Civil Law Contracts
I. Introduction
a. “Contract” Defined
i. A contract is an agreement between two or more parties by which obligations are created, modified, or extinguished.
b. Applicable Law
i. The following laws govern contracts in Louisiana:
1. Contracts, like all obligations, are governed by the law of found in Title III (Obligations in General) of Civil Code (articles 1756-1905).
2. All contracts, both nominate and innominate, are also governed by the Law of Conventional Obligations found in Title IV of Book III of the Civil Code (articles 1906 through 2057). [La. Civ. Code Ann. art. 1915] Note that the rules of Convention Obligations are also applicable to obligations that arise from sources other than contract to the extent that those rules are compatible with the nature of those obligations. [La. Civ. Code Ann. art. 1917]
3. Nominate contracts are also subject to special rules that may “trump” the general rules of Conventional Obligations by modifying or departing from those rules. [La. Civ. Code Ann. art. 1916]
II. Kinds of Contracts
a. Unilateral/Bilateral Contracts
i. The distinction drawn between unilateral and bilateral contracts is based on whether one party alone assumes an obligation to another or whether parties assume reciprocal obligations.
ii. Unilateral Contract
1. If only one party to the contract incurs an obligation and the other party does not assume a reciprocal obligation, the obligation is unilateral. [La. Civ. Code Ann. art. 1907]
iii. Bilateral Contract
1. If both parties to the contract bind themselves reciprocally, the contract is bilateral (or synallagmatic). [La. Civ. Code Ann. art. 1908]
a. Requirements for Bilateral Contracts and Their Implications
i. There are thus two requirements for a bilateral contract, both of which must be met. First both parties to the contract must have incurred obligations. Second, the reason why each party bound herself must have been to receive the performance promised by the other party.
ii. These requirements have several implications:
1. Each party in a bilateral contract is both an obligor and an obligee.
2. The nature of the reciprocal obligations in a bilateral contract is that they are correlative. Each party has bound herself in order to receive the performance promised by the other party. For one party to be bound, both must be bound.
b. Onerous/Gratuitous Contracts
i. The distinction drawn between onerous and gratuitous is based on the cause of the obligor’s obligation. “Cause” is defined as “the reason why a party obligates himself.” [La. Civ. Code Ann. art. 1967]
ii. Onerous Contract
1. If the reason why an obligor bound himself was to obtain a benefit to himself, the contract is onerous. [La. Civ. Code Ann. art. 1967]
iii. Gratuitous Contract
1. If the reason why an obligor bound himself was to benefit the oblige (or some other person), the contract is gratuitous. [La. Civ. Code Ann. art. 1909]
c. Principal/Accessory Contracts
i. The distinction drawn between principal and accessory contracts is based on whether the contract was entered into to provide security for another obligation.
1. Principal Contract
a. A principal contract is a contract whose obligation is secured by an accessory contract. [La. Civ. Code Ann. art. 1913]
2. Accessory Contract
a. If the contract was entered into to provide security for the performance of another obligation, the contract is necessary. [La. Civ. Code Ann. art. 1913]
d. Nominate/Innominate Contracts
i. The distinction drawn between nominate and innominate contracts is based on whether the contract has been given a special designation. A nominate contract is one given a special designation. An innominate contract is one with no special designation. [La. Civ. Code Ann. art. 1914]
e. Two Additional Types of Contracts
i. In addition to the above categories, the Code recognize two additional types of contracts.
1. Commutative Contract
a. A commutative contract is one where the performance by one party is correlative to the performance by the other party. [La. Civ. Code Ann. art. 1911]
2. Aleatory Contract
a. An aleatory contract is one where the performance or extent of the performance of any party to the contract depends on an uncertain event (e.g., an insurance contract). [La. Civ. Code Ann. art. 1912]
III. Requirements for a Valid Contract
a. Capacity
i. Persons Who Lack Contractual Capacity
1. All persons have contractual capacity except: (i) unemancipated minors, (ii) interdicts, and (iii) persons “deprived of reason” at the time of contracting. [La. Civ. Code Ann. art. 1919]
2. When Contracts by Minors Are Enforceable
a. A contract is enforceable despite the fact that a party is a minor when:
i. The other party reasonably relief on the minor’s representation of a majority [La. Civ. Code Ann. art. 1924];
ii. The contract is made for something related to the minor’s business or necessary for his support or education [La. Civ. Code Ann. art. 1923]; or
iii. The contract falls within the special rules for minors with respect to gratuitous contracts. [La. Civ. Code Ann. arts. 1470 et seq.]
3. When Contracts of Noninterdicted Persons Deprived of Reason are Enforceable
a. Other Party Knew or Should Have Known
i. If not interdicted, one may obtain recission of an onerous contract only upon showing that the other party knew or should have known of the incapacity. However, a party lacking capacity may rescind a gratuitous contract without showing the other party’s actual or constructive knowledge of the incapacity. [La. Civ. Code Ann. art. 1925 and comment (e)]
b. After Death
i. A contract made by a noninterdicted person deprived of reason may be attached after his death only when: (i) the contract is gratuitous, (ii) the contract evidences lack of understanding, (iii) the contract is made within 30 days of death, or (iv) an application for interdiction was filed before death. [La. Civ. Code Ann art. 1926]
c. May Be Rescinded Only by Party Lacking Capacity
i. A contract entered into by a party without contractual capacity is a relative nullity, but the contract may be rescinded only by the party lacking capacity or his legal representative. [La. Civ. Code Ann. art. 1919]
b. Consent--Evidenced By Offer and Acceptance
i. No Formalities Generally Required for Offer and Acceptance
1. Offer and acceptance may be made orally, in writing, or by action or inaction manifesting consent. No formalities are required unless the law so prescribes or the parties have agreed to a certain form. If a certain form is required by law for a contract, the same form is required for offer and acceptance. [La. Civ. Code Ann. art. 1927] If a certain form is mandated by the parties’ agreement, it is presumed that the parties do not intend to be bound until the contract is so executed. [La. Civ. Code Ann. art. 1947]
ii. Offer
1. An offer is personal to the offeree, is not assignable, and expires if either the offeror or the offeree dies or becomes incapacitated before acceptance. [La. Civ. Code Ann. art. 1932] An offer is either revocable or irrevocable.
2. Revocable Offer
a. An offer generally is revocable and may be revoked before acceptance. [La. Civ. Code Ann. art. 1930] The revocation must be received before the offer is accepted. [La. Civ. Code Ann. art. 1937]
3. Irrevocable Offer
a. If the offer specifies a period of time for acceptance, it is irrevocable during that time. If the offeror does not specify a time but intends to give the offeree a period within which to accept, the offer is irrevocable for a reasonable time. [La. Civ. Code Ann. art. 1928]
iii. Expiration of Offer
1. A revocable offer expires if not accepted within a reasonable time. [La. Civ. Code Ann. art. 1931] An irrevocable offer expires if not accepted within the period during which it is irrevocable. [La. Civ. Code Ann. art. 1929]
iv. Acceptance
1. When Effective
a. Revocable Offer-When Transmitted
i. Acceptance of a revocable offer is effective when the offeree transmits it (“mailbox” rule), so long as the acceptance is made in a manner and by a medium suggested by the offer or in a reasonable manner, which is one used customary in similar transactions at the place and time the offer is received. [La. Civ. Code Ann. art. 1935,1936]
b. Irrevocable Offer-Upon Receipt
i. Acceptance of an irrevocable offer is effective when the offeror receives it, which occurs when the acceptance comes into the offeror’s possession. [La. Civ. Code Ann. arts. 1934, 1938]
2. Acceptance by Performance
a. Acceptance by Commencement of Performance
i. If the offeror invites acceptance by performance and it is contemplated that the performance will be completed if commenced, a contract is formed when performance begins. [La. Civ. Code Ann. art. 1939]
b. Acceptance by Completion of Performance
i. IF an offer can be accepted only by a completed performance, the offeror cannot revoke the offer once performance has commenced for a reasonable time necessary to complete the performance. The offeree, however, is not bound to complete the performance he has begun. [La. Civ. Code Ann. art. 1940]
c. Duty of Offeree to Give Prompt Notice
i. If the offer is made irrevocable by or is accepted by performance, the offeree must give prompt notice unless the offeror knows or should know that the offeree has commenced performance. [La. Civ. Code Ann. art. 1941]
3. Acceptance by Silence
a. When silence lead the offeror to reasonably believe that the offer has been accepted, the contract is deemed confected. [La. Civ. Code Ann. art. 1942]
4. Nonconforming Acceptance
a. An acceptance not in accord with the terms of the offer is a counter-offer. [La. Civ. Code Ann. art. 1943] There is an exception for certain sales of movables.
5. Offers of Reward to the Public
a. Communication to Offeree
i. An offer of reward made to the public is binding on the offeror regardless of whether the person who performs the requested act knows of the offer. [La. Civ. Code Ann. art. 1944]
b. Revocability of Reward Offers
i. An offer of reward made to the public is revocable before completion of performance but can be revoked only by the same or equal means used for the offer.
c. Performance by More than One Person
i. If more than one person has performed the requested act, the reward goes to that person who first gave notice to the offeror of the completion of performance.
6. Contracts of Adhesion
a. A contract of adhesion is a standard contract, usually in printed form, prepared by a party of superior bargain power of adherence or rejection by the weaker party. These contracts sometimes raise a question as to whether the weaker party actually consented to the terms. [Aguillard v. Auction Management Corp., 908 So. 2d 1 (La. 2005)] Consent is called into question by the standard form, small print, and most especially the disadvantageous position of the accepting party. An unequal bargaining position is evident when the contract unduly burdens the nondrafting party. However, adhesion contracts are not automatically void. Instead, the party seeking to avoid the contract generally must show that it is unconscionable [Lafleur v. Law Office of Anthony G. Buzbee, P.C., 960 So. 2d 105 (La. App. 2007)]
c. Cause
i. For an obligation to exist, there must be either: (i) a lawful cause (i.e., one not prohibited by law or public policy), or (ii) detrimental reliance. [La. Civ. Code Ann. arts. 1966-1967] “Cause” is the reason why a person obligated himself. Cause is the functional equivalent of consideration at common law. Both explain why some promises are enforceable while others are not. However, cause is not the same as consideration.
1. Areas in Which Doctrine of Cause is Useful
a. The three areas in which the doctrine of cause is more useful are:
i. Distinguishing between onerous contracts and gratuitous contracts. The reason why a person binds herself in a gratuitous contract is to bestow a liberality upon the other person. The reason why a person binds herself in an onerous contract is to obtain an advantage.
ii. Distinguishing between those errors that constitute vices of consent and those that do not. In fraud, the induced error must concern some significant reason why a party bound herself. In error, the false belief must concern a but-for cause.
iii. Identifying those contracts that should not be upheld because they were entered into to achieve a result either prohibited by law or against public policy.
2. Cause Need Not Be Expressed
a. A party need not express in his contract why he is binding himself. An obligation is valid even though its cause has not been expressed. [La. Civ. Code Ann. art. 1969] If no cause is stated int eh agreement or if a false cause is recited, an obligation is effective if there is any valid cause. A contract in which the parties do not express their true cause is called a simulation (see IX., infra). Simulations are the subject of chapter 10 of title IV. [La. Civ. Code Ann. arts. 2025-2028]
i. Example-If a contract is not a sale because there is no price, it may be classified and enforced as a donation if there is donative intent and the requisite formalities for donation are complied with (e.g., authentic act).
3. Detrimental Reliance
a. A promisor can be obligated by a promise under the doctrine of detrimental reliance if three criteria are satisfied:
i. The promise relied on the promise to her detriment;
ii. The promisor knew or should have known that the promisee would so rely; and
iii. The promisee was reasonable in so relying.
b. Reliance on Gratuitous Promise
i. If the promise was a gratuitous one made without required formalities, then the promisee’s reliance is deemed not reasonable. [La. Civ. Code Ann. art. 1967]
c. Recovery is Discretionary
i. Recovery under this doctrine is discretionary with the court. The court can limit recovery to either the expenses incurred or the damages suffered by the promisee.
4. Object
a. Parties are free to contract for any object that is lawful, possible, and determined or determinable. An object is possible according to its nature; this relates to physical and moral impossibility, and not the parties’ ability to perform. [La. Civ. Code Ann. art. 1971]
b. When Object is Determined or Determinable
i. The object must be determined at least as to kind but the quantity need only be determinable. The determination can be left to the discretion of a third person; if the third party fails to determine the quantity, the court may do so. [La. Civ. Code Ann. art. 1974. Accord, La. Civ. Code Ann art. 2465] Quantity may be determined by the output or the requirements of a party, which must be set in good faith. [La. Civ. Code Ann. art. 1975]
c. Future Things
i. Future things may be the object of a contract. [La. Civ. Code Ann. art. 1976]
d. Promesse de Porte-Fort
i. A promesse de porte-fort is a contract the object of which is an act done by a third party. The original obligor is bound by the obligation until the third person binds himself; the original promisor is liable in damages to the promisee if the third person does not bind himself or fails to perform. [La. Civ. Code Ann. art. 1977]
e. Third-Party Beneficiary (Stipulation Pour Autrui)
i. A party may stipulate a benefit for a third person. That third person is called the third-party beneficiary. [La. Civ. Code Ann. art. 1978]
1. Revocability of Stipulation
a. Once the third-party beneficiary has manifested his intent to accept the benefit, the stipulation may not be revoked without his agreement. If the promisor has an interest in performance, the stipulation cannot be revoked without the promisor’s consent [La. Civ. Code Ann. art. 1979] If the stipulator revokes the benefit before it is accepted or if the beneficiary refuses it, the promisor must render performance to the stipulator. [La. Civ. Code Ann. art. 1980]
2. Enforceability of Stipulation
a. The beneficiary has a right of action against the promisor to compel performance. The stipulator may also demand performance from the promisor for the benefit of the third-party beneficiary. [La. Civ. Code Ann. art. 1981]
IV. Vices of Consent
a. Error
i. Types of Error
1. Bilateral Error
a. Consent is vitiated if both parties are in error. Either party may obtain rescission of the contract; in the alternative, the parties may reform the instrument to reflect their true mutual intent. [La. Civ. Code Ann. art. 1949, comment (d)]
2. Unilateral Error
a. Where only one party is in error, error will vitiate that party’s consent if:
i. It concerns a cause without which the obligation would not have been incurred, i.e., the error concerns the principal cause; and
ii. This cause was known or should have been known to the other party. [La. Civ. Code Ann. art. 1949]
ii. Problems with Unilateral Error
1. The Cause Element
a. Error concerns a cause when it bears on:
i. The nature of the contract;
ii. The contractual object or a substantial quality of that object;
iii. The person or the qualities of the other party;
iv. Anything the parties regarded or should have regards in good faith as a cause; or
v. The law when a party has drawn erroneous conclusions of law and entered into a binding contract based on them. [La. Civ. Code Ann. art. 1950]
2. The “But-For Cause” Requirement
a. The but-for cause requirement ensures that parties do not invoke error to get out of contracts on insignificant grounds. Thus, a party can rescind on the basis of error only if that party would not have bound himself if he had not suffered from this error. If the party would have entered into the contract despite the error, there is no vice of consent.
3. The Knowledge Requirement
a. The requirement of knowledge by the other party is an attempt to treat the other party fairly. If the other party neither knew nor should have known that the party in error was binding himself because of this erroneous belief, then there is no vice of consent. Note that the requirement is that the other party knew or should have known of the cause. There is no requirement that the other party knew of the error, or that the other party held the same erroneous belief.
4. Failure to Read Contract
a. In the absence of fraud, a party may not avoid the provisions of a signed, written contract simply because he failed to read the contract or to have the instrument read to him. [Peironnet v. Matador Resources Co., 144 So. 3d 791 (La. 2013)]
iii. Rescission and Liability for Damages
1. General Rule
a. When unilateral error vitiates a party’s consent, that party may generally obtain rescission of the contract.
2. Exceptions
a. A party may not avail himself of his own error if the other party is willing to perform the contract as intended by the party in error. [La. Civ. Code Ann. art. 1951] A court may also refuse rescission when the effective protection of the other party’s interest requires that the contract be upheld. Damages may be instead awarded. [La. Civ. Code Ann. art. 1952] Finally, courts generally do no grant rescission when the error was “inexcusable.” [La. Civ. Code Ann. art. 1952, comment (d)]
3. Liability for Damages
a. A party who obtains rescission on grounds of his own error is liable for any loss sustained by the other party unless the latter knew or should have known of the error. [La. Civ. Code Ann. art. 1952]
b. Fraud
i. Fraud is the misrepresentation or suppression of the truth made with the intent to obtain an unjust advantage or cause a loss or inconvenience to the other party. [La. Civ. Code Ann. art. 1953]
1. Exception
a. Fraud does not vitiate consent when a party could have ascertained the truth without difficulty or special skill unless a relation of confidence has reasonably induced a party to rely on the other’s assertions. [La. Civ. Code Ann. art. 1954]
2. Need Not Be But-For Cause
a. Fraud need not concern a but-for cause, as long as it substantially influenced consent. There must be reliance on the statement. The party whose consent was vitiated by fraud can recover damages and attorneys’ fees. [La. Civ. Code Ann. art. 1955]
3. Fraud Through Silence
a. Fraud may be the result of silence or inaction. Jurisprudence, however, considers silence or inaction as fraud only when the facts justify the imposition of a duty to speak.
4. Fraud Committed by Third Party
a. Fraud committed by a third person vitiates consent fi the party to in error knew or should have known of the fraud. [La. Civ. Code Ann. art. 1956]
5. Recovery by Defrauded Party
a. A party whose consent is vitiated by fraud may obtain rescission of the contract. The party against whom rescission is granted because of fraud is liable for damages and attorneys’ fees. [La. Civ. Code Ann. art. 1958]
c. Duress
i. Duress Compared to Fraud and Error
1. Duress differs from error and fraud in a fundamental way. With error and fraud, the party whose consent was vitiated agreed to the contract because he did not know the truth. With duress, the party whose consent was vitiated knew the truth but agreed to the contract anyway because he felt that the was forced to consent.
ii. Nature of Duress
1. Consent is vitiated when it has been obtained by duress “of such a nature as to cause a reasonable fear of unjust and considerable injury to a party’s person, property, or reputation.” [La. Civ. Code Ann. art. 1959] There are thus two elements of duress:
a. The Objective Element
i. The act must be threatening enough to cause fear in a reasonable person of unjust and considerable injury.
b. The Subjective Element
i. However, “reasonableness” is determined by taking into account the attributes of the party threatened with injury. The age, health, disposition, and other personal circumstances of a party must all be taken into account in determining reasonableness of the fear. [La. Civ. Code Ann. art. 1953]
iii. Fear of Unjust Injury
1. The feared injury must be unjust. Thus, if the threat is to perform a lawful act or to exercise a legitimate legal right, there is no duress. [La. Civ. Code Ann. art. 1962]
iv. Other Party Need Not Perpetrate or Know of Duress
1. The perpetrator of the duress can be a third person, and there is no requirement in this case that the other party to the contract either know or should know of the duress. [La. Civ. Code Ann. arts. 1961, 1964]
v. The Victim
1. The contracting party whose consent was vitiated by duress need not have been the same party against whom the violence was threatened. The threatened injury can be directed against the spouse, an ascendant, a descendant, or a close friend of the contracting party. [La. Civ. Code Ann. art. 1960]
vi. Recovery
1. The party whose consent was vitiated by duress can recover damages and attorney’s fees. This is recoverable from the other party to the contract if the other party exerted the duress or knew of it. If the duress was exerted by a third person, then both the party whose consent was vitiated by duress and any other parties to the contract innocent of the duress can recover from this third person.
V. Interpretation of Contracts
a. Definition
i. Interpretation of a contract is the determination of the common intent of the parties. [La. Civ. Code Ann. art. 2045]
b. The Propriety of Engaging in Interpretation
i. When the words of a contract are clear and explicit and do not lead to absurd consequences, no further interpretation may be made in search of the parties’ intent. [La. Civ. Code Ann. art. 2046]
c. Meaning of Words
i. Prevailing and Technical Meanings
1. Words in a contract are to be given their generally prevailing meaning. If the contract involves a technical matter, however, words of art and technical terms should be given their technical meaning. [La. Civ. Code Ann. art. 2047]
ii. Multiple Possible Meanings
1. When a word is susceptible to several possible meanings, the one that best conforms to the object of the contract should be used. Likewise, an interpretation should be chosen that renders the contract effective rather than ineffective. [La. Civ. Code Ann arts. 2048-2049]
d. Interpretative Rules
i. Provisions on the Same Subject Matter
1. Every provision in a contract should be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole. [La. Civ. Code Ann. art. 2050]
2. General and Specific Wording
a. Generally Worded Contracts
i. Contracts should be interpreted to cover only things the parties apparently intended to include, even if they are worded generally. [La. Civ. Code Ann. art. 2051]
b. Contracts with General Scope, But Particular Provisions
i. When the parties intend a contract with general scope but, to eliminate doubt, include a provision describing a specific situation, interpretation should not restrict the scope of the contracts to that sole situation. [La. Civ. Code Ann. art. 2052]
3. Equitable Aids
a. Doubtful Provisions
i. A doubtful provision must be interpreted in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and other similar contracts between the parties. [La. Civ. Code Ann. art. 2053]
b. No Provision for a Particular Situation
i. When the parties made no provision for a particular situation, it must be assumed that they intended to bind themselves to the express provisions of the contract and to what the law, equity, or usage regards as implied or necessary to achieve the purpose of such a contract. [La. Civ. Code Ann. art. 2054]
c. Equity and Usage Defined
i. “Equity” in this context, means not taking unfair advantage of another or enriching oneself unjustly at another’s expense. “Usage” refers to a practice regularly observed in affairs of a nature identical or similar to the object of the contract at issue. [La. Civ. Code Ann. art. 2055]
4. Interpretation in Favor of a Particular Party
a. Against the Drafter
i. If doubts cannot be otherwise resolved, a contract should be interpreted against the party who furnished its text. Thus, a contract executed in the standard form of one party must be interpreted, in case of doubt, in favor of the other party. [La. Civ. Code Ann. art. 2056]
b. Contracts Generally Interpreted in Favor of Obligor
i. Id doubts cannot be otherwise resolved, a contract must be interpreted against the oblige and in favor of the obligor. However, if the doubt arises from the lack of necessary explanation that one party should have given, of from negligence of fault of a party, the contract must be interpreted in a manner favorable to the other party, whether he is obligee or obligor. [La. Civ. Code Ann. art. 2057]
VI. Nullity
a. “Null Contract” Defined
i. A contract is null if the requirements for its formation are not met. Nullity can be either absolute or relative.
b. Distinctions Between Absolute and Relative Nullity
i. A contract is absolutely null if it violates a rule of public order, e.g., the object of the contract is illicit or immoral. [La. Civ. Code Ann. art. 2030] A contract is relatively null if it violates a rule intended for the protection of a private party (e.g., lack of capacity of a vice of consent). [La. Civ. Code Ann. art. 2031] Absolute and relative nullity differ in their effects:
1. Confirmation
a. An absolutely null contract cannot be confirmed. On the other hand, a relatively null contract can be confirmed.
2. Invocation of Nullity
a. Absolute nullity may be invoked by any person or may be declared by the court on its own initiative. In contrast, relative nullity may be invoked only by the person whom the rule protects.
3. Prescription
a. An action for annulment of an absolutely null contract does not prescribe. On the other hand, an action to rescind a relatively null contract prescribes in five years from the time the ground for nullity ceased (e.g., incapacity of duress) or was discovered (e.g., error or fraud). Nonetheless, the nullity may be raised at any time as a defense to an action based on an absolutely or relatively null contract, even, for relative nullity, after the time for the action of annulment has prescribed. [La. Civ. Code Ann. art. 2032]
c. Effects of Nullity
i. A null contract is deemed never to have existed. If restoration in kind is impossible or impracticable, the court may award damages. [La. Civ. Code Ann. art. 2033] Nullity of a provision does not render the whole contract null unless, from the nature of the provision of the intention of the parties, it can be presumed that the contract would not have been made without the null provision. [La. Civ. Code Ann. art. 2034] Nullity does not impair the rights acquired through an onerous contract by a third party in good faith. If the contract is for an immovable, the principles of recordation apply. [La. Civ. Code Ann. art. 2035]
VII. Effects of Conventional Obligations
a. Contracts have the Effect of Law for Parties
i. Contracts have the effect of law for the parties and can be dissolved only by consent or for grounds provided by law. [La. Civ. Code Ann. art. 1983] Generally, contracts produce effects only for the contracting parties. Contracts produce effects for third persons only when provided by law. [La. Civ. Code Ann. art. 1985] For example, a third-party beneficiary contract enables third parties to demand performance from the promisor.
b. Good Faith Requirement
i. Contracts must be performed in good faith. [La. Civ. Code Ann. art. 1983] This is particularized expression of article 1759, which requires all obligors and obliges to act in good faith. Failure to comply with the good faith requirement results in greater liability for damages if the contract is breached. [La. Civ. Code Ann. art. 1977]
c. Heritability
i. Generally, contractual rights and obligations are heritable. [La. Civ. Code Ann. art. 1984]
d. Failure to Perform
i. What Constitutes Breach?
1. The term signifying contractual breach used in the Civil Code is “failure to perform.” An obligor’s failure to perform can arise in three ways:
a. (i) Nonperformance (i.e., performance was never rendered);
b. (ii) Defect Performance (i.e., performance was rendered but in a manner inconsistent with the contractual commitment); and
c. (iii) Delay in Performance (i.e., performance was rendered but in an untimely fashion). [La. Civ. Code Ann. art. 1994]
2. Rights of Obligee if Obligor Breaches
a. The aggrieved oblige is entitled to damages caused by the obligor’s failure to perform (see VIII.B., infra). [La. Civ. Code Ann. art. 1994] In addition, the aggrieved oblige is entitled to pursue one of the two following mutually exclusive remedies.
i. Specific Performance
1. The oblige may request enforcement of the contract by a suit seeking specific performance (see VIII.A., infra). [La. Civ. Code Ann. arts. 1986-1988]
ii. Dissolution
1. Alternatively, the oblige may seek resolution of the contract by a suit requesting dissolution (see VIII.C., infra) [La. Civ. Code Ann. arts. 2013-2024]
VIII. Remedies Available to Obligee Upon Obligor’s Failure to Perform
a. Specific Performance
i. When Available
1. Specific performance is available in obligations to deliver a thing , or not to do an act, or to execute an instrument, unless it is impracticable. [La. Civ. Code Ann. art. 1986] The Louisiana Supreme Court has stated that specific performance is “impracticable” when it is: (i) impossible; (ii) greatly disproportionate in cost to the actual damage caused; (iii) no longer in the creditor’s interest; or (iv) of substantial negative effect on the interest of third parties. [Weingarten, Inc. v. Northgate Mall, Inc., 404 So. 2d 896 (La. 1981)]
a. Example
i. A lessor shopping center developer breached its lease by erecting a building in the area reserved for the tenant’s customer parking. The tenant sought specific performance of the lessor’s obligation not to infringe on the tenant’s contractual rights over areas reserved for parking by the lease. Specific performance was denied on the ground of impracticability. Here, where the building had already been constructed, specific performance was not available because the cost of tearing down the building far outweighed the tenant’s actual damage. [Weingarten, supra]
ii. Discretionary in Contracts to Do and Contracts Based on Detrimental Reliance
1. Specific performance is discretionary with the court if the obligations to do something. [La. Civ. Code Ann. art. 1986] If an agreement is enforced due to detrimental reliance, the court may grant damages rather than specific performance and recovery may be limited to the damages suffered as a result of the reliance. [La. Civ. Code Ann. art. 1967]
b. Damages
i. The obligor is liable for damages when he fails to perform. [La. Civ. Code Ann. art. 1994]
1. Measure of Damages
a. Damages are measured by the loss sustained by the obligee and the profit of which he is deprived. [La. Civ. Code Ann. art. 1995] Damages for lost profits must be proven to a reasonable certainty. However, if damages are insusceptible of precise measurement, much discretion is left to the court for the reasonable assessment of those damages. [La. Civ. Code Ann. art. 1999]
2. Effect of Party’s Good or Bad Faith on Liability for Damages
a. Good Faith Obligor
i. An obligor acting in good faith is liable for the damages that were reasonably foreseeable when the contract was made. [La. Civ. Code Ann. art. 1996]
b. Bad Faith Obligor
i. An obligor acting in bad faith is liable for all damages that are a direct consequence of his failure to perform. Bad faith is intentional and malicious failure to perform. [La. Civ. Code Ann. art. 1997]
c. Effect of Obligee’s Actions
i. Obligee Misconduct
1. The oblige may not recover damages if: (i) his bad faith caused the obligor’s failure to perform, or (ii) he concealed facts that he knew or should have known would cause a failure at the time the contract was formed. [La. Civ. Code Ann. art. 2003]
ii. Obligee Negligence
1. The obligee’s negligence reduces damages proportionately. [La. Civ. Code Ann. art. 2003]
iii. Duty to Mitigate Damages
1. An oblige is under a duty to make reasonable efforts to mitigate damages caused by the obligor’s breach. [La. Civ. Code Ann. art. 2002] The jurisprudence on which this article is based imposes the duty to mitigate damages only if the expenditures meet two criteria:
a. (i) They are small in comparison to the possible losses; and
b. (ii) It is virtually certain that the risks incurred will avoid at least part of the loss. [Unverzagt v. Young Builders, Inc., 215 So. 2d 823 (La. 1968)]
3. Nonpecuniary Damages
a. Nature of Contract Intended to Gratify Nonpecuniary Interest
i. Damages for nonpecuniary losses (e.g., emotional distress) may be recovered when: (i) the contract because of its nature is intended to gratify a nonpecuniary interest, and (ii) the obligor knew or should have known that his failure to perform would cause this kind of loss. The nonpecuniary nature of the contract need not be the exclusive object of the contract for nonpecuniary damages to be recoverable. Where there exist more than one principal object, nonpecuniary damages are recoverable so long as one of the objects is gratification of a significant nonpecuniary interest. [Young v. Ford Motor Co., 595 So. 2d 1123 (La. 1992)]
b. Obligor Intended to Aggrieve Obligee’s Feelings
i. Damages for nonpecuniary losses may also be recovered when, regardless of the nature of the contract, the obligor intended, through his failure, to hurt or aggrieve the feelings of the obligee.
4. Contractual Modification of Liability
a. In general, the parties are free to address the matter of damages in their contract and to allocate responsibility as they choose.
i. Exceptions
1. The parties may not exclude or limit the liability of a party for intentional or gross fault that causes damage to the other party. In addition, the parties may not exclude or limit the liability of a party for causing physical injury to the other party. [La. Civ. Code Ann. art. 2004]
5. Stipulated Damages
a. Parties may stipulate damages. This obviates the necessity of the obligee proving damages. [La. Civ. Code Ann. art. 2009] The oblige may demand either specific performance or the stipulated damages but not both, unless the stipulated damages are purely delay damages. [La. Civ. Code Ann. art. 2007] Stipulated damages may not be modified by a court unless so unreasonable as to be against public policy. Stipulated damages may be reduced by any benefit conferred on the obligee. [La. Civ. Code Ann. art. 2011]
6. Delay Damages (Moratory)
a. Delay damages are owed from the time an obligor is put in default. [La. Civ. Code Ann. art. 1989]
i. Putting Obligor in Default
1. An obligor is put in default in the following ways: (i) when a term for performance is fixed or can be clearly determined, the obligor is put in default by the arrival of the term [La. Civ. Code Ann. art. 1990]; (ii) by written demand; (iii) by oral demand made before two witnesses; (iv) by filing suit for specific performance; or (v) by a specific provision in the contract. [La. Civ. Code Ann. art. 1991] In any case, the obligor cannot be put in default before performance is due. [La. Civ. Code Ann. art. 1990]
c. Dissolution
i. When an obligor fails to perform, the obligee may request judicial dissolution or regard the contract as dissolved, if the circumstances permit (extrajudicial dissolution). [La. Civ. Code Ann. art. 2013]
1. Extrajudicial Dissolution
a. An oblige may regard the contract as dissolved in the following circumstances:
i. Express Dissolution Clause
1. Upon the obligor’s failure to perform a particular obligation, an obligee may regard a contract as dissolved if there is an express agreement between the parties that the contract will be dissolved for failure to perform the obligation. [La. Civ. Code Ann. art. 2017]
ii. Dissolution After Notice to Perform
1. When the obligor fails to perform, the oblige may give notice to perform within a certain time with a warning that the contract will be dissolved if the obligor fails to perform. The “noticed” time for performance must be reasonable. In addition, the notice must meet the formalities governing the putting in default of an obligor. [La. Civ. Code Ann. art. 2015]
iii. Dissolution Without Notice to Perform
1. An oblige may regard a contract as dissolved without giving notice to the obligor if it evident that the obligor will not perform or if the delayed performance would be of no value to the oblige. [La. Civ. Code Ann. art. 2016]
2. Judicial Dissolution
a. Unless the requirements for extrajudicial dissolution are met, the oblige who seeks judicial dissolution is not entitled to dissolution. The court can grant the obligor additional time within which to perform. [La. Civ. Code Ann. art. 2013]
i. Factors Considered by Court
1. The circumstances taken into consideration by the court in determining whether dissolution is warranted include: (i) the extent and gravity of the failure to perform alleged by the complaining party, (ii) the nature of the obligor’s fault, (iii) the good or bad faith of the parties involved, and (iv) the surrounding economic circumstances that may make the dissolution opportune or not.
3. Effects of Dissolution
a. Upon dissolution, the parties are restored to the situation that existed before the contract was made. If restoration is impossible or impracticable, the court may award damages. Dissolution does not affect rights acquired under onerous title by a third party in good faith. If the contract involves immovable property, principles of recordation apply to a third person acquiring an interest whether by onerous or gratuitous title. In addition, dissolution does not affect performance already rendered in a contract for continuous or periodic performance. [La. Civ. Code Ann. art. 2009]
IX. Simulation
a. Simulation Defined
i. A simulation occurs when the parties agree that a contract does not express their true intent. If the true intent is expressed in a separate writing, it is counterletter. There are two types of simulations: absolute and relative. [La. Civ. Code Ann. art. 2025]
1. Absolute Simulation
a. In an absolute simulation, the parties intend that the contract will produce no effects (e.g., a sham sale). It has no effect as between the parties. [La. Civ. Code Ann. art. 2026]
2. Relative Simulation
a. In a relative simulation, the parties intend that the contract will produce an effect different from the one recited in the contract (e.g., a donation disguised as a sale). It produces the effect intended between the parties if the requirements for those effects are satisfied. [La. Civ. Code Ann. art. 2027]
b. Effects of Simulations as to Third Parties
i. An absolute or relative simulation may have effects as to third parties. A counterletter has no effect against a third party acting in good faith. However, if the counterletter affects immovable property, principles of recordation apply to govern third-party rights. [La. Civ. Code Ann. art. 2028]
X. Revocatory and Oblique Actions
a. Revocatory Actions
i. An oblige may annul an act or the result of a failure to act of an obligor that causes or increases his insolvency and that occurred after the right of the oblige arose. [La. Civ. Code Ann. art. 2036] AN obligor is insolvent when the total of his liabilities exceeds the total of his fairly appraised assets. [La. Civ. Code Ann. art. 2037]
1. Onerous Contract Made by Obligor
a. An obligee may annul an onerous contract made by the obligor with a person who knew or should have known that the contract would cause or increase the obligor’s insolvency. In that case, the person is entitled to recover what he gave in return only to the extent that it has inured to the benefit of the obligor’s creditors. An oblige may annul an onerous contract made by the obligor with a person who did not know that the contract would cause or increase the obligor’s insolvency, but in that case that person is entitled to recover as much as he gave to the obligor. That lacks of knowledge is presumed when that person has given at least four-fifths of the value of the thing obtained in return from the obligor. [La. Civ. Code Ann. art. 2038]
2. Gratuitous Contract Made by Obligor
a. An oblige may attack a gratuitous contract made by the obligor whether or not the other party knew that the contract would cause or increase the obligor’s insolvency. [La. Civ. Code Ann. art. 2039]
3. Contract Made in the Course of Business
a. A contract made in the regular course of the obligor’s business may not be annulled. [La. Civ. Code Ann. art. 2040]
4. Time Period for Action
a. The action prescribes in one year from when the oblige learned or should have learned of the act but may not be brought after three years from the act. [La. Civ. Code Ann. art. 2041]
ii. Oblique Action
1. If the obligor causes or increases his solvency by failing to exercise a heritable right, the oblige may exercise it unless the right is strictly personal to obligor. [La Civ. Code Ann. art. 2044]
XI. Conflict of Laws Provisions for Contracts
a. General Rule
i. An issue concerning conventional obligations is governed by the law of the state whose policies would be most seriously impaired if its law were not applied. [La. Civ. Code Ann. art. 3537] In making this determination, the court should evaluate the strength and pertinence of the relevant polices of the involved states in light of the following:
1. Contracts of each state to the parties and the transaction;
2. The nature, type, and purpose of the contract; and
3. The following policies
a. The general policies that affect choice of law generally [see La. Civ. Code Ann. art. 3515];
b. Facilitation of the orderly planning of transaction;
c. Promotion of multistate commercial intercourse; and
d. Protection against undue imposition by a party.
b. Special Rules
i. Form of Contract
1. A contract is valid as to form if made in conformity with one of the following:
a. (i) The law of the state of making;
b. (ii) The law of the state of performance, but only to the extent that performance is to be rendered there;
c. (iii) The law of the state of the common domicile or place of business of the parties; or
d. (iv) The law governing the substance of the contract.
2. However, if the law governing the substance of the contract requires a certain form for reasons of public policy, then the contract must comply with that form. [La. Civ. Code Ann. art. 3538]
ii. Capacity
1. A person is capable of contracting if he possesses that capacity under the law of either: (i) the state in which he was domiciled at the time he made the contract, or (ii) the state whose law is applicable to the contract. [La. Civ. Code Ann. art. 3539]
iii. Party Autonomy
1. All other issues are governed by that law expressly chosen or clearly relied on by the parties, unless that law contravenes the public policy of the state whose law would otherwise be applicable. [La. Civ. Code Ann. art. 3540]
XII. Special Types of Contract from Code III
a. Deposit and Sequestration
i. Deposit
1. A deposit is a contract in which depositor delivers a movable thing to the depositary for safekeeping. The depositary is bound to return the thing to the depositor upon demand. [La. Civ. Code Ann. art. 2925] This is like bailment at common law.
a. Characteristics
i. Onerous Deposit
1. An onerous depositary is bound to fulfill his obligations with diligence and prudence. [La. Civ. Code Ann. art. 2930]
ii. Gratuitous Deposit
1. A gratuitous depositary is bound to fulfill his obligations with the same care he uses for his own property. This is intended to be a lower standard than that imposed upon the onerous depositary. [La. Civ. Code Ann. art. 2930]
iii. Liability for Losses Imposed Upon All Depositaries
1. All depositaries are liable for loss sustained by the depositor resulting from the depositary’s breach of the standard of care. [La. Civ. Code Ann. art. 2930] In the absence of a special undertaking, depositaries are not responsible for losses caused by a force majeure (e.g., a natural disaster). Such forces typically extinguish obligations as a result of impossibility of performance.
b. Use of Deposited Thing
i. The depositary may not use the deposited thing without express or implied permission of the depositor. [La. Civ. Code Ann. art. 2931]
1. Special Rule for Consumables
a. If the deposited thing is consumable and the depositary is permitted to consume to dispose of it, the contract is a loan for consumption, not a deposit. [La. Civ. Code Ann. art. 2932]
c. Return of Deposited Thing
i. Duty to Return Deposited Thing
1. The depositary is bound to return the deposited thing, and to return it as the agreed upon place. If no place of return is specified in the contract, the thing to be returned at the place where the deposit was made. Costs of transportation are borne by the depositor. [La. Civ. Code Ann. arts. 2933, 2937]
ii. Delivery of Fruits and Value Received
1. The depositary must also deliver all fruits that he received from the deposited thing. [La. Civ. Code Ann. art. 2935] If the deposited thing is lost or deteriorated without the depositary’s fault, he must deliver any value he has received on account of that loss (e.g., insurance proceeds). [La. Civ. Code Ann. art. 2934]
iii. Time of Return
1. The depositary must return the thing whenever the depositor demands its return (unless the contract provides otherwise). In the absence of such a demand by the depositor, the depositary may not return the thing prior to expiration of the term unless unforeseeable circumstances render it impossible for him to keep the thing safe without prejudice to himself. If the contract does not have a term, the depositary may return the thing at any time. [La. Civ. Code Ann. art. 2938]
d. Deposit with Innkeepers
i. Innkeeper Treated as Compensated Depositary
1. An innkeeper who accepts for deposit the personal belongings of guests is treated as a compensated depositary. [La. Civ. Code Ann. art. 2942] An innkeeper is not treated as a depositary when a safe is placed at the disposal of the guest in the guest’s room. [La. Civ. Code Ann. art. 2943]
ii. Innkeeper’s Liability for Personal Belongings Not Deposited
1. The innkeeper’s liability for stolen or damaged personal belongings (that were not deposited with the innkeeper) is limited to $500 so long as the innkeeper has provided a safe deposit facility and has posted notice of its availability. [La. Civ. Code Ann. art. 2945]
2. Sequestration
a. Conventional Sequestration
i. Conventional sequestration occurs when parties agree to deliver a contested thing (movable or immovable) to a depositary pending resolution of their dispute. Conventional sequestration is governed by the rules of deposit. [La. Civ. Code Ann. arts. 2946-2948]
b. Judicial Sequestration
i. Judicial sequestration takes place pursuant to a court order and is governed by the rules of deposit to the extent that such rules are compatible with the nature of judicial sequestration. It takes place according to a court order as provided in the Code of Civil Procedure (see Louisiana Code of Civil Procedure outline, XVII.). [La. Civ. Code Ann. arts. 2949-2951]
b. Loan
i. Loan for Use
1. A loan for use is a gratuitous contract whereby a lender delivers a nonconsumable thing to the borrower who must return it after he finishes using it. [La. Civ. Code Ann. art. 2891]
a. Duties of Borrower
i. The borrower must keep, preserve and use the loaned thing as a prudent administrator. Unless the agreement permits other uses, he must use it according to its nature. The borrower is liable for the breach of this duty. [La. Civ. Code Ann. arts. 2894, 2896]
ii. Loan for Consumption
1. A loan for consumption is a contract whereby the lender delivers fungible and consumable things to the borrower, who is permitted to consume the loaned things and to replace them with things of the same kind and quality. [La. Civ. Code Ann. arts. 2904, 2906]
a. Duties of Borrower
i. The borrower must deliver things of the same kind and quality at the time and place agreed upon and, upon his failure to do so, is liable for interest from written demand. [La. Civ. Code Ann. arts. 2907, 2912]
c. Compromise
i. A compromise is a contract whereby one or more parties make concessions to settle a dispute or uncertainty concerning an obligation or other legal relationship. [La. Civ. Code Ann. art. 3071] Moreover, a compromise settles only those differences that the parties clearly intended to settle. [La. Civ. Code Ann. art. 3076]
1. Form Requirements
a. A compromise must either be in writing or recited in open court and capable of being transcribed from the record of the proceeding. [La. Civ. Code Ann. art. 3072]
2. Accord and Satisfaction
a. A compromise is also made when the claimant of a disputed or unliquidated claim accepts a payment tendered by the other with the clearly expressed written condition that acceptance of the payment will extinguish the obligation. [La. Civ. Code Ann. art. 3079]
3. Effect of Compromise
a. A compromise can be rescinded for vices of consent but cannot be rescinded for error in law or lesion. A compromise precludes the parties from bringing a subsequent action based upon the matter that was compromised. [La. Civ. Code Ann. arts. 3080, 3082] It does not effect a novation. If the compromise is not performed, the other party may seek to enforce the compromise is not performed, the other party may seek to enforce the compromise or dissolve it and to enforce his original claim. [La. Civ. Code Ann. art. 3081]