Contracts

Contract

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

  • not all promises create a K

• Governed by: state common law

  • restatement (second) of K - lists all K laws and alternatives - used by majority listed 1st

• State Statutory Law - uniform commercial code, Article 2 (sales of goods) by a merchant + between merchants

• Difference between contract law, torts, and property law

  • Contract: future

  • Torts: past

  • Property: present

Types of Contracts

A. Bilateral vs Unilateral - Based on what the offeror expects as acceptance

• Elements

(1) Offer

(2) Acceptance

(3) Consideration

(4) Legality

(5) Capacity

a. Bilateral: two promises

b. Unilateral: promises for an act

B. Express vs. Implied

a. Express: clearly set forth in writing/spoken words (K’s don’t have to be in writing to be legal)

b. Implied: establish by conduct, behavior, and context of the situation

• Implied in fact: Plaintiff must show

(1) provided property/service to defendant

(2) expected to be paid for property/service by defendant, reasonable person must agree

(3) defendant had opportunity to reject property/service, and did not

• Implied in Law (quasi K’s)

  • Requirements: court imposes a K obligation not a true K

  • Purpose: prevent one party from being unjustly enriched

(1) benefit was conferred to defendant

(2) the defendant appreciated the benefit

(3) plaintiff reasonably expected compensation

(4) because of the circumstances which defendant received benefit, unjust enrichment to the defendant if she/he is allowed to keep the benefit and not pay

C. Valid vs. Unenforceable vs. Void vs. Voidable

1. Valid: legit

2. Unenforceable: valid face level

3. Void: not a K at all

4. Voidable: either party can withdrawal from K or remain obligated

D. Executed vs Executory

1. Executed: done

2. Executory: ongoing (ie: lease)

Contract Formation

1. Offer

a. Essentials

(1) Objective Intent (Objective Theory of Contract): reasonable person in position of the offeree thinks that a binding promise was made

(2) Certain and definite: clear terms, just address main items

• parties must perform in K, subject matter, price consideration, payment terms, duration, any conditions

(a) Significance: serve as evidence of intent to K

• gives court a basis for doing with a breach

(b) Difference between Common Law and Uniform Commercial Code (UCC)

• UCC more forgiving (operate on good faith)

  • offers do not have to have all terms (open terms)

  • as long as parties enter K in good faith, terms will be filled in by UCC

(c) Advertisements: not offers

• imitation to negotiate

• exception: when an ad is clear, definite, leaves nothing open, can be an offer

(3) Communication to the Offense

b. Validity of an offer

(1) Until accepted

(2) Terminated by Action of Parties or by Law

(a) Revocation by Offeror - effective when received by Offeree

• Five Exceptions

i. Option Contracts: offer bounds to hold open an offer for specified period of time when consideration is given (something of value = money)

ii. Firm Offers Under the Code: under UCC, firms are bound to keep an offer open for a states period of time he/she promises to do in writing

iii. Statutory Irrevocability: can’t take back an offer

iv. Irrevocable Offers of Unilateral Contracts: when the offeree starts to perform what is offered

v. Promissory Estoppel: relied on promise

(b) Rejection by Offeree - effective when received by offeror

i. Counteroffer - effective when received by offeror

• Operations of Law

ii. Lapse of Time

iii. Death or incompetence of the offeror or offeree

iv. Destruction of the subject matter of the offer

v. Subsequent illegality of the type of K proposed by the offer

2. Acceptance

a. Mirror Image Rule

(1) Unequivocal

(2) Silence

(a) Exception: “take silence as acceptance“

b. Mail Box Rule

• valid when sent (doesn’t matter when received)

(a) Exception: offer sent then accepted/rejected

Mutual Assent by Law

1. Multiple Promisors (ie: landlord with separate leases)

a. Default: MP accept liability for the entire promise, jointly and severally

b. Alternatives: an agreement addressing the % of liability

2. Private sector employment termination

a. Default: at will

• get rid of will for any/no reason

b. Alternatives: employment K

(1) Agreed reasons for termination (just cause, serious misconduct, professional incompetence)

(2) Specified terms: have for ____ years

(3) Agreed conditions termination (ie: notice, severence —> paid after done)

3. Sales of Services/Service Agreement

a. Default:

(1) Provider must perform with reasonable care

(2) Customers are required to pay reasonable value

b. Alternatives:

(1) Express Warranty

i. Bid: fixed price, onus on the service provider

ii. Hourly rates

4. Sale of real property

a. Default: seller promises only good title (only the fact that defendant owns it, not conditions)

(1) Exception: certain statutes

b. Alternatives

(1) Warranties: structural, foundational, habitibility, soundness (ie: get an inspection)

5. Sales of goods

a. Default: UCC, Art 2

• Old Default Rule: Caveat Emptor - let the buyer beware

• New Default Rule: imposes 2 implied warranties on the sale of goods

(1) Exceptions under the UCC

(a) Implied warranty of fitness for a particular purpose

• applies when a buyer has a specific purpose, and the seller knows of that purpose and recommend a product based on the purpose

(b) Implied warranty of Merchantability

• implies every good bought must be fit for its ordinary purpose

  • properly labeled

  • goods (include food)

    • Repair

    • Replace

    • Money back

i. Enforcement under Magnuson Moss Warranty Act (Fed Law): make manufactures honor warranty

• Consumer’s Jurisdiction

• Fed Court

• Defendant must pay Attorney’s Fee

• Statute Limitations - 4 years (from time of sale)

b. Alternative

Consideration

A. Definition: the exchange of something of value, given by each party

B. Legal Sufficiency of Consideration

1. Legal Benefit: when promisee/promisor, attains something of value which he/she had no prior legal right to obtain

2. Legal Detriment: when promisee/promisor has under no previous legal obligation to do/refrain from doing something

C. Agreements lacking consideration - Unenforceable

1. Preexisting duty

• final K, parties want to modify before finish

• both parties must present additional considerations for modification K to be valid

2. Past Consideration: can never be used as basis of a K

3. Gratuitous Promise

4. Illusory Promise: when promisor doesn’t commit themselves

D. Agreements lacking consideration - Enforceable

1. Unforeseen Difficulties

• K must be performed under burdensome conditions

• conditions were not anticipated by the partner of the K

• promises agree to pay what is fair and reasonable in light of the change of circumstances —> act of God, natural disasters

2. Promissory Estoppel

3. Contracts Implied-in-fact

4. Contracts Implied-in-law (Quasi-Contracts)

Legality of Object - The purpose of a contract must not be criminal, tortious, or otherwise against public policy

Capacity

A. Children (under 18) cannot contract

1. Exceptions: If enter K, under 18, once turn 18, and then make payment of K ratified = valid K

B. Mental disability: adjudicated (went to court and judge declared)

• anything signed = void

• non-adjudicated = voidable

Breach of Contract

Facet I: BoK Cause of Action

A. Questions asked by the Courts

1. Valid K exist

2. Conditions were performed by non-breaching party (plaintiff)

3. promise was broken by the breaching party who failed to comply with perform as indicated in the K

B. Who can sue for Breach

1. 3rd party beneficiary

2. assignees (assign rights —> give up to another person)

3. cannot delegate a duty

Facet II:

1. Novation: 3 party K, where a new party takes over the rights and duties of the OG party (agreement)

2. Conduct Invalidating Consent

a. Duress

(1) Physical (VOID): physical force compelling someone to agree to a K (ex: gun to head)

(2) Economic (VOIDABLE): improper threats (economic coercion) leaving a victim with no reasonable alternative than to agree with the K

(a) Factors (need to prove all)

• was there a wrongful threat/application of pressure

• was there lack of alternatives

• was the pressure the significant cause, inducing the plaintiff into a K

• did the other party gain an advantage by causing this financial distress

b. Undue Influence (VOIDABLE): when one person is taken advantage of his/her dominant position in a relationship based on trust to unruly influence the other party to the point of interfering with that person’s ability to make his/her own decisions

(1) Factors (only need to prove one)

• was the dominant party rushing the other party to consent

• did the dominant party gain undue enrichment

• was the non-dominant party isolated from advisors at the time of the agreement

• did the result of the exchange overwhelmingly benefit the dominant party

a. vs. b.

• Duress: aware it’s against your will

• Undue Influence: not aware

c. Fraudulent Misrepresentation - “Fraud“

(1) Elements

• a false representative of a material fact

• made with scienter

• justifiably relied on

• causing injury

(2) Two types

(a) Fraud in the execution (VOID): misrepresentation about the nature of the document

(b) Fraud in the inducement (VOIDABLE): misrepresentation about the subject matter in the K, which serves to induce the party to enter the K

• injured = can get out of K

d. Non-fraudulent Misrepresentation (VOIDABLE)

(1) Elements: didn’t intend to lie (negligent)

e. Mistakes

(1) Mutual Mistake (bilateral) (VOIDABLE by the adversely affected party)

• both parties has the same but erroneous belief, forming the basis of the K

(2) Unilateral Mistake (VOIDABLE):

(a) Exceptions

• if the other party either know or should have known the other party made a mistake

• mistake was so serious that the K was unconscionable that it is outrageous

3. Statute of Frauds

a. Definition: state statute which requires that a certain types of K be writing to be enforceable and that it be signed by the party to be charged (against whom the K is to be enforced)

(1) Suretyship provision: a contracted promise made by one party (surety = plaintiff) to a creditor (promisee = defendant) to perform duties or obligations of a 3rd party (principal debtor)

• if principal debtor fails to perform —> has to be in writing

Original Promise: insurance company pays for the ensure

Main Purpose Doctrine: surety is guaranteed the obligation to secure an economic benefit for themselves

EXCEPTIONS

(2) Agreements upon consideration of marriage (marriage provision)

• pre-up, in writing

(3) Any K that deals with real (physical) property, must be in writing

a. Exception: Part performance (never got into writing, but if can prove these 3 things, it can become legit)

• parties make an oral K and all essential terms were present

• K has been partially performed by the party seeking enforcement

• partial performance was encouraged by the parties misrepresentation

(4) K that cannot by their terms, be performed within one year from the making of the K (whenever the K states it starts is valid until a year later, not when it is signed)

(5) UCC - K for sale of goods over $500

a. Exception: Specifically Manufactured Goods: made specifically for the buyer that cannot be resold to other sellers

b. Effect of Noncompliance - Contract is void

c. Promissory estoppel

4. Statute of Limitations: 1 (oral) - 5 (written) years

5. Res Judicata

Facet III:

1. Type of breach:

a. Minor Breaches: when the breaching party fail to perform some aspect of the K, but the other party still receives substantial performance by the other party

• not breaching party must still perform their duties under the K - but are allowed their damages

b. Material Breaches: when one party receives something substantially different from what the K specified, due to the breaching party failure to perform some aspect of the K

• non-breaching party does not have to perform

(1) Factors courts consider in determining materiality

• amount of benefit received by the non-breaching party

• whether the non-breaching party can be adequately compensated for damages

• extent of performance of breaching party

• hardship to the non-breaching party

• negligent or willful behavior of the breaching party

• likelihood that the breaching party will perform the remainder of the K

c. Anticipatory breach: anticipate the party will breach the K

• an unequivocal indication that a party will not perform when performances is due

2. Remedies available:

a. Money damages

(1) Liquidated damages: in the K, for every day they don’t fulfill their duties, they must pay for it

(a) penalties: not entitled to a better deal than the one you made

(2) Mitigation of Damages: reasonable acts from the non-breaching party will have them entitled to what they are owed

b. Rescission: rescind

c. Restitution: back the before the K was signed

d. Specific Performance: every real estate is a unique good (never used w/ personal services)

e. Reformation: court rewrites K to fix mistakes

f. Attorney’s fees: breaching party pays for their own and non-breaching party AF

3. Contract Provisions Limiting Remedies:

a. Exculpatory clauses: promise to not sue

b. Limitation of liability clauses: limit liability of K

c. Indemnification clause: shift losses to a K parties or 3rd party

d. Arbitration clause: alt. to suing

Contracts of Adhesion (E-Commerce)

A. Definition: a binding agreement between 2 parties, in which 1 party has the bargaining power and uses it to write the K primarily to her advantage (take it or leave it —> legal)

B. Types:

1. Click-wrap agreements: user must take an affirmative action after being presented with the terms and conditions (must click to agree —> read it or not)

2. Browse-wrap agreements: terms and conditions are available through a hyper-link, and the user can access the website without affirmatively agreeing to the terms

a. Specht v. Netscape (2002) - Notice

• user must be aware of hyperlink (constructive notice)

C. Unconscionable Adhesion agreements:

1. Definition: An agreement that is so unfair to the weaker party a court will refuse to enforce them

• procedural unconscionable: the forming of K (ie: confusing legal term, change, lack of meaningful choice)

• substantive unconscionable: terms in K (unfair terms, extreme cost shifting, one-sided remedies, harsh dispute regulation requirement)

2. Clauses most likely to cause strict scrutiny by Courts: (after clauses get strike = can sue)

• Arbitration clauses: forces private arbitration (no sue or appeal)

• Forum Selection clauses: where the lawsuit is brought/heard (no due process)

• Choices of Law clauses: which state laws applies

Contract Interpretation

A. Goal: determine objective intent of the parties at the time of the contracting (obj test)

B. Interpretation Rules:

1. Parol Evidence Rule (written K only)

a. Definition: when parties have entered into a final K (integrated agreement), no prior or contemporaneous oral or written statements; may be introduced in court to add to, modify or contradict the terms of the K

b. Exceptions to PER

• to challenge the validity of the K

• to explain ambiguous terms

• prove the K was subject to a condition precedent (condition must occur before party must perform duty)

• clarify correctable mistakes

2. Other Rules of Contract Interpretation:

a. Interpret K as a whole avoiding interpretations (obj. test)

b. Courts consider the purpose and intention of the parties taking all circumstances into account (thus recitals - not binding - evidence)

c. Language is given its general meaning

d. Specific > General language (boiler plate language)

e. Specifically negotiated terms over conflicting standardized language (negotiated terms take precedent)

f. Construction against the draftsman (whoever draft agreement = ambiguous, the person who didn’t draft will be in favor)

3. Effect of a Merger Clause

• boiler plate language (standardized, pre-written clauses that appear in many agreements regardless of the specific deal)