Contracts Law: Enforceability, Formation, and Remedies

Vocabulary flashcards covering core concepts of contract law, including contract enforceability, measures of damages, consideration, formalities, restitution, assent, offer, acceptance, and UCC Article 2 provisions.

Contract

A promise or a 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.

Promise

A manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

Promisor

The person manifesting the intention to act or refrain from acting in a specified way.

Promisee

The person to whom the manifestation of intention is addressed.

Beneficiary

A person, other than the promisee, who benefits from performance of a promise.

Agreement

A manifestation of mutual assent on the part of two or more persons.

Bargain

An agreement to exchange promises or to exchange a promise for a performance or to exchange performances.

How a promise may be made:

May be stated in words either written or oral, or may be inferred wholly or partly from conduct.

Express warranties by the seller are created by any of the following:

• Any affirmation of fact or promise relating to the goods, if part of the basis of the bargain, creates an express warranty that the goods shall conform to the affirmation or promise.

• Any description of the goods, if part of the basis of the bargain, creates an express warranty that the goods shall conform to the description.

• Any sample or model, if part of the basis of the bargain, creates an express warranty that the whole of the goods shall conform to the sample or model.

Basis of the bargain

Mutual inducement; each party's promise or performance serves as an inducement for the other party's promise or performance.

It is not necessary in the creation of an express warranty that the seller:

• Uses formal words like “warrant” or “guarantee.”

• Have specific intention to make a warranty.

What does not create an express warranty?

An affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods (i.e., puffery).

Promise vs. warranty

A promise is a commitment to do or refrain from doing something; a warranty is a commitment that a fact or condition is or will be as represented.

Measure of expectation interest

• Difference between the value promised and the value received; plus

• Other losses caused by the breach (incidental or consequential damages); less

• Costs saved by not having to perform

Expectation damages =

(value promised − value received) + other losses − costs saved

Purpose of expectation damages

Putting the plaintiff where they would have been if the contract had been performed (forward looking).

Measure of reliance interest:

• Expenses incurred in preparing to perform or performing the contract; less

• Any losses the breaching party proves the injured party would have suffered even if the contract had been performed.

Reliance damages =

expenses incurred − losses injured party would have suffered had contract been performed

Purpose of reliance damages

Putting the plaintiff where they would have been if contract had never been entered into (backward looking)

To what extent is a party entitled to restitution?

Only to the extent that he has conferred a benefit on the other party by way of party performance or reliance.

Measure of restitution

The value of the benefit the breaching party received, measured by either:

• What it reasonably would have cost breaching party to obtain the benefit from someone else; or

• How much the benefit increased the breaching party’s property value or improved their interests

Purpose of restitution

Return any benefits that the plaintiff conferred upon the defendant (backward looking).

General rule for breach of contract remedies

• Default remedy is contract damages.

• Contract damages are compensatory; damages awards are focused on the plaintiff’s position, not the defendant’s.

• We compensate for the value of the promised performance; damages awards aim to approximate contract performance, rather than undoing breach.

Uncertainty in calculating contract damages

Damages aren’t calculated with mathematical precision; there’s often some uncertainty involved. If you are in breach, you might have to accept imprecise forms of proof. Where there is uncertainty, courts will favor the non-breaching party.

Measures focused on plaintiff’s position

Expectation interest and reliance interest

Measures focused on defendant’s position

Restitution and disgorgment (i.e., remedy that requires breaching party to surrender profits obtained through breach)

When might defendant’s gains be relevant to a contract damages calculation?

When defendant’s profits tend to define the plaintiff’s loss.

Punitive damages are not recoverable for a breach of contract unless:

The conduct constituting breach is also a tort for which punitive damages are recoverable.

Equitable principles

• Equity will not suffer a wrong without a remedy

• He who comes into equity must come with clean hands

• Equity aids the vigilant, not those who slumber on their rights

• Equity acts in personam

• Equity regards substance rather than form

Nominal damages

A small, symbolic sum awarded when a breach occurred, but substantial actual damages were not established.

Injunctive relief

A court order requiring a party to act or refrain from acting.

Specific performance

A court order requiring a party to perform their contractual obligations.

Replevin

A legal remedy used to recover possession of specific personal property (chattel).

Efficient breach

A breach that produces a greater economic benefit to the breaching party than performance would, even after compensating the non-breaching party for its losses.

Requirements for injunctive relief

• Plaintiff has suffered legal injury.

• The injury is irreparable by other means.

• The injunction is warranted upon consideration of the balance of hardships between defendant and plaintiff.

• Granting the injunction would not harm public interest.

Liquidated damages terms are generally enforced if they:

• Are not punitive.

• Do not fail at their essential purpose.

How are promises enforced?

• With compensatory damages aimed at putting the plaintiff in the position they would have occupied had the contract been performed.

• In exceptional circumstances:

  • Nominal damages

  • Punitive damages

  • Injunctive relief (usually specific performance)

• By giving effect to remedial clauses.

Law of obligations

Legal relationship arising out of interpersonal interaction.

Three categories of legal obligations

1. Wrongdoing (torts)

2. Bargains (contracts)

3. Unjust enrichment (restitution)

Consideration

A bargained-for change in legal position.

Feinberg v. Pfeifer rule

An act done before a promise is made cannot serve as consideration because the promisor cannot bargain for services already rendered.

Bilateral contract

A promise exchanged for a promise. Consideration is the return promise. The contract forms when that return promise is made or received.

Unilateral contract

A promise exchanged for a performance. Consideration is the completed performance. The contract forms when performance is completed.

Gratuitous promise

A promise to make a gift without consideration.

Kirksey v. Kirksey rule

A gratuitous promose may include certain conditions or stipulations that the promisee must fulfill simply to receive or collect the gift. Even if promisee changes their position or performs a required act, if that performance was not bargained for, the promise remains unenforceable as a standard contract.

Tests for gratuitous promises

• Is promisor shopping for anything in the world?

• Was promise made as part of a bargain?

• Did promisor make this promise because they sought something in return?

To constitute consideration, a performance or return promise must be:

Bargained for

A performance or return promise is bargained for if:

It is sought by the promisor in exchange for his promise and given by the promise in exchange for that promise.

The performance may consist of:

• An act other than a promise

• A forbearance

• The creation, modification, or destruction of a legal relation

Who may give or receive performance or a return promise?

The performance or return promise may be given to the promisor or to some other person and may be given by the promise or by some other person.

Illusory promise rule

A promise that leaves performance entirely to the discretion or desire of the promisor is illusory and cannot serve as valid consideration.

Test for illusory promises

Can you easily imagine what non-performance looks like? If the promisor can say, "I'll perform unless I change my mind," it is illusory.

A promise is not consideration if promisor reserves a choice of alternative performance, unless:

• Each of the alternative performances would have been consideration if it alone had been bargained for; or

• One of the choices counts as consideration, and there's a substantial chance that something will happen to remove the choice that does not count as consideration before the promisor has to decide.

If requirement of consideration is met, there is no additional requirement of:

• A gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee (Hamer v. Sidway); or

• Equivalence in the values exchanged; or

• Mutuality of obligation (requirement that both parties be bound).

Sham exception to consideration

If both parties know the consideration is a mere pretense/sham, it will not enforce the contract.

Satisfaction clause:

A contract term that makes one party's obligation depend on whether something is satisfactory to them.

Satisfaction clauses can be non-illusory and enforceable because:

• Reasonable professional standards may determine satisfaction.

• Even without an objective standard, the implied duty of good faith limits the party's discretion.

Promises to fulfill an underlying legal relationship do not require:

Consideration to be enforceable.

Examples of promises to fulfill an underlying legal relationship

• A promise to repay a debt after the statute of limitations has expired is enforceable without new consideration because consideration was already provided when the original debt was created.

• A promise to repay a debt discharged in bankruptcy may still be enforceable without new consideration because of the preexisting legal relationship.

A promise made in recognition of a benefit previously received is binding to the extent necessary to prevent injustice, unless:

• Promise is gratuitously conferred.

• Promise is disproportionate to the benefit.

A person who provides professional services to protect another's life or health may recover:

Restitution to prevent unjust enrichment if circumstances justify intervention without a request. Recovery is measured by a reasonable charge for the services.

A person who protects another's property from harm may recover:

Restitution to prevent unjust enrichment if circumstances justify intervention without a request, and it is reasonable to assume the owner would want the action performed. Recovery is measured by the lesser of the loss avoided or a reasonable charge for the services.

Statute of Frauds

Requires certain contracts to be in writing to be enforceable.

Contracts subject to the Statute of Frauds:

• Marriage (i.e., contracts in consideration of marriage)

• Year or more (i.e., contracts that cannot be performed within the space of one year)

• Land (i.e., contracts conveying an interest in land)

• Executor of estate (i.e., contracts making the executor of an estate liable for debts of the estate)

• Goods valued at or above $500

• Suretyship or guarantee contracts (i.e., contracts making someone liable for the debts of another)

When is a contract within the Statute of Frauds enforceable (Restatement)?

If it is evidenced by any writing, signed by or on behalf of the party to be charged, which:

• Reasonably identifies the subject matter of the contract

• Is sufficient to indicate that a contract has been made between the parties or offered by the signer to the other contract party

• States with reasonable certainty the essential terms of the unperformed promises in the contract

If the requirements the Statute of Frauds are not satisfied, what are the effects?

Contract is unenforceable unless:

• Detrimental reliance

• Part performance (can claim value of part performance)

• Full performance (if fully performed, Statute of Frauds does not affect parties’ relationship)

UCC Statute of Frauds

• A contract for the sale of goods for the price of $500 or more is not enforceable unless there is writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought

• A writing is not insufficient because it omits or incorrectly states a term agreed upon; but

• The contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing

If the requirements of the UCC Statute of Frauds are not satisfied, what are the effects?

Contract is unenforceable unless:

• Goods are unique, specially manufactured, in good faith (reliance interest)

• Party being sued admits there was a contract (evidentiary concern no longer in doubt)

• Part performance (e.g., payment has been made or goods have been received and accepted) (reliance interest and parties’ conduct indicates contractual relationship)

When does/doesn’t Article 2 of the UCC apply?

• Applies to transactions in goods

• Does not apply to security transactions (i.e., securing a debt with property

• Does not impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers (permits more precise regulatory frameworks)

Goods

All things moveable at identification of contract for sale, including specially manufactured goods, unborn young animals, growing crops, and things attached to realty (to be severed, and excluding money, investment securities, real estate, and things in action.

Transaction

Transfer of title for a price

Hybrid Transaction

A contract that merges the sale of goods and the provision of services into a single agreement.

Test for which law applies to hybrid transaction

Predominant purpose test

Predominant Purpose Test

The test applied to determine governing law in a hybrid transaction: if the sale of goods predominates, UCC Article 2 applies; if the provision of services predominates, common law applies.

Unjust Enrichment

A basis for restitution liability arising from the receipt of a benefit whose retention would result in unjustified enrichment of the defendant at the expense of the claimant, requiring the benefit to be measurable, non-officiously conveyed, and non-gratuitously conveyed.

Officious

Conduct marked by excessive eagerness in offering unwanted services or advice to others, which bars a plaintiff from imposing a legal obligation on another through unjust enrichment.

Equitable Estoppel

A principle where a voluntary act, admission, or conduct induces someone else to foreseeably and reasonably change their position to their detriment (for the worse).

Promissory Estoppel (Restatement § 90)

A doctrine holding that a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person, and which does induce such action or forbearance, is binding if injustice can be avoided only by enforcement.

Offer (Restatement § 24)

A manifested willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it (i.e., an act whereby one party confers upon another the power to create contractual relations between them).

Firm Offer (UCC § 2-205)

A merchant's signed writing assuring that an offer will be kept open for a stated period (or a reasonable time not exceeding $3$ months), which is irrevocable despite the lack of consideration.

Option Contract (Restatement § 45)

A contract created when an offeree tenders or begins invited performance under an offer inviting acceptance only by performance; the offeror is bound and cannot revoke, but the offeree is not obligated to complete.

Mirror Image Rule

A common law rule providing that an acceptance must match the terms of the offer exactly; an acceptance that adds or alters terms operates as a counter-offer.

Mailbox Rule

A principle stating that an acceptance made in a manner and by a medium invited by an offer is operative and completes mutual assent as soon as it is put out of the offeree's possession.

Last Shot Rule

A common-law form-contracting rule stating that if parties perform after exchanging conflicting documents, they are bound by the terms in the final form exchanged before performance began.