Contracts

Contract

A contract is a voluntary agreement, mutually assented to by competent parties supported by valid consideration to do or not to do a specific thing.

The ingredients for a valid contract are TACO

1. Necessary, definite Terms

2. Acceptance of a valid offer;

3. Consideration

4. an Offer inviting acceptance

Contracts Implied-in-Fact

Implied-in-fact contracts are enforceable agreements, the terms of which are implied circumstantially from what the parties say and do.

Offer

Outward manifestation of intent to enter into a contract
Need: Intent AND specific terms

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Invitation to offer
NOT an offer

An offer expires when its T.I.I.R.R.D

T.I.I.R.R.D

T - a reasonable TIME after the offer was made or after the date stated in the offer

I - an intervening ILLEGALITY

I - mental INCAPACITY or death of the offeror or offeree

R - an express or implied REVOCATION of the offer communicated before acceptance.

R - REJECTION

D - DESTRUCTION of the subject matter of the contract

Revocation

Rule: Offers are REVOCABLE

Effective at the time of receipt.

Direct Revocation

Retraction of an offer by the offeror

Indirect Revocation

Person receiving offer LEARNS another deal was made

Four Things that Limit Offeror’s Power to Revoke their Offer

1. Options Contract

2. Firm Offer Rule

3. Detrimental Reliance

4. Part Performance of a Unilateral Contact

Options Contract

Offeror promises to keep the offer open and the offeree pays for the privilege of the offer being kept open.

• If nobody paid money, it is illusory (a false promise). Offeror can revoke at any time.

Firm Offer Rule

1. Must be dealing with the UCC sale of goods,

2. Offeror must be a merchant (someone who REGULARLY deals in goods of a certain kind or someone with specialized knowledge of the business practice involved); AND

3. Written and signed offer that PROMISES to keep an offer open for a certain period of time

Firm Offer - Time Limit

The offer cannot be revoked for up to 3 months, and there is no need for consideration to make this offer firm.

• Once we hit 3 months, it does not automatically terminate the offer. It just become revocable by the Merchant.

Firm Offer Situations

Situation 1

• Walmart sends you a signed writing stating that they will keep the prices firm at the time for 6 months. Then 2 months later, they send a new catalog and say “Sorry, we revoke our offer. Our new prices are 10% more.”

  • You can still enforce the prices from the old catalog because they tried to revoke the offer within the 3 month time of irrevocability.

Situation 2

• But if in the 4th month, Walmart sends you a new catalog with new prices. You cannot enforce the old contract because Walmart revoked the offer after the irrevocability time.

  • If I wanted to make the original contract enforceable, I would have had to pay consideration.

Situation 3

• If I get a firm offer from Walmart saying they will leave these prices firm for 8 months, but without my knowledge they change all their prices and do not tell me. If I place an order past the 3 month window, I can hold Walmart to that pricing.

  • After the 3 month window, the offer becomes revocable but it does NOT automatically terminate. Walmart would need to communicate that the offer is revoked.

Detrimental Reliance

Offer cannot be revoked if there has been detrimental reliance by the offeree.

• reliance has to be reasonably foreseeable

Eg: In construction contracts

Part Performance of a Unilateral Contract

If there is part performance of a unilateral contract, it won’t be revocable for a reasonable time in which the offeree could complete performance.

• preparing is not enough, you have to substantially start

• part performance is NOT full acceptance of a unilateral offer. In order to “accept” an offer, you have to complete performance.

Types of Contracts

1. Unilateral Contract - promise for an act

2. Bilateral Contract - promise for a promise

Mirror Image Rule

For an acceptance to create a valid, enforceable K, it must exactly match the terms of the offer.

• An additional terms is treated like a counter-offer and NO CONTRACT is formed.

Acceptance

The assent by the offeree to all of the terms and conditions of the offer.

• Parties can reach an agreement in principle but they just need to do the paperwork later. If we have meeting of the minds and intent to be legally bound, then there is acceptance.

Common Law Mailbox Rule

Acceptance is effective when SENT

Mailbox Rule EXCEPTION

If a REJECTION is sent FIRST, then an ACCEPTANCE is sent, whichever ARRIVES first wins

UCC Acceptance

Acceptance is construed liberally

UCC Acceptance Exceptions - meaning where additional terms do not get automatically added even if both parties are merchants

• Material change to the terms of the contract

• Objection to the change of a term in a reasonable amount of time

• Offer limits the acceptance to terms of the original offer

Focus on offer and acceptance

Consideration

Bargained for legal exchange

There must be a bargained for gain or advantage to the promisee, or a bargained-for legal detriment or disadvantage to the promisor.

Past or Moral Consideration

NOT valid consideration.

Past consideration is not enough to support a promise because the detriment did not induce the promise (meaning since the detriment already happened, it could not be bargained for in exchange for the promise).

A promise based on moral consideration arising out of the promisee’s past act would be unenforceable because it was based on past consideration.

Illusory Promise

Where one of the contracting parties reserves an unqualified right to terminate the contract to perform or agrees to perform “only if he wants to”

• No consideration

Gifts

• Promise to give a gift is NOT valid consideration

• Already GIVEN gift IS valid consideration

Pre-Existing Duty Rule

Common law - if you had an existing duty to perform, and then someone made a modification (like price or type of service), you COULD NOT hold that person to the “new promise” because there was a pre-existing duty to perform.

Promise to Pay Debt Barred by Statute of Limitations

IS valid consideration

Promise to Pay Debt Discharged by Bankruptcy

IS valid consideration

Forbearance to Sue

Promise NOT to sue
IS valid consideration

Promissory Estoppel

A promise (not conduct) reasonably expected to induce action, and it does produce the act (detrimental reliance)

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• The promise is binding, notwithstanding its failure to satisfy the SOF, if injustice can be avoided only by enforcement of the promise.

Three Types of Rejection

1. Express

2. Counter-offer

3. Conditional Acceptance

Express (Rejection)

You expressly reject someone

Counter-offer (Rejection)

Terminates the original offer and creates a new offer.

• Questions (aka bargaining) are not counter-offers

Conditional Acceptances (Rejection)

Under common law and the UCC, conditional acceptances terminates the offer and becomes a new offer (aka counter-offers)

CONTRACT DEFENSES

I³ FU²MED & I S²IP

Lack of Capacity to enter into contracts

1. Infancy

2. Insanity (mental incapacity)

3. Intoxication

Infancy

Contracts entered into by infants are generally voidable.

• The power of avoidance is held only by the infant or her heirs, administrator or executor.

• Complete defense

• When infant reaches majority, they can disaffirm the K.

Insanity

The person asserting incompetency must establish:

1. The incompetent person could not understand the nature and consequences of his action (cognitive test); or

2. The contract was merely an uncontrolled reaction to a mental illness (psychosis) and the other person had reason to know of the existing mental incompetency (motivational test)

Contract is void

Intoxication

The person asserting the defense must establish - the cognitive test or motivational test, and that the other contracting party was aware of his impairment.

Impossibility of Performance

Three categories of impossibility of performance:

1. impossibility,

2. commercial impracticability,

3. frustration of purpose

Impossibility

(Impossibility of Performance)

Destruction of subject matter of the contract, or death of the performing party

Commercial Impracticability

(Impossibility of Performance)

When performance is possible, but because of an unforeseen change in circumstances, has become economically unrealistic.

• A seller can be excused from performance where the nonoccurrence of an event were a basic assumption of the contract.

• Eg: severe shortages, embargos, or severe price increase

Frustration of Purpose

(Impossibility of Performance)

An unanticipated occurrence rendering one party’s performance virtually worthless to the other party.

• has to be an event that is unpredictable

Mutual Mistake

• Where the mistake is mutual and substantial.

• The misconception is shared by both parties.

Remedy = Rescission (ie, cancellation, revocation, repeal)

Unilateral Mistake

Where only one party was mistaken

Generally, NOT a defense unless:
1. Other party KNEW of mistake,
2. Clerical error

One party is not entitled to compensation because there was an error how much time or expense the contract job would take because of unforeseen difficulties after performance started.

Duress

Elements:

1. a threat,

2. which was unlawfully made,

3. which caused involuntary acceptance of the contract terms, and

4. the circumstances permitted no alternative.

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• A wrongful threat that induces the party threatened to enter into a transaction under the influence of fear, and precludes him from exercising free will and judgment.

• In order to claim duress, the offensive behavior must involve a wrongful act or threat precluding the exercise of free will.

• Can be economic duress

Undue Influence

A party assented due to unfair or excessive persuasion from someone who dominated (eg, prison guard/prisoner) or held a special relationship of trust and confidence with (eg, attorney/client) the assenting party.

• Does not involve a threat.

Illegality

• K illegal at the time they are entered are void

• If K was legal when executed, but became illegal later because of a change in the law, the K will be terminated due to its impossibility of performance.

Misrepresentation

A false statement of fact that induces another party to enter into a contract.

• K is voidable

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• material misrepresentation can be made innocently or negligently

• a misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent.

• there are two types - fraud and negligent misrepresentation

• misrepresentation must be of fact, and not an opinion, estimates, or a prediction of something.

• concealment (an affirmative act to prevent another from uncovering the truth) is a misrepresentation.

Fraud

(misrepresentation)

Elements:

1. a representation,

2. falsity,

3. scienter (the Defendant knows or believes the representation is false),

4. reliance by the other party (there must be causation: the listener believed the misrepresentation and been deceived by it),

5. damages

Negligent Misrepresentation

(misrepresentation)

Defendant did not intend to defraud, but did so through the defendant’s negligence in rendering services that were relied upon by the plaintiff to the plaintiff’s detriment

Unconscionability

(“Terms and Tactics”)

You have to prove BOTH substantive and procedural unconscionability.

• Both the terms contained in the contract was unconscionable AND the tactics were unconscionable

• Usually someone in a superior position who has all the info with a more vulnerable person on the other side, and then all of a sudden the contract signing is happening fast.

  • Substantively off - the rate is 3x the normal rate

  • Procedurally off - you have “no time” and must sign now !!!

Non-Compete Clauses

Reasonable under the circumstances

Statute of Frauds

Rule: Certain contracts must be in writing to be enforceable

MYLEGS

• Marriage - a promise to give money or property to another in return for a promise of marriage;

• One Year - a promise that is incapable of completing within one-year from its making

• Land - a promise involving a transfer of real property

• Executor - a promise by an executor or administrator to personally satisfy a prior debt incurred by the decedent;

• Guarantor/surety - a promise to answer for the debt of another

• Sale of goods $500 or more

Exceptions to the Statute of Frauds requirements is SWAMP

S - contracts for SPECIALLY manufactured goods

W - WAIVER

A - judicial ADMISSION of contract

M - “MERCHANT MEMORANDUM” (if there’s an oral agreement and either party sends a sign writing w/ quantity, and the other party does not object within 10 days)

P - PART PERFORMANCE

SOF - Part Performance Exception

The law will recognize an oral contract to convey real property, enabling the buyer to sue for specific performance (but not for breach of contract), if the buyer performed 2 out of 3:

PIP
1. Pays part of the purchase price;
2. Substantial improvements; or
3. Occupies the premises.

Main Purpose Rule

(SOF - Guarantor/Surety Exception)

When one party agrees to answer for the debt of another, but the intent (main purpose) is to benefit oneself, no writing required.

Parol Evidence Rule

The PER prevents the introduction of certain evidence about the formation of a contract.

• To be admissible, it must be information discussed before or at the time parties entered the contract.

Merger Clause

• States the contract language in the signed writing supersedes all prior agreements between the parties.

• A merger clause is evidence that the agreement is the final integration of the parties’ intent.

• Parol evidence is NOT admissible

Final/Complete Integration

Parol evidence is NOT admissible

Parol Evidence Rule is NOT applicable where evidence is offered to show:

1. Invalidity of the contract or a contract provision;

2. Mutual mistake;

3. Fraud;

4. Duress, Illegality, or lack of capacity;

5. That there was no contract, or it was subject to an oral condition precedent (meaning it was to become effective and binding only upon the happening of some specific event);

6. Consideration was not given;

7. Trade usage or custom

Partial Integration

• Parol evidence IS admissible

• Evidence that EXPLAINS or supplements the original contract IS admissible

• Evidence that CONTRADICTS or materially alters the contract is NOT admissible

Risk of Loss - NON-Carrier Case

Non-carrier cases are when the parties do not agree to use a common carrier to deliver goods.

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• Seller is a MERCHANT: risk is on seller until buyer takes POSSESSION.

• Seller is a NON-merchant: risk is on seller until goods are tendered to buyer (only tender is required, not actual receipt by the buyer).

Risk of Loss in Carrier Cases - Shipment Contract

Risk of loss shifts to buyer when goods are delivered to CARRIER

Risk of Loss in Carrier Cases - Destination Contract

Risk of loss shifts to buyer when goods delivered to DESTINATION

FOB

FOB SELLER is a SHIPMENT contract
FOB "ANYTHING ELSE" is a DESTINATION contract

Requirements Contract

Buy ALL the widgets
Key Word = good faith

Modification Rule

Changing a material term of contract.

• Common Law: NEW consideration is needed

• UCC: NO new consideration, good faith needed.

UCC:

A J STRAW materially alters an offer if it would cause surprise or hardship to the offeror if the offeror was not made aware of its existence.

J - bestowing JURISDICTION on a particular court, or requiring offeror to consent to a jx in a particular state;

S - shortening the STATUTE OF LIMITATIONS to sue for non-conforming goods;

T - limiting TORT liability or limiting a buyer’s right to sue for consequential damages;

R - altering UCC rules for RISK OF LOSS;

A - adding an ARBITRATION CLAUSE (unless customary to do so in the trade);

W - adding a clause negating a WARRANTY

Modifications

Can be oral or written.

• UCC: Clauses prohibiting oral modifications are VALID. Often seen in big construction projects

Mutual Modification

1. BOTH parties agree to modify the original terms
2. Fair and reasonable under circumstances

Condition Precedent

Event happens PRIOR to performance of contract

Condition Concurrent

Event occurs AT TIME of performance of contract

Condition Subsequent

Event occurs AFTER the contract

Conditions Excused

Waiver
Bad faith
Avoiding forfeiture (forfeiture is the harm that would be suffered by a party who failed to perform according to a condition)

Time is of the Essence

Time is NOT of the essence unless STATED
If stated, it becomes a condition to the contract

Buyer's Rights

May reject
May accept
May reject in part & accept in part

Seller's Right to Cure

A seller has right to cure a defective tender if:

1. Time for performance under the contract has not yet elapsed, OR

2. Seller had reasonable grounds to believe the goods would be acceptable

Seller must give notice of intent to cure and make a new tender of conforming goods.

Installment Contract

Delivering goods in several different shipments

Non-Conforming Installment Contract

Defective shipment CANNOT be rejected if the defect can be cured

Impracticability

Elements:

• Unforeseen event,

• Non-occurrence of the event was a basic assumption on which the contract was made, and

• Party seeking discharge is not at fault.

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This defense is available if:

1. performance becomes illegal after the contract is made;

2. the subject matter of the contract is destroyed;

3. in a personal services contract, the performing party to the contract dies or becomes incapacitated; or

4. performance becomes impracticable

Impossibility

NO ONE can perform

Anticipatory Repudiation

This refers to words or actions that clearly, voluntarily and unequivocally indicate a contracting party’s intention NOT to perform or that they will breach.

1. BEFORE contract performance
2. One party UNEQUIVOCALLY refuses to perform

• This doctrine does NOT apply to unilateral contracts when the offeror withdraws the offer once the offeree has begun to perform because the offeree is not required to complete performance.

• “I’m not sure I will meet the deadline” is not unequivocally. Do not declare anticipatory breach until you are 100% sure

Demand Assurances

Demand when doubtful about performance
Party must respond in a reasonable amount of time
UCC: Demand MUST be in writing

Retraction of Repudiation

Party CAN retract unless:

• The other party has sued

• The other party has accepted the repudiation

• The other party has relied on the repudiation

Legal Remedy

Money damages

Compensatory Damages

• Meant to compensate the nonbreaching party for actual economic loss

• Goal - put the nonbreaching party in good position as performance would have done (ie, expectation damages) plus consequential and incidental damages minus mitigation of damages (if applicable)

Expectation Damages

• Put plaintiff in position as if contract had been PERFORMED

• Foreseeable with reasonable certainty

  • If damages are too speculative, can seek reliance damages

Formula for Expectation Damages

(Contract price w/o the breach) - (Cost of performance with breach) + (Costs like consequential or incidental damages)

Reliance Damages

• Put plaintiff in position he would have been in PRIOR TO contract

• UNreimbursed costs

• NO expectation damages

Restitution

• Awards the nonbreaching party the value of any benefits conferred on the breaching party

• When the Contract is PARTIALLY performed

• Measured by market value of the services

Consequential Damages

Foreseeable costs because of breach

Liquidated Damages

• Determined AT TIME of contract

• Enforced if reasonable

• NOT a penalty

Quantum Meruit

Elements

1. Performance of services in good faith,

2. Acceptance of service by the person whom they are rendered to,

3. An expectation of compensation, and

4. The reasonable value of the services

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• Requires the absence of a valid, enforceable K

• TO RECOVER DAMAGES

• The BREACHING party can recover:
  (Reasonable value of services) - (Damages incurred)

Quantum Meruit Examples

• Partially Performed Services Before Contract Termination - A contractor agrees to renovate a house for $50,000 but is wrongfully terminated by the homeowner after completing half the work. The contractor can recover the reasonable value of the work already done under Quantum Meruit, even if the contract was not fully performed.

• Emergency Medical Treatment - A doctor provides life-saving emergency treatment to an unconscious patient who later refuses to pay, claiming there was no contract. The doctor can recover a reasonable fee under Quantum Meruit because the patient benefited from the services.

• Services Rendered Without a Formal Agreement - A graphic designer creates a company logo at the request of a business owner, but they never agreed on a price. The business owner uses the logo. The designer can claim compensation based on the fair market value of their work under Quantum Meruit

UCC Seller Damages

If BUYER breaches, seller can recover:
Goods delivered & accepted = contract price
Some/none goods delivered = (contract price) - (market price)
Goods resold = (contract price) - (resale price)

Additionally, incidental damages (including storage and shipping costs)

Lost Volume Seller

Seller can sell as many widgets as possible

Lost Profits

(Expected profit) + (Costs) - (Payment of resale)