the $3,000. Can Buyer now accept Seller’s offer of $5,000? No, the $5,000 offer was terminated when Buyer extended a counteroffer of $3,000. iii. Mere inquiries about the offer do not constitute as rejections. Example: After Seller offers to sell the car to Buyer for $5,000, Buyer asks, “Will you take $3,000?” Can Buyer later accept the Seller’s offer of $5,000? Yes, Buyer’s inquiry was only mere bargaining (inquiry), not an express rejection. iv. Additionally, a conditional acceptance is treated the same as a counteroffer. If additional terms are added to the acceptance, it is treated like a counteroffer rather than an acceptance under common law. d. Termination of the Offer by Operation of Law. i. Death or Insanity of a Party Prior to Acceptance. The general rule is that the death or incapacity of either party terminates the offer, except for if the contract is an option contract or if there is part performance of the offer to enter into a unilateral contract. Example: On Monday, Owner sends Contractor a written offer. Owner dies on Tuesday. Contractor is unaware of Owner’s death and mails his acceptance of the written offer on Saturday. Is Contractor’s acceptance of the written offer effective? No. As a general rule, when a party dies, the death terminates the offer. ii. Destruction of the subject matter of contract iii. Supervening Illegality C. Acceptance Valid acceptance of a bilateral contract requires an offeree who has the power to accept, unequivocal terms of acceptance, and communication of the offeree' s acceptance. 8 1. Who Can Accept the Offer? Generally, an offer may be accepted only by a person who knows about the offer and who is the person to whom it was made. 2. How do you Accept the Offer? The way that an offer may accepted depends on how it is presented. “The offeror is master of the offer.” a. Start of Performance. The starting of performance is considered acceptance of an offer to enter into a bilateral contract but is not considered acceptance of an offer to enter into a unilateral contract. i. Bilateral Offer. If the offer is open as to the method of acceptance, then the start of performance may be considered as acceptance. Example: 0 offers P $10 to mow her lawn. The offer is silent as to the method of acceptance. P starts mowing the lawn. P’s start of performance is P’s acceptance of O’s offer. ii. Unilateral offer. Since this type of offer requires performance for acceptance, the start of performance is not considered acceptance. Completion of the performance by the offeree is required. Example: O offers P $10 to mow her lawn. O’s offer states that it can only be accepted by performance, not by promising to perform. P starts to mow O’s lawn. Has P accepted O’s offer or can P leave the job unfinished and go mow someone else's lawn? No contract is formed. P’s starting to mow the lawn is not “acceptance” of O’s offer, the offer clearly stated and required performance as “acceptance.” b. Mailbox Rule. If an offer is made by mail, a mailed acceptance by the offeree is effective when posted. However, there are exceptions to this rule: i. If the offer states the acceptance has to be made otherwise; ii. If the offeree rejects, then accepts, and the acceptance arrives first; iii. If the offeree accepts, then rejects; iv. In the case where an option deadline is given. Practice Tip: Even if you are sending a formal document by mail, always email a “courtesy copy” to opposing counsel. That way you can be sure they will get it right away. This should also be done with court filings. It is also helpful and courteous to inform people promptly that you received their documents. 9  c. Buyer’s Offer, Seller Sends Wrong Goods. An offer may be accepted when the Seller responds to Buyer’s offer to buy goods and the Seller sends the wrong goods. Example: Buyer orders 100 boxes of blue crayons from Seller. Seller sends Buyer 100 boxes of red markers. Did Seller accept the offer? Yes, Seller accepted Buyer’s offer. This is a sales of goods situation, where the Seller responded to Buyer’s offer and provided the wrong shipment (a breach). A contract was created, and the Buyer now has contractual rights against the Seller to remedy the breach. d. Silence. As a general rule, silence by the offeree is not acceptance, unless the offeree agrees that silence is acceptance. Example: Seller offers to sell his treadmill to Buyer for $100. Buyer says, “If you don't hear from me by Tuesday, I accept.” In this case, silence has been agreed to by the offeree as a form of acceptance. D. Consideration “Bargained-for Exchange/Legal Detriment” 1. Consideration. Consideration is “bargained-for exchange/legal detriment” which must exist on both sides of a contract. Courts generally do not concern themselves with the adequacy of the consideration, just as long as some exists. Look for: a. Bargained-for exchange/legal detriment (promise for a promise or a promise for an act) b. Legal value 2. Performance or Forbearance. Has there been Performance/Forbearance or the Promise to Perform/Forbear? Look at each promise separately and determine whether the person promising to do something has suffered a detriment by promising to do something that he/she does not have a prior obligation to do (a promise to perform) or by promising to refrain from doing something which he/she has a legal right to do (a promise to forbear). Example: Dad says to his adult son, “Stop smoking and I'll pay you $1000.” Forbearance of smoking by the son is considered a bargained-for legal detriment. By not smoking, the son has promised to refrain from doing something which he has a legal right to do. 3. Past Consideration or Pre-Existing Legal Duty. At common law, past consideration or a pre-existing legal or statutory duty does not qualify as consideration. 10  Example 1: Boy saves Owner’s dog from running into the street. Owner is so grateful that he promises to pay Boy $100. Owner later changes his mind. This promise is not legally enforceable. There is no consideration (bargained-for legal detriment) for the promise. Boy already saved the dog prior to Owner’s statement about the $100. Owner is not bargaining for dog’s life. There is an exception if Owner expressly requested the Boy to save the dog and should have known that the Boy expected to be paid. Example 2: Baker contracts to bake a six-layer wedding cake for $2,000. On the day of the wedding, Baker refuses to bring the cake unless he is paid $3,000 instead of $2,000. The distraught bride promises to pay $3,000. Baker brings the cake to the reception. The bride only pays the Baker $2,000. Is the bride’s promise to pay the additional $1,000 legally enforceable? No, Baker was already legally obligated to bake and provide the cake at $2,000. There was no new consideration or legal detriment provided in the second situation. 4. Gift. A gift does not count as consideration. Thus, a promise that someone will make a gift cannot serve as the basis for an enforceable contract. Note: Navajo Case Law. In order to make a valid gift, there must be a delivery amounting to present transfer of title. In the Matter of the Estate of Joe Dee Nelson, 1 Nav. R. 165 (1977). To constitute a gift inter vivos, there must be a donative intent, the gift executed by deliver and irrevocable title vested u on such delivery. Damon v. Damon, 8 Nav. R. 226 231 (Nav. Sup. Ct. 2002). 5. Partial Payment. Partial payment as consideration for promise to forgive balance of debt is acceptable. However, if the debt is due and undisputed, then part payment is not consideration for release of the debt. There would no legal detriment (no consideration) to the Debtor if he is allowed release of an undisputed debt by making only a part payment. Basically, there is an exception to the usual rule that carrying out an existing legal obligation is not consideration to allow debtors and creditors to enter into binding contracts that reduce the amount of debt owed. 6. Illusory Promises. Illusory promises are promises in which the promisor has not committed himself in any manner and there is no consideration because there is no detriment to the promisor. Contracting parties, even (or especially) sophisticated parties love to try to do this. They add little escape clauses here and there to the contract until there are no real obligations left. Example 1: I promise to buy your stereo next Monday… unless I change my mind. There’s no detriment. I have not obligated myself for anything. Example 2: Buyer enters into contract to purchase Blackacre from Seller. This contract states that there is a two-month inspection period, and that the Buyer may terminate the contract if the inspection uncovers a problem. This is a valid 11  contract because the Buyer’s discretion to terminate the contract is not unlimited and he cannot terminate, for example, because a better deal became available. 7. Consideration substitutes. These may be enforceable. For example, a written promise to satisfy an obligation for which there is a legal defense is enforceable without consideration. Settling an ongoing or imminent litigation is always sufficient consideration for a contract, even if the other side has a really bad case and is sure to lose. 8. Uniform Commercial Code. Under the U.C.C., a written release of all or part of a claim for breach of a contract for sale of goods is enforceable without consideration. 9. Promissory Estoppel. Occurs when the promisor should reasonably expect a promise to induce action or forbearance by the promisee and which does induce such action or forbearance. The promise will be binding in order to avoid injustice. Elements necessary for Promissory Estoppel: a. Promise; b. Reliance that is; c. detrimental and foreseeable; d. Enforcement is necessary to avoid injustice. E. Defenses to Formation 1. Lack of Capacity. A person may lack capacity to contract for various reasons. However, even a person who lacks capacity to contract will be legally obligated to pay for things that are necessary such as food, clothing, medical care or shelter. Those who lack capacity to contract are: a. Infants under the age of 18. Minors may form contracts, but their obligations are voidable. However, minors may affirm the contract after the age of majority. The common law age of majority is 21; however, some states have lowered the age by statute to 18. There are also special rules regarding student loans. b. Mental Incompetents. Contracts involving persons suffering from a mental disability or infirmity are voidable. c. Intoxicated Persons. If the other person has reason to know of the intoxication, this contract is voidable. 2. Statute of Frauds 12 In most jurisdictions, certain types of contracts are only valid if they are in writing. a. Generally. Normally applied in state courts, this law provides that certain agreements must be in writing to be enforceable. The statute is satisfied if the writing states the identity of the parties, the contract’s subject matter, its terms and conditions, consideration, and signature of the party to be charged or his agent. Agreements that must be in writing are the following: b. Promises by executors or administrators to pay estates’ debts out of their own funds. c. Promises to answer for the debt or default of another (like a surety). d. Promises made in consideration of marriage (pre-nups). e. Promises dealing with an interest in land (usually leasehold interests for more than one f. Promises that cannot be performed within one (1) year (the year runs from the date of agreement). g. Agreements for the sale of goods for $500 or more except (1) those goods that are specially manufactured (2) a written agreement confirming an oral arrangement between merchants; (3) admissions in pleadings of court that a contract for goods existed; or (4) partial payment or delivery made and accepted. The Statute of Frauds does not apply on the Navajo Nation. But please put your client’s contracts in writing anyway. Note: Navajo Case Law. There shall be no Statute of Frauds applicable to the Navajo Nation until the Navajo Nation Council adopts one. Hawthorne v. Wener, 2 NAV. R. 62, 65 (W.R. Dist. Ct. 1979). Thus, the Statute of Frauds is currently not recognized as a defense to contract formation under current Navajo law. See also, Green Tree Servicing v. Bahe, 8 Nav. R. 885 (Chin. Dist. Ct. 2005) (finding that a gift of a truck was completed by the gesture of handing over the keys without the signing of a deed because “under Navajo traditional law such transfers are binding. No written contract is required. It is similar to a handshake which is enough under Navajo to constitute a contract.” 3. Unconscionability. A contract may be voidable where the terms of the contract are unfair and beneficial to only one party to the extent that the contract is unconscionable. Test unconscionability at the time the contract was entered into. Usually this argument is used as a defense when one party has greater bargaining power that is unfair for negotiations. 4. Illegality, Duress. or Fraud 13  a. Illegality. Generally, if the subject matter is illegal and this illegality existed before the formation of the contract, the agreement is void. If the subject matter is legal, but the purpose is illegal, then the agreement is only enforceable by the person who did not know of the illegal purpose. Example: Satellite Company makes an offer to Joe where he may be paid $50 for every satellite unit he sells. While the offer is still open and before Joe accepts, the government enacts an ordinance that prohibits the sale of satellite units. The offer by the Satellite Company has been revoked by operation of law. If the ordinance had been enacted and effective several months after Joe accepted the offer, the obligations of both parties would have been discharged on a theory of objective impossibility. b. Duress. Personal or physical duress is a basis for avoiding an agreement, however economic duress does not provide a basis for voiding an agreement. Example: If Joe does not sell his brand-new convertible to Dr. Evil for $40, then Dr. Evil threatens to injure Joe or Joe's family. Joe sells the vehicle to Dr. Evil for $40. The coercive acts or threats do not need to be aimed at the immediate victim; they are actionable if directed at someone close to the victim. c. Fraud in the Factum/Fraud in the Execution/Fraud in Inducement. Fraud in the factum occurs when a person does not know she is signing a contract; the agreement is void. Fraud in the execution occurs when the person is aware there is a contract, but when the contract is committed to writing, the written version is not the same as the agreed upon oral version. Generally, one party trusts the other to faithfully draft the written document and is betrayed. Fraud in inducement occurs when the person is deceived about the material terms of the contract; thus, the agreement is voidable. Example: Sam compliments Joe’s neat handwriting. Sam gives a blank piece of paper to Joe and asks for his signature so that he may always remember and admire Joe’s neat handwriting. Joe is very flattered and agrees. Later, Sam takes the blank paper and types in text above Joe’s signature that seems to give Sam Joe’s brand-new convertible for $1. This would be fraud in the factum (real fraud). 5. Ambiguity. No contract exists when both the parties use a term that is open to at least two (2) reasonable interpretations and each party attaches different meaning to the term; and neither party knows or has reason to know the meaning that the other holds. However, this ambiguity must be as to an essential term, or the formation of the contract will not be defeated. 14  6. Mistake. No contract exists if both parties are mistaken about a basic assumption of fact that materially affects the agreed exchange. However, if the mutual mistake concerns the value of the subject matter or the mistake concerns what the subject matter is worth, then the agreement is still legally enforceable. Generally, courts will not allow a party to avoid a contract if the mistake is only made by one party, except if the other party knew or should have known of the mistake or the mistake is discovered before the other party significantly relies on it. IV. TERMS OF THE CONTRACT A. The Plain Language of the Contract 1. An unambiguous contract. (a contract where the words have only one possible or reasonable meaning) is interpreted according to its plain language. 2. The test is the intent of the parties. “The standard canon of construction [is] that a court must read a document between its four corners or examine a document as a whole to find the intent of the contracting arties.” Gene v. Hallifax, 8 Nav. R. 22, 26 (Nav. Sup. Ct. 2000). B. Is the contract “fully integrated”? 1. This concept usually applies to written contracts. 2. If the writings are intended to constitute the final expression of one or more terms in the agreement, then the contract is considered fully integrated. Many documents include an “integration clause” that states it is the intent of the parties that the writing is intended to be the final expression of the parties. Only integrated writings are protected by the Parole Evidence Rule. 3. When no single document is intended as the complete or final expression of the agreement, the agreement is considered to be non-integrated. Example 1: A and B draft a detailed 30-page written contract that includes a clause saying, “this agreement is the full and final expression of the intent of the parties” and another clause saying, “any modifications to this contract must be in writing.” This is an integrated contract. Example 2: Buyer emails Seller and says, “Yes, I'd be happy to buy that old desk for $50.” This is a binding written contract, but not a fully integrated contract. It includes the price and quantity terms but does not specify important details such as whether the desk will be delivered, or the buyer needs to come pick it up. C. Parole Evidence Rule 15 Evidence of a prior or contemporaneous agreement (written or oral) cannot be used to vary the terms of a written contract and are inadmissible, when the contract is fully integrated, although some courts will allow limited parole evidence if in practice a fully integrated contract is ambiguous. The contract must be in writing, and the Parole Evidence Rule applies only if the evidence that a party is trying to introduce concerns a prior or contemporaneous negotiation or agreement. Evidence of subsequent modifications to the written contract may be introduced if the modification was relevant. D. Other Sources of Terms (not from the words of the parties) 1. Common law. The law of contracts includes many standard contract provisions that the law assumes that the parties meant if they did not specify a particular term. If the price term is not specified, for example, the court will use the market price, or the standard rate charged by the company providing a service. When the time of performance is not specified, it is assumed to be “reasonable.” Example: I call a tow truck to rescue my car from a snowy ditch. I tell them where the car is, and they tell me how long it will probably take them to get there. Later, once the car is out, they hand me the bill. The fact that we did not discuss price does not mean that I do not have to pay, but it also does not give them a blank check to charge whatever they want. I have entered into a contract to pay them their normal rate. 2. Uniform Commercial Code (in the case of a Sale of Goods) a. The Navajo Nation has adopted four (4) of the nine (9) U.C.C. articles (Article 1 Article 2 Article 3 and Article 9). See N.N.C. § 1-101. i. Article 1 is a general article that defines terms utilized in the U.C.C., ii. Article 2 governs the sale of personal property (“goods”), iii. Article 3 deals with negotiable instruments, which includes drafts, business and personal checks, certificates of deposits and promissory notes, iv. Article 9 governs the creation and enforcement of security interests. A security interest is an interest of a creditor in certain property (“collateral”) owned by a debtor. b. According to the Navajo Nation Code, the adoption of these articles was to provide uniform law for the Navajo Nation regarding commercial transactions. In addition, its purpose was to simplify, clarify, and modernize the Navajo Nation law, while also allowing the expansion of commercial practices through custom, usage, and agreement of the parties. See N.N.C. § 1-102(B). 16  3. Course of Performance. During the performance of an executory contract, “course of performance” is essentially the understandings of performance that develop by the parties' conduct without objection by the two (2) parties. 4. Past Dealings. Terms of a contract may be found by looking to the past dealings of the contracting parties. 5. Custom and Usage. Terms of a contract may be found by looking at the custom and/or usage. This may be a habitual or customary practice which is widespread, and prevails throughout an area or industry; furthermore, usage may be a course of conduct based on a series of actual occurrences. E. Covenants Not To Compete A term that appears generally in employment contracts and sales of businesses limiting the right of a party to compete against the other party. Whether the covenant is valid or not is determined by the reasonable business need for protection, reasonableness of geographical limitation and reasonableness of time limitation. V. CONDITIONAL CONTRACTS A. Contract Condition A condition in a contract is basically an “if” clause. It states that the contract will only be performed, or will not be performed, if a particular event occurs or other type of condition is met. An act or event, not certain to occur, which affects the duty of performance. Example 1: A delivery service promises guaranteed two-day delivery. The contract includes a clause saying that the guarantee does not apply during severe weather. Example 2: Buyer promises to purchase land from Seller if the title search does not uncover any cloud on the title. Most real estate contracts condition the sale on a successful title search and inspection and on the Buyer’s ability to obtain financing, among other conditions. 1. When the contracting party has promised to perform under the contract and there is no condition attached to the covenant/promise, the duty to perform is absolute. 2. The duty to perform is also absolute if there is a condition attached to the covenant/promise to perform, and the condition is satisfied. 3. Promise to Perform and Condition Excused. Furthermore, if there is a condition attached to the covenant/promise to perform and the condition is excused, the duty to perform is absolute. B. Express/Constructive 17  1. Express Conditions. Express conditions are those conditions which are created by the language of the contract. Look for phrases such as “if,” “so long as,” “on the condition that,” and “until.” 2. Constructive Conditions. Constructive conditions are conditions created by operation of law and depend on the order of performance Example: If nothing is said about the time of payment, the work must occur before payment. Thus, in a service contract, such as going into the hair salon, you pay the hairstylist after completion of the haircut/service. The work is a constructive condition precedent to the payment performance. C. Conditional Acceptance Offeree adds a condition to her reply to an offer, which was unconditional. Example: Seller offers to sell his 1999 motorcycle to Buyer. Buyer responds by saying he will buy the motorcycle for $1000 if he wins the state lottery next Tuesday. Is there a contract? No, there was an offer by Seller, followed by a conditional acceptance by Buyer. This is the same as if Buyer said, “No.” Remember that a counteroffer is a rejection. D. Performance Condition Both parties have agreed that performance by both parties depends on an event beyond their control. Example: Same facts as the example above. What if Seller agrees to sell his 1999 motorcycle to Buyer, if Buyer wins the state lottery next Tuesday? Is there a valid contract? Yes, the parties have agreed to a contract in which the performance is conditional. E. Description of Conditions 1. True condition. When an event affects the party’s duty to perform under the agreed upon contract that is beyond the control of both the parties. 2. Condition coupled with a covenant. An event that affects the duty to perform that is somewhat within the control of one of the parties and creates a legal obligation on that party to use reasonable good faith efforts to cause the event to happen. Example: Buyer agrees to buy a house from Seller. Buyer must obtain a mortgage at 6%, as a condition of the closing. This would be a condition coupled with a covenant. Buyer must obtain the mortgage as a condition of the covenant to purchase the house. 18  3. Condition precedent. A condition precedent is a condition that must occur before the performance. 4. Condition subsequent. A condition subsequent is a condition that must not occur during the performance. Example: Owner states that Renter may rent his house for $100 a month until the second blue moon of the year. This is a condition subsequent. F. Excusing an Express Condition 1. Waiver. The term “waiver” in the law means the formal relinquishment of a known legal right (such as waiving the right to a jury trial). The party the condition is designed to protect may waive the condition; in which case the contract remains binding. 2. Estoppel. The term “estoppel” is used in the law for a variety of doctrines that protect people who almost, but not quite, fulfill a technical legal standard. In this context estoppel applies to people who make a statement or take an action that makes the other contracting party believe that a condition has been waived, but it only applies if the other party reasonably relies on that statement or action to change his position in a manner that damages his interests. VI. NONPERFORMANCE OF A CONTRACT A. Breach of a Contract 1. Breach. If a promiser has an absolute duty to perform, the promiser “breaches” the contract if the duty to perform has not been discharged. Note 1: Navajo Case Law. The Navajo Nation’s policy is not to encourage people to breach oral contracts or written contracts. Anderson Petroleum Serv. Inc. v. Chuska Energy & Petroleum Co., 4 N.L.R. 112, 114 (W.R. Dist. Ct. 1983). Note 2: Navajo Case Law. A contracting party seeking to sue the Navajo Nation for breach of contract must state a claim in compliance with the Navajo Nation Sovereign Immunity Act and its exceptions. Raymond v. Navajo Agricultural Products Industry, SC-CV-26-94, Nav. Sup. Ct. (1995). 2. Material breach. A “material” breach is a breach that actually matters, taken in context. To determine whether a breach is material or minor, look at factors such as: a. The amount of benefit received by the non-breaching party; b. The extent of part performance under the contract; 19  c. Whether the breaching party was negligent or willful in breaching the contract; d. Whether adequate damages can be paid to compensate the non-breaching party; and e. The likelihood that the breaching party will perform the balance of the contract after the breach occurred. It is very common for complicated contracts to be breached in small ways, but this does not generally excuse the other party from its obligations or give rise to any damages. 3. Duty to Perform Discharged a. Excuse by Failure of Condition. If a party’s duty to perform is conditional and the condition fails, then the party’s duty to perform is excused. Example: Buyer contracts to purchase vintage automobile on the condition that its value is appraised at $85,000. If the vehicle is not appraised at $85,000, but far less, then she does not have a duty to purchase the vehicle. Her duty to perform is excused. Note: Navajo Case Law. There is no breach of contract where the alleged breaching party proves legal excuse for failure to perform. Navajo Tribe of Indians v. Jones, 5 N.L.R. 121, 128 (W. R. Dist. Ct. 1986). b. Excuse by Cancellation. Duties under the contract may be discharged by cancellation of the original agreement. Note: Navajo Case Law. May agree to a termination, modification, or rescission of the contract. Michael Nelson and Assoc. v. DC/ Shopping Center, 5 N.L.R. 26 27 (Nav. Ct. App. 1985). c. Discharge by Release. Duties under a contract may be discharged by a release and/or covenant not to sue. This release must be in writing and supported by new consideration or promissory estoppel. 4. Excuse by Other Party's Breach a. Common Law. If one party to a contract substantially performs its obligations under the contract, the other party is required to perform its obligations. The contract performance may only be excused by a material breach of the contract, not by a minor breach by one party. A material breach is a performance that is not substantial. Whether a particular breach is material is a question of fact. Example: Homeowner contracts with Painter to paint his house inside and out. Painter forgets to paint the cupboards in the kitchen. This may be a 20  breach, but it is not a material breach and does not excuse Homeowner from paying Painter for the work performed. b. Uniform Commercial Code. In a sale of goods situation, the Seller is generally required to make a perfect tender. If not, the Buyer can reject the goods, withhold payment and is excused from paying. c. Excuse because of Other Party’s Anticipatory Repudiation or Inability to Perform Under the Contract. Anticipatory repudiation arises when a party states that he/she will not perform before the time for performance is due. The “anticipatory repudiation” by one party excuses the non-repudiating party from the duty to perform. As a general rule, the non­repudiating party may have a claim for damages against the repudiating party. Example: Mower contracts with Homeowner to mow Homeowner's five (5) acre lawn for $100. After Mower begins to mow the second acre, Homeowner states that he will not be able to pay Mower. Mower immediately stops mowing the lawn. Can Homeowner sue Mower for non-performance under the contract? Or can Mower sue Homeowner? Since Homeowner was the party that breached the contract by his anticipatory repudiation. Mower was excused from further performing under the contract. Mower may take legal action to sue Homeowner for the damages he incurred by the anticipatory repudiation. After Homeowner repudiates, what if Homeowner immediately states, “Just kidding. I'll pay you in one (1) week”? If Homeowner’s anticipatory repudiation is immediately disavowed or retracted, and Mower has not made a material change, then Mower is not excused from performance. Mower must still cut the five (5) acres of grass; however, Mower may demand adequate assurances from Homeowner that Homeowner will perform his side of the contract (payment). 5. Excuse by Reason of a Later Contract a. Rescission. Rescission means that the parties agree to withdraw their contract. Rescission can also be ordered by a court as a remedy in a contract dispute. Essentially the same act as cancellation, which occurs before performance of the contract has been completed. Example: Carpenter agrees to build new cabinets for Homeowner for $500 with payment to be made to Carpenter when the work is finished. Carpenter begins to work on cabinets. However, before Carpenter is finished with the cabinetwork, Carpenter and Homeowner agree to cancel the contract. Is Carpenter allowed to sue Homeowner for the work performed under the contract, even though both parties agreed to cancel 21  the contract? No, Carpenter and Homeowner agreed to a rescission of the contract; thus, the performance obligation is excused. b. Accord and Satisfaction. Generally, an accord (agreement) occurs when the parties to an existing contract agree that they will do something different than originally contracted for, which will extinguish or satisfy the prior existing obligation. The accord suspends the legal enforcement of the prior existing obligation. Satisfaction indicates the accord’s execution or performance. The classic situation for accord and satisfaction is when one party is not pleased with the performance of a contract or there is otherwise some dispute regarding the amount owed, and one party offers the other party something less than the full original contract price. If the other party accepts the partial payment, for example by cashing a check, this is treated as a compromise of the dispute, basically a binding settlement agreement and discharges the obligation to pay the remainder of the money. Example: Carpenter agrees to build new cabinets for Homeowner for $500 with payment to be made to Carpenter when the work is finished. Carpenter and Homeowner later agree that instead of paying Carpenter $500 for his services, Homeowner will give Carpenter his 1978 Chevy. This is an example of an accord. Can Carpenter later sue Homeowner for the $500 after the accord is entered into? No. The accord that both parties agreed to suspend legal enforcement of the prior obligation of $500. However, if Homeowner fails to give Carpenter his 1978 Chevy, then Carpenter can sue under the original $500 agreement or can sue under the accord. c. Novation. Generally, a novation is an agreement between the parties to a contract that a new party shall be substituted for one of the original parties. When a novation occurs, the original party that was replaced is excused from performance under the contract. All parties must agree to a novation for it to be valid. Example: Carpenter agrees to build cabinets for Homeowner. Later, Carpenter, Homeowner, and Manufacturer agree that Manufacturer will do the work instead of Carpenter. This is an example of a novation. If Manufacturer fails to build the cabinets, can Homeowner hold Carpenter liable for breach of contract? No, because Carpenter was originally obligated to perform under the contract, but his performance was excused by the novation. 6. Excuse because of a Later, Unforeseen Event. 22 When an event occurs after the formation of the contract, but before the completion of the contract performance, that was unforeseen and makes performance impossible or commercially impracticable, the performance is excused. 7. Death of a Party. Under common law, performance of a contract is not excused after the death of a party, unless the contract was for the performance of a specialized service by the person who died. If the contract was for the performance of a service that could be performed by anyone, then it is likely that the contract performance will not be excused. The contracts are obligations of the estate, though, and will not pass down to the heirs if there are insufficient assets in the estate to satisfy them. Example 1: Ann hires a well-known, famous painter, Leonardo, to paint a portrait of her. However, Leonardo dies before finishing the portrait. Is Leonardo’s estate liable to Ann for breach of contract? No, the performance is excused by reason of an unforeseen event. Since Ann hired Leonardo specifically to complete her portrait, it is an important part of the contract. Leonardo was hired for his reputation and skill. Example 2: Compare. After several offers from painters to paint her garage for no less than $1500, A hires L to paint her garage for the price of $800. Before painting the garage, L dies. Does A have to pay an additional $700 to have her garage painted because of L’s death or can she sue L’s estate for breach of contract? In this case, it appears the contract was for the basic performance of a service. There appears to be nothing shown in the facts indicating L had special painting skills or expertise. Thus, L’s death does not excuse the performance under the contract and A can collect the difference to hire a new painter from the estate. 8. Excuse of Non-performance Due to Destruction of Subject Matter. Generally, if the subject matter of a contract is destroyed, then the non-performance of a party is excused. Example: Owner contracts with Dancer for Owner’s ballroom during the last week of December. During the third week of December, the ballroom is completely destroyed by a hurricane. Dancer sues Owner for breach of contract. Is Owner’s non-performance excused? Yes, the complete destruction of the ballroom by the hurricane makes performance of the contract impossible. 9. Excuse of Seller's Performance Due to Casualty to Identified Goods. Generally, you look to see who carried the risk of loss, then you determine whether the goods that were destroyed were the subject matter of the contract. If the risk of loss is on the buyer, the buyer must pay for the destroyed goods. If the risk of loss is on Seller and the goods are destroyed, Seller’s non-performance is excused because of a later, unforeseen occurrence that made performance impossible. It is important to note that performance must be impossible; it does not matter if it just costs more to perform. 23  Example: Owner contracts to sell his boat to Buyer for $1000. The boat is destroyed by a hurricane before Owner gives the boat to Buyer. Can Buyer sue Owner for breach of contract or does Buyer have to pay for the boat? The Buyer does not have to pay for the boat, because the risk of loss is on the Owner (Owner had not shifted the risk of loss by transferring possession of the boat to Buyer). Buyer cannot sue the Owner, because there was a later, unforeseen occurrence that made performance of the contract impossible. 10. Excuse of Non-performance Due to Frustration of Purpose. In this case, an unforeseen event occurs after formation of the contract that does not affect the ability of the parties to perform but does eliminate the purpose for the performance. Example: Visitor meets with Hotel Owner regarding the availability of hotel rooms with a balcony on the second floor to view the Presidential inauguration on January 1st. Visitor contracts for a room to view the inauguration at a very hefty monetary sum. However, an unexpected tornado wreaks havoc on the city and the inauguration is postponed. Visitor must argue that the tornado was not foreseen, nor reasonably foreseeable at the time of the contract and that the purpose for the performance was frustrated. The value or the utility of the second-floor room is not the same as the day of the contract; therefore, performance may be excused. VII. BREACH REMEDIES FOR UNEXCUSED NONPERFORMANCE A. Damages 1. Expectancy Damages. Amount of damages that it would take to place the non- breaching party is as good of a position as he/she would have been in had it not been for the breach. The standard measure of damages in a contract dispute is the expectancy of the parties, “the parties are entitled to the benefit of their bargain.” Note: Navajo Case Law. Breach of an ordinary contract may result in the innocent or injured party receiving the value of what he or she would have received if the breach had not occurred. For example, the cost of repairs needed to correct any defects when a builder breaches the warranty of habitability. Brown v. Todacheeney, A-CV-35-91, (Nav. Sup. Ct. 1992). Although this is the standard measure of damages under the common law tradition, it can sometimes be very difficult to calculate. For example, if a breach of a contract prevents you from selling your first novel, it is hard to accurately guess how much money you lost. The book could have been the next Harry Potter – but probably not. The plaintiff bears the burden of actually proving damages as a question of fact. 24 2. Punitive Damages. Damages which are given in order to punish the defendant for breach. Punitive damages are not typically given in contract cases, unless the contract being breached is for insurance, and then the breach of contract is treated as a tort. Courts do not punish people for breaching their contract, they just expect the breaching party to make the other party whole. 3. Nominal Damages. Token damage awarded where a breach is shown, but the Plaintiff has not shown an actual loss. Example: In finding against the Defendant, the judge orders D to pay P $1. 4. Liquidated Damages. Damages that the parties agree to in the event of a breach, at the outset of the contract. Usually in the instances where damages are difficult to determine at the time of the contract and the amount agreed upon is a reasonable determination of what the damages might be. Liquidated damages are only enforceable if they are a reasonable estimate of actual damages and cannot be used as a penalty clause (which doesn't keep people from trying all the time). 5. Specific Performance (Non-Monetary Damages) a. Generally. Equitable remedy, which is granted if the legal remedy of damages is inadequate. The non-breaching party may be able to obtain a court order directing the breaching party to perform under the contract. b. When Awarded. This type of remedy is allowed only when the subject matter of the contract is rare or unique. Real estate is “unique” by definition, so a contract involving real property is always enforceable by specific performance unless the parties agree otherwise. This is not really relevant on the Navajo Reservation. Example: If the contract is for a unique painting by Van Gogh, you may argue that legal remedies are not sufficient, and that specific performance is necessary. This is possible for contracts involving unique or rare goods. The parties may also agree in their contract that specific performance will be available for breach. These provisions are generally enforceable, and very common. Read the boilerplate! 6. Quasi-Contractual Relief. May be a remedy appropriate when there is no valid contract, but one party has conferred a benefit on the other and unjust enrichment occurs. 7. Restitution. The most common equitable remedy. Instead of placing the non- breaching party in the position he would have been in if the contract had never been breached, it places the non­breaching party in the position he would have been in if 25  there had never been a contract. Restitution is also often used as an alternative remedy because it is sometimes much easier to calculate than expectancy. Example: If you paid a literary agent to sell your first novel, and then the agent did not do this, the easiest way to calculate damages would be to make the agent pay you back your money instead of trying to figure out how much the novel would be worth. Interestingly, restitution is also the most common English translation of the word nalyeeh, but it may not be appropriate in this context. Note: Nalyeeh is a paying of restitution to the injured party. See In re: Estate of Benally v. Navajo Nation, 5 Nav. R. 209, 212 (WR Dist. Ct. 1986). B. Duty to Mitigate The non-breaching party has a duty in most jurisdictions to mitigate the damages, which means the non-breaching party must take affirmative action to minimize the damages and cannot sit by and allow the damages to increase in amount. Example: You are on your way to meet for a multi-million dollar business deal and your babysitter does not show up. Instead of missing the meeting and then suing the babysitter (a rich kid) for millions of dollars, you need to try to call an alternate sitter first. Note: Navajo Case Law. When there is a clear breach of contract, the aggrieved/non­ breaching party must take necessary steps to protect his/her interests. Failure to mitigate damages may reduce the damage award. Hall v. Arthur, 3 Nav. R. 35, 38 (Nav. Ct. App. 1980). VIII. NON-PARTIES TO A CONTRACT A. Third Party Beneficiaries 1. General Rule. When identifying third-party beneficiary problems, look for two parties that are contracting with the intent of benefitting a third party. The third party is not a party to the contract, but is generally able to enforce the contract others made for his/her benefit. If the third-party beneficiary knows of the contract or has agreed to the contract, his/her rights as a beneficiary of the contract have vested and the contract cannot be cancelled or modified without his/her consent unless the contract provides otherwise. Before vesting, the promisee and promisor are able to change or rescind the beneficiary’s rights under the contract. Example: Husband (promisee) agrees to pay Florist $100 and Florist (promisor) agrees to deliver six (6) dozen roses to Wife. In this example, Wife is the third party beneficiary who receives the benefit of the contract. 26  2. Types of Third-Party Beneficiaries. a. Intended or Incidental Beneficiary. Only intended beneficiaries have contractual rights. Incidental beneficiaries do not have contractual rights. To determine whether a beneficiary is intended or incidental, look to see whether the beneficiary: i. Is identified in the contract, or ii. Receives performance directly, or iii. Has a relationship with the promisee that indicates intent to benefit. iv. Creditor Beneficiary. A person to whom a debt is owed by the promisee. v. Donee Beneficiary. A person who the promisee intends to benefit gratuitously. b. Possible Litigation i. Beneficiary v. Promisor. A beneficiary may sue the promisor under the contract. However, the promisor may defend against any potential litigation by raising any defense that the promisor may have against the promisee. ii. Beneficiary v. Promisee. A creditor beneficiary may sue the promisee on the existing obligation between them. The creditor beneficiary may also sue the promisor, but the creditor beneficiary is only able to obtain one satisfaction. On the other hand, a donee beneficiary is not able to sue the promisee unless grounds for a remedy relying on detrimental reliance exist. iii. Promisee v. Promisor. A promisee may sue the promisor for specific performance if the promisor did not or is not performing for the intended third-party beneficiary. B. Assignment Assignment. An “assignment” is a contract under which the parties later transfer rights, property, or interest under that contract to a third party. Generally, consideration is not required for an assignment to be valid. The parties to an assignment are the following: 1. Assignor. The party to the contract who later transfers his/her rights, property, or interest under the contract to a third party. 27 2. Assignee. The party that was not a part of the original contract and obtains the right to enforce the contract because of the assignment. 3. Obligor. The remaining party to the contract. Example: Business contracts to rent office space from Owner for a term of one (1) year at the rate of $500 per month. After six months, Business (Assignor) decides that it would like to relocate to another city and would like to “assign” all of its rights, interest and property under the lease to Corporation (Assignee). Owner (Obligor) agrees to the assignment of the lease and Corporation (Assignee) is now entitled to enforce the contract under the Business’ (Assignor’s) previous] rights, interest, and property. The Corporation now is obligated to pay Owner the rate of $500 per month for the use of the office space for the next six months. The Business is no longer liable under the contract. Note: Nava jo Case Law. An Assignor may not shift his liability to the Assignee, however, this does not mean the Assignor must personally perform all the duties and obligations of the contract. He may delegate the performance of his obligations to another where that party is capable of performing the obligations. General Electric Credit Co. v. Vandever, 1 N.L.R. 109 110 (C.P. Dist. Ct. 1478). 4. General Limitations on Assignments a. Prohibition. If the language of the contract prohibits assignments, a later assignment of the contract may be a breach by the Assignor, but the Assignee may still enforce the contract for his/her performance under the contract as long as the Assignee does not know of the prohibition of assignments. b. Invalidation. If the language of the contract invalidates assignments, a later assignment of the contract would be a breach by the Assignor and would create no rights in the Assignee. The assignment is void, as the language of invalidation takes away the right to assign and the power to assign. c. Common Law. Under the common law, an assignment may not substantially change the duties of the Obligor. 5. Assignee's Rights a. Enforcement. After a valid assignment, the Assignee can sue the Obligor for performance under the contract. Furthermore, the Assignee can sue the Assignor for wrongfully revoking an irrevocable assignment situation. Yet, the Assignor is not liable to the Assignee if the Obligor cannot perform. b. Defenses. The Obligor would have the same defenses against the assignee as he/she would have had against the Assignor. 28 C. Delegation of Duties 1. Delegation. Delegation is when a party to a contract (Delegator) transfers his/her duties or burdens under the contract to a third party (Delegatee) who was not a party to the original contract. Compare a delegation to an assignment: An assignment is the transfer by a contracting party of his rights or benefits under the contract to an outside party; it is not a transfer of duties or burdens. Furthermore, in a delegation the Delegator remains liable under the contract, unlike the Assignor in the case of an assignment. 2. Consent. The consent of all the parties to the original contract is not required for a valid delegation. Example: Painter contracts to paint Owner’s kitchen cabinets. Painter and Worker agree that Worker will paint the house. Does Owner have to consent to the delegation? No, Owner does not have to consent to the delegation. If Owner did consent, it would be a novation instead of a delegation. 3. Consideration. Consideration is not required for a delegation. However, the party that is delegated the duties and burdens under the contract (Delegatee) has no legal obligation unless consideration is given. Example 1: Carpenter contracts to build cabinets for Homeowner for $1500. Builder than agrees with Carpenter that she will build the cabinets for Homeowner because Carpenter is Builder's brother. Builder never builds the cabinets for Homeowner. Can Homeowner sue Carpenter? Yes, Homeowner can sue Carpenter; the delegation to Builder does not relieve Carpenter of liability or excuse non-performance. Example 2: Same facts as above. Can Carpenter or Homeowner sue Builder? No, they cannot sue Builder because Builder never received any consideration from Carpenter (delegating party). Builder, as Delegatee, is only liable if she received consideration from Carpenter. A delegation for consideration would create a third-party beneficiary situation and only then would Homeowner be able to sue Builder. 4. Delegable Duties. Generally, most contractual duties are delegable, unless there is language that prohibits delegation or assignments, special skills are required under the contract, or the party to perform under the contract has a special reputation/status. Example: Mr. Music is a world-renown pianist. He contracts to play the piano for Mrs. Rich's annual Christmas party. Can Mr. Music delegate playing piano to his neighbor? No. The contract calls for special skills and relies on his special reputation. 29