CONTRACT A contract is a legally enforceable agreement. Promise + Consideration = K Promise + Detrimental Reliance = K
PROMISE
CONSIDERATION
A promise is the manifestation of intent to act or refrain from acting in a specified way
To constitute consideration, a performance or promise must be bargained for , i.e. sought in exchange for another performance or a return promise
A promise or performance must offer some legal detriment , i.e. something of value or some form of freedom
Each party has the duty to bargain in good faith DETRIMENTAL RELIANCE In some instances, detrimental reliance acts in place of consideration.
UNENFORCEABLE DISCRETIONARY
Conditional & Illusory Promises An agreement that depends on the wish, will, or pleasure of one of the parties will not be enforced.
No Commitment One party cannot convert what both parties knew to be a joke into a serious transaction simply by claiming it to be so. There must be a meeting of the minds.
ENFORCEABLE
Vague & Indefinite Terms Six Ways of Interpreting a Term: The Courts use these to determine INTENT (1) Language of the K (2) Dictionary (3) Prior Negotiations Between the Parties (4) Trade Usage (5) Standards Incorporated by Reference (6) The Conduct of the Parties
Satisfaction Clauses Two Categories: (1) Objective test: Reasonable person standard , where “satisfaction” can be asserted to something measurable (2) Subjective test: Good faith standard , where “satisfaction” is determined by the fancy, taste, or judgment of judgment of the parties
Other relevant factors: Evidence; Subject Matter Exclusivity: Good Faith & Reasonable Efforts Implied Promises = A promise may be lacking, and yet the whole K may be “instinct with an obligation, imperfectly expressed.” In expressed.” In these situations the court reads in the promise through good faith and reasonable efforts by both parties.
Defenses to K Formation An unjustified failure to perform an absolute duty
(I). I). Lack of of Capacity Capacity (1) Illiteracy without guidance (2) Mentally Ill (3) Infant (Minor) K is voidable if: - Party is unable to understand in a reasonable manner - Party is unable to act in a reasonable manner
(II). (II). Dure Duress ss (1) Mere Stress of $ Situation = No Void of K (Bad public policy) (2) Assent Induced by Improper Threat = Voidable K (3) Business Compulsion creates no other speedy remedy = Voidable K. i.e. did the person do what they otherwise would not have done?
(III). (III). Unco Uncons nsci cion onab able le & Unju Unjust st K’s of Gross Inequality are not sustained Adhesion & Unjust Terms: K’s offered by the party with more power to the party with weaker power on a take-it-or-leave-it basis. Rule: Enforceability depends upon the (1) degree of inequality and the (2) social necessity of the contract.
Unconscionability: Occurs where there is an absence of meaningful choice on one party, together with contract terms unreasonably favorable to another party. Must be a necessary act of life, not a luxury or hobby. Rule: Where the element of unconscionability unconscionability is present at the time a K is formed, formed, the K is unenforceable. K must be with the reasonable expectations of the weaker party [substantive] to be enforceable. Conduct is also considered [procedural]. NOTE: Both substantive and procedural unconscionability must be shown for a K to be unenforceable.
Defenses to K Formation (Continued) An unjustified failure to perform an absolute duty
(IV). (IV). Frau Fraud d & Misr Misrep epre resen senta tatio tion n (A) Nondisclosure = Recission of K (B) Partial Disclosure believed to be Full Disclosure = Promisor is Liable Rule: If the promisee acted in reliance, then there is no K and the Promisor is liable. Nondisclosure of knowledge of a defect that creates misrepresentation is illegal. There is a duty to disclose if lack of disclosure creates reliance.
(V).
Release
Rule: When one party’s obligation to another party is extinguished, usually through a K clause. To be valid and enforceable the release must: (1) Clearly, unambiguously, and explicitly express the specific intent of the subscribing parties (2) Be distinguished from the rest of the contract language when signed . (3) Notify the releasor of the effects of signing (4) Remain within the realm of known risks, i.e. those reasonably foreseeable to the acts the release is meant to protect.
(VI). Mistake If the expressions of the parties are capable of two different and equally reasonable interpretations, and neither one negligently misled the other, there is no contract. contract. Parties are bound by the reasonable meaning of meaning of what they said. Mutual Mistake: The Court offers NO REMEDY for cases of mutual mistake. Latent Ambiguity = Ambiguity = A problem that was hidden before a certain event that is essential to the contract. Parole Evidence (Extrinsic Evidence) Evidence) = Can be used to clear up a latent ambiguity. Think chicken/cotton shipping case. Was the mistake as tothe mistake as to a basic assumption or essential term of the contract? (1) Was a basic assumption?Yes = K is voidable; No = K is e nforceable. (2) If is liability can be determined the courts consider: Yes = Contract (i) Element of Risk for each party voidable (ii) Fraud of Quasi-Fraud No = Contract (iii) Negligence enforceable: •
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Unilateral Mistake: (1) General Unilateral = When through fraud or mistake one party is misled, the K must be revised on the Did the other party side of the injured injured party. If the other party knew or had reason to know of the mistake and did not know or have reason disclose it, the K is unenforceable. unenforceable. to know of the (2) Scribner’s Error = If the parties have agreed to terms, and only the written document is defective, a mistake? meeting of minds has occurred and the contract is enforceable on original understood terms. NOTE: Contract Contract is voidable if one party does not bear risk of mistake. mistake. Also note that risk is allocated allocated depending on fairness; the court will also see whether risk has been allocated in the co ntract itself. Contract is voidable under R153
Basic Remedies
Compensatory Damages When a person makes a promise, the promisor undertakes the promised performance or a or a sum or money that will place the promisee in the same position as they would have been had the promise been performed.
Expectation Positive: What the injured party would have made in profit had the K been performed. Rule: The law is meant to place compensate the injured party for the benefits he would have gained in the contract, not to place the injured party in a better position than they would have been in had they performed the K.
Reliance Negative: Returns the injured party to before the K was made. Rule: Wasted expenditure can be recovered when it is wasted by reason of the defendant’s breach of K. If one party party knows expenses exist as a result of their agreement to K, but breaches anyway, that party is liable for the expenses of the injured party.
KP – Cost of Goods Sold = Damages
Restitution Negative: Getting back the benefits conferred. “Disgorging ” the benefits conferred. A court may award damages in an attempt to return to the injured party any value that it may have conferred on the breaching party. This interest is distinguished from quantum meruit because restitution can only be given for breach of K. Fair Market Value of benefit conferred is returned.
General v. Consequential Damages General Damages: Incidental damages resulting from the seller’s breach including those commercially reasonable. Consequential Damages: (1) In a sellers breach: Any loss resulting from general or particular requirements and needs that the seller had reason to know at the time of K and could not have reasonably prevented; (2) Injury to person or property directly resulting from a breach of K. To recover consequential damages: (1) The damages must flow naturally from the breach (2) Both parties must be aware of the damages and assume the risk of those damages at the time of K
Remedies: How the Law Enforces Promises
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Punitive Damages Almost never recoverable for breach of contract. Only if compensatory damages are inadequate. Exist to punish/deter the wrongdoer, considered inappropriate for contract cases.
SPECIFIC RELIEF: Granted when legal remedy is inadequate. (UCC 2-719) 2-719)
INJUNCTION
Granted IF: Special circumstances to prevent unfair competition (anti-competition clauses Unfair trading of secrets Unique goods and services Limited to Employment Contracts Public interest is at harm Irreparable harm where monetary damages is not enough If costs of remedy damages exceed cost of injunction (Walgreens) Temporary/Permanent? •
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SPECIFIC PERFORMANCE
Easier to get for Sale of Goods Contract
Granted IF: There is a breach Remedy at law is inadequate (UCC) Performance is practical Courts can supervise Special Circumstances Contract is clear and valid Uniqueness makes it impossible to assess damages Not Granted IF: Inconvenient and Expensive Impractical Contract too vague Project too complex No Special Circumstances • • • • • • •
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Alternative Remedies When basic remedies are not enough
Arbitration Is there an arbitration clause? Did both parties parties agree to to arbitration? If Yes… Arbitration over litigation: Faster Cheaper Rules of evidence don’t apply Prevents class-action Avoids a jury
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Reasons for appeal: 1. Fraud or corruption 2. Award is irrational 3. Award is against public p olicy 4. Hearing is postponed for no reason
Liquidated Damages Specified damages for breach of K to be given even if no actual damages occur: Penalty or Reasonable estimate? Only obtainable if: 1. Damages are too difficult to ascertain at the time K was formed 2. Amount agreed upon by the parties was a reasonable forecast of compensatory damages
Quantum Meruit Only when unjust enrichment occurs outside of a contract Must be the reasonable value of goods and services conferred. - A benefit conferred on D by P - Appreciation or knowledge by D of the benefit - Acceptance or retention of the benefit by D under circumstances Two ways of measuring unjust en richment: 1. What the non-breaching party received 2. What the breaching party received Under CA law, a breacher cannot recover under QM.
Tort Provides remedies for civil wrongdoings not arising out of contractual obligation Kinds of cases: personal injury, outrageous conduct, outrage, special relationships, insurance.
AVOIDABLE CONSEQUENCES : DUTY TO MITIGATE DAMAGES Injured party should do whatever it reasonably can to improve all reasonable and proper opportunities to lessen injury. Non-breaching party cannot recover for damages it could have reasonable a voided following notice that the other party is repudiating the contract. Restatements 350 .
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Construction K Mitigation Once contract has been breached nonbreacher should not be allowed to pile up damages. Stop building when they tell you to stop. Remedy is to treat contract as broken when receives notice and sue for the recovery of such damages as he may have sustained from breach. Ex. Luten Bridge
Construction: KP - Cost of Completion (expectation) Or KRate for completed part + Lost Profit (reliance)
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Sale of Goods Mitigation If lost volume seller: UCC 2-708: 2-708: If the measure of damages proved (KPrice – Market Price) is inadequate to put seller in as good a position as performance would have done, seller’s lost profit on the sale is an appropriate appropriate measure. Expectation Interest o Protected
Sale of Goods: Seller: K Price – Market Price Buyer: Cover Price – Kprice
Employment K Mitigation Employee has to show that he was actively looking for another job after employment contract was breached. Must prove there was no other comparable employment. The employee’s rejection of or failure to seek other available employment of a o different or inferior kind may NOT be resorted to in order to mitigate damages. ( Shirley Shirley McLain) Can collect excess damages with the difference between salaries for both jobs. (Employee) Money needs to comparable, type of work, seniority (how much input you’ll have), reputation, location and skill set.
Employement: Employer: Replacement Replacement K – Breached K Employee: KPrice – 2nd Job Earnings (Mitigation)
Limits on Promise
Legal Limits If a contract is immoral, unfair, or illegal, then it is unenforceable and against public policy : Illegal on face Illegal in performance Illegal in procurement The illegality must be of a substantial degree to prove no K.
For a K to be enforceable: No violation of public policy No criminal activity
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Relationships
Positive Law = Public Policy Limits on Contract Restatement § 178 (1) A promise is unenforceable if legislation makes it so, or if its enforcement is clearly outweighed in the circumstances because of public policy. (2) In weighing enforcement courts examine: (i) The parties justified expectations (ii) Any forfeiture that would result if enforcement were denied (iii) Special public interest in enforcement of a term. (3) In weighing public policy: (i) The strength of the relevant policy (ii) The likelihood that refusal to e nforce will further that policy (iii) The seriousness of misconduct (iv) The connection between the misconduct and the promise
Parent-to-Child (1) Extrinsic evidence of a binding agreement must be shown (2) Evidence must be express: clear and convincing to prove K (3) Circumstances are considered
Secret Service K is not enforceable if: Litigation discloses confidential matters Litigation might have even a slight chance of impairing or undermining covert operations
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Attorney – Client Limited to Quantum Meruit for the value of services performed by attorney when client discharges attorney
Spousal (Some states have a palimony rule) Property rights established in a pre-nuptial agreement are enforceable Spousal support waivers and pre-nuptial agreements are not in violation of public policy and are not per se unenforceable. Judicial discretion is applied applied to determine enforceability of K Unmarried cohabitants can sue only under Quantum under Quantum Meruit because Meruit because no marriage K exists. Occurs if one party retains an unreasonable amount amount of property that was gained by the efforts of both parties.
Consideration § 71 Restatement (1) For consideration, a performance or promise must be bargained for . (2) A performance or promise is bargained for if it is sought by the promisor in exchange for his promise, and is given by the promisee in exchange for that promise. (3) A performance may be: - An act other than a promise p romise - Forbearance - The creation, modification, or destruction of a legal relationship
(I). (I). Barg Bargai ain n v. Gif Giftt Prom Promis ise e
(II). (II). Adequate Adequate Consider Consideratio ation n
An unbargained for promise, unless enforceable for some other reason, will be a gift promise and will not be enforceable.
While the law does not question the adequacy of consideration, there must be value to the buyer. Novel ideas are not required. There are no additional requirements of: - A gain - Equivalent value - Mutuality of obligation
Prior to delivery of delivery of the gift, the promise can be withdrawn. A discretionary policy also has an obligation to act in good faith, and this is consideration.
In an exclusivity K , parties must act in good faith for consideration to be adequate. Parties must have valid business reasons for varying a requirements K .
(II.) Past Consid Considerati eration on & Moral Moral Obligati Obligation on Past Consideration: No valid consideration is bargained for because a promise is made in return for a detriment already suffered by the promisee. To be valid, there must exist new consideration. new consideration. Moral Obligation: Is sufficient consideration for an express promise only so far as there exists another good or valuable consideration at some point Exceptions: - Debts (1) barred by the statute of limitations; (2) incurred by infants; (3) bankruptcy debts - Where one party has received a material benefit (such as life or a hand)
Consideration (Continued)
(IV). Action or Forbearance from from Reliance § 74 Restatement Forbearance to assert a claim that proves to be invalid is not consideration unless: (a) the claim is doubtful because of uncertainty as to the law (b) the forbearing party believes that the claim may be fairly determined to be valid
(VI). Form & Enforceabilit Enforceability y
If the plaintiff believes in good faith that they could have brought a claim but did not file suit in exchange for something else, that good faith agreement will be enforced. DETRIMENTAL RELIANCE: In some instances, if one party relied on the promise of another party and thus did or did not do something because of that promise, the promise is enforceable even though it did not have bargained for consideration Unbargained-For Reliance: (1) Must be reasonable (2) Must be foreseeable
(V). (V). Pre-Ex Pre-Exist isting ing Duty Duty A promise to do something one is already obligated to do, or forbearing to do what they are not legally entitled to do. There is no contract in cases of pre-existing duty because duty because there is no bargained for exchange of consideration. One party must already do something. Contract Modification: (1) New Consideration. Consideration. Any change in an existing existing K must have new consideration to support it. it. In such a case, the K is continued, not ended. (= more compensation for more hours worked) (2) Mythical Intermediate K. Employment K’s. K’s. (a) Old K (b) is terminated terminated by consent of both parties (c) and a new K is executed executed in its place. The mutual promise to terminate is consideration (Intermediate K), and to re-contract is again consideration. consideration. Usually occurs in one moment. (= pay raise for same work work hours). Actions Speak Louder Than Words (N.O.M. K’s): of conduct between two parties may can amount to the oral modification of a K. (i) The pattern of conduct (ii) Conduct as oral modification may amount to a waiver of some right by a party Settlements of Debt & Compromise: The difference between the two depends upon the intent of intent of the parties. (A) Accord & Satisfaction = A compromise providing for the future acceptance of a stated performance in satisfaction of the existing claim. (B) Substituted Contract = A compromise agreement itself that is accepted as a substitution and extinguishment of the existing claim. An Accord is more likely if: (1) The original duty was one to pay money; (2) if the issue is undisputed; (3) if it was liquidated; (4) if it was matured
