1) Types of Rules for Contract Formation
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Contracting rules:
1) Types of rules for contract formation:
a. Default-“gap-filling” rules, can be contracted around. Govern when parties have remained silent.
b. Mandatory-Immutable, established by UCC, court and legislature.
c. Altering-as provided by UCC, allows for agreements to change default conditions.
2) Contracts come into existence at acceptance
3) Contracts can be unilateral (conferral on another party of the right of acceptance, wherein a promise is exchanged for performance and performance is acceptance) or multilateral (most often manifest as bilateral, promise for a promise)
4) Product of a bargain
a. Defects in the bargaining process
a.i. Mistake:
a.i.1. Consider least cost avoidance when allocating risk of mistake
a.i.2. Unilateral
a.i.2.a. Restatement § 153-One party’s mistake as to a basic assumption that has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of mistake and:
a.i.2.a.i. The effect of the mistake is such that enforcement of the contract would be unconscionable, or
a.i.2.a.ii. The other party had reason to know of the mistake or his fault caused the mistake
a.i.2.b. Good faith nature of the mistake is balanced against potential for gross negligence
a.i.2.c. Five criteria (Boise Junior College)
a.i.2.c.i. Material nature of mistake
a.i.2.c.ii. Unconscionability of enforcement as agreed
Outline-Contracts-Belia-Fall 2009 a.i.2.c.iii. Culpable negligence
a.i.2.c.iv. Prejudice to non-mistaken party
a.i.2.c.v. Prompt notice of the mistake
a.i.3. Bilateral (Mutual Mistake)
a.i.3.a. Restatement § 152-mistake of both parties at the time of contract as to a basic assumption that has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake.
a.i.3.b. Sherwood and Lenawaee provide case base for mutual mistake
a.i.3.c. Generally results in rescission, rather than reformation (both are equitable remedies)
a.i.3.d. Reformation is only used to alter an agreement to match the terms “actually agreed to.” Significant burden on plaintiff to prove mistake and intended inclusion. Intended only to fix a broken writing, not a broken agreement.
a.i.3.e. If the mistake is one of formulation rather than expression, rescission is the proper remedy. a.ii. Fraud
a.ii.1. Rules intentionally left open in order to prevent those intending fraud from simply finding the cracks
a.ii.2. Pertains both to misrepresentations and failures to disclose
a.ii.3. Asking for particular information can create a duty to disclose where one did not otherwise exist
a.ii.4. Relationship between contracting parties determines extend of duty (arms length as opposed to fiduciary)
a.ii.5. Failing under a fraud claim still leaves open the possibility to claim mistake
a.ii.6. Fraud requires, elementally:
a.ii.6.a. A misrepresentation of material fact
Outline-Contracts-Belia-Fall 2009 a.ii.6.a.i. a matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question.
a.ii.6.a.ii. This misrepresentation can take several forms
a.ii.6.a.ii.1. Blatant, express misrepresentation
a.ii.6.a.ii.2. Misleading half-truth
a.ii.6.a.ii.3. Concealment
a.ii.6.a.ii.4. Silence in the face of a duty to disclose (Restatement (2d) § 161)
a.ii.6.a.ii.4.a. Prevention of previous assertion from being a misrep or fraudulent or material
a.ii.6.a.ii.4.b. Correction of a mistake of the other party as to a basic assumption on which that party is making the contract and if nondisclosure amounts to a failure to act in good faith
a.ii.6.a.ii.4.c. Correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part
a.ii.6.a.ii.5. Relationship of trust or confidence
a.ii.6.b. Reliance upon the misrepresentation (inducement) a.iii. Unconscionability
a.iii.1. Not designed to balance inequities in bargaining power, but rather to prevent oppression or injustice
a.iii.2. UCC provides a broad mandate (2-302)
a.iii.3. Defensive measure not offensive litigation tool
Outline-Contracts-Belia-Fall 2009 a.iii.4. Absence of meaningful choice on the part of one party with contract terms that are reasonably favorable to the other party.
a.iii.5. Meaningful choice is a fact-specific inquiry, often negated by gross inequality in bargaining power, and examines the conditions at the time the contract was made
a.iii.6. Were important terms plain and clear or hidden in contract?
a.iii.7. Is there a procedural defect rendering the bargaining process unreliable?
a.iii.8. Is there a substantive gap in value (finally touching on adequacy of consideration)? a.iv. Illegality
a.iv.1. Public policy exception to promissory liability to discourage contracts whose formation, performance, or objectives are illegal.
a.iv.2. Strongest argument is when legislation provides strict prohibition, but general public policy argument can still work
a.iv.3. Restitution is normally denied the aggrieved party in the interests of discouraging further illegal contracting
a.iv.4. Factors for enforcement:
a.iv.4.a.Parties' justified expectations
a.iv.4.b.Any forfeiture that would result if enforcement were denied
a.iv.4.c. Any special public interest in enforcement of the particular term
a.iv.5. Factors against enforcement:
a.iv.5.a.Strength of the policy (legislative and judicial indications)
a.iv.5.b.Likelihood that refusal of the term would further the policy
a.iv.5.c. Seriousness of the conduct involved and the extent to which it was deliberate
Outline-Contracts-Belia-Fall 2009 a.iv.5.d.Directness of the connection between misconduct and the term
a.iv.6. Illegality defense is not waiveable and may be brought up sua sponte at any time.
5) Offer
a. Conferral of right of acceptance and assumption of liability upon acceptance
b. Counteroffers terminate the previous offer unless a reservation of previous offer is specifically stipulated
c. Advertisements generally cannot constitute offers unless they stipulate very specific and limited terms of acceptance.
d. Price quotations are not offers
e. Offers can be made to more than person without being invalidated
f. Mirror-image rule: creates power of acceptance only for offer as given
g. Revocation must take place prior to acceptance
6) Acceptance
a. Can be conditioned by offeror
b. Must be expressed. Private acts of acceptance are not sufficient
c. Partial performance can constitute acceptance, but also binds the promisor to complete performance according to the contract terms. An implied promise not to revoke is then in place.
d. Silence is not acceptance. Some other element must be present
d.i. Intent
d.ii. Acceptance of benefit
d.iii. Past dealings
e. Mailbox rule: as soon as acceptance is mailed it is in effect
e.i. Does not apply to rejections or revocations, same are in effect upon receipt
f. Accommodation is not acceptance
Outline-Contracts-Belia-Fall 2009 f.i. Shipment of non-conforming goods w/o notice of accommodation still manifests an intention to fulfill the contract
f.ii. Shipment of non-conforming goods w/ notice of accommodation constitutes a counteroffer.
7) Consideration, resulting from a bargain
a. Assent
b. Meeting of the minds (objective manifestation)
8) Satisfaction of SoF (if applicable)
9) No issues of fraud, duress, illegality, or unconscionability
10) Performance
a. Parol Evidence Rule
b. Interpretation
c. Good Faith
d. Express Conditions
e. Constructive Conditions
f. Impracticability
g. Frustration of Purpose
11) Exculpation clauses
a. Three approaches to overly broad exculpation clauses:
a.i. Total severance of provision
a.ii. Blue-pencil approach (partial severance)
a.iii. Rewrite (generally resisted)
12) Options-application of consideration (even nominal) for formerly gratuitous promises
a. Options can keep an offer open for a given period of time
b. Can resemble either one single contract with conditional rights and duties. “In consideration of $50, I promise to convey X to you if, within 30 days, you give me $30,000.
Outline-Contracts-Belia-Fall 2009 c. Can also resemble two separate contracts, one primary and the other subsidiary. “I offer to sell you X and I promise to keep the offer of $30,000 open for 30 days.”
Policy rationales for enforcing contracts:
1) Will-protects the promisor as someone freely willed to make a promise.
2) Reliance-protects the promisee who reasonably relied upon someone’s promise.
3) Efficiency-law tends to protect agreements that are substantively efficient. Efficiencies result in a reduction of transaction costs, the likelihood of profit-maximizing conduct in the future, and allowance for otherwise detrimental contingencies. Larger efficiencies on a market scale stem from these party-based efficiencies.
4) Fair- law tends to protect agreements that are substantively fair.
5) Bargain-focuses on the manner in which the agreement was made rather than the substance of the agreement itself. Law tends to protect agreements that undergo the bargaining process.
Consideration:
1) Product of a bargain, which is a negotiation involving the voluntary assumption of an obligation by one party in exchange for an action or forbearance by the other party
2) Can be either a benefit conferred or detriment assumed. Does not have to be both.
3) Can be performance or promise based, including the creation, modification, or destruction of a legal duty (Hamer v. Sidway).
4) Courts do not readily consider the adequacy of consideration, only its sufficiency.
5) Nominal consideration is no consideration (exception for options)
a. Balance of trite object against a gratuitous promise or act
6) Past consideration is no consideration
7) Consideration cannot be a gratuitous act (Kirksey v. Kirksey).
Reliance (when consideration is absent):
1) Grounds for promissory estoppel
2) A promise must be given (rather than a prediction or representation)
3) Detrimental reliance must be reasonable
4) Injustice can only be avoided through enforcement of the agreement
Outline-Contracts-Belia-Fall 2009 5) Do not confuse with equitable estoppel, which requires a misrepresentation of a fact rather than a promise.
6) Restatement definition: “A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”
7) Promise is enforced to avoid an injustice, not to do justice.
Moral obligation (when consideration and reliance fail):
1) Not common in application
2) Some jurisdictions still recognize the material benefit rule, but not most
a. If one party has received a material benefit then the other party had an expectation of pay based on a promise. Promise to pay cures the Q(K) issues.
b. Conferred benefit generally treated as past consideration (therefore no consideration)
3) Unconscionability is arguably the most applied moral remedy
a. Jones v. Star Credit is the principal example
b. Some procedural defect must exist in the bargaining process
c. There must be a substantive inequality in the exchange
Quasi(K)
1) If there is an enforceable contract, there is no Quasi-Contract
2) Tiered inquiry: failure at any level defeats the quasi(K)
3) Benefit conferred?
a. Was the benefit accepted?
b. Was an opportunity given to reject the benefit?
4) Expectation of pay?
a. Reasonable expectation?
5) Retention of benefit unjust?
a. Would the parties have entered into a contract if able?
Statute of Frauds
Outline-Contracts-Belia-Fall 2009 1) Stipulates formal written requirements for CSG, forms must be signed by the party against whom enforcement is sought
a. Writing does not have to be particularly formal, and can even be composed of multiple writings so long as they contain the parties, subject matter, essential terms and the signature
2) Pertains not to forms that in and of themselves render a promise enforceable but rather to forms that, when consideration is present, are necessary for enforcement
3) Q(K) can apply when an agreement fails under SoF
4) One Year Clause
a. If performance cannot be completed within one year, a writing is required
b. Fairly narrow application of rule, any reasonable mechanism for performance within a year will result in an enforceable agreement without a writing
c. Full performance of one party’s duties, even outside of one year, brings into play the one-side exception (no writing then required)
5) Sales of Goods valued over $500
6) Real Estate
7) Contracts for custom goods, not resalable on the common market, with an indication they were made specifically for the buyer and production has begun, are enforceable even in the absence of a writing.
8) Part performance and admission under oath also provide exceptions
Remedies:
1) Compensatory nature of contract law trumps punitive instincts, money is given in almost all breaches
2) Direct Damages: damages expected to naturally flow from a given set of circumstances
a. Expectation
a.i. Gains expected from contract performance
b. Reliance
b.i. Attempt to restore non-breaching party to pre-contract condition
c. Restitution
Outline-Contracts-Belia-Fall 2009 c.i. Disgorgement of benefit conferred to breaching party.
c.ii. Often capped at expectation damages
3) Consequential Damages:
a. Damages arising as a consequence of a breach that are unique to a given set of circumstances.
b. Must be reasonably foreseeable, and
c. Provable with reasonable certainty
4) Incidental Damages:
a. Flow from duty to mitigate
5) Equitable Remedies (granted by judge, not jury):
a. Designed to serve when remedies at law are unfair or insufficient
b. UCC focuses on irreparable harm and “unique or other circumstances”
c. Restatement places discretion in the interest of justice in judge’s hands, but advises ought not to be given when damages are sufficient
d. What was the inadequacy in the legal remedy asserted by the plaintiff to justify equitable relief?
d.i. Ease of getting substitute performance from the market
d.ii. Impact on the plaintiff if too costly or unavailable
e. What, if any, are the difficulties in enforcing an equitable remedy in a given case?
e.i. Means of supervision
e.ii. Standard of performance
e.iii. Refraining from activity easier to enforce than performance
f. Are there any questions of fairness in enforcing the contract or problems of morality associated with the plaintiff’s conduct?
f.i. Unconscionable disproportionality
f.ii. Unclean hands
Outline-Contracts-Belia-Fall 2009 f.iii. Unconscionable agreement (does not have to rise to full level of unconscionability sufficient to deny a contract, merely sufficient incentive not to grant equitable relief)
g. Can be shaped in the interests of fairness or justice.
h. Should damages be granted in addition to equitable relief?
i. Specific Performance
i.i. Generally given in land sales
i.i.1. Uniqueness of land
i.i.2. Invaluable preference
i.i.3. Irreplaceability of parcel
i.ii. UCC allows for specific performance when a good is unique “or in other proper circumstances”
i.iii. Almost never given in contracts for personal service
i.iii.1. Actual enforcement is difficult
i.iii.2. 13th Amendment issues of slavery
j. Injunctive Relief
j.i. Often easier than specific performance
j.ii. Requires supervision, possibly in perpetuity
j.iii. Violations can result in fines and jailtime
6) Liquidated damages
a. Stipulated in contracts as reasonable calculations of otherwise difficult to determine damages resulting from a material breach
a.i. Reasonability determined, generally, at time of contract
a.ii. UCC allows for consideration of “anticipated or actual” harm
a.iii. Restatement focuses on time of contracting
b. Cannot operate strictly as a punitive measure
c. Should not be the result of fraud, defective bargaining, or designs to induce a breach
Outline-Contracts-Belia-Fall 2009 d. Self-interest and informational advantage of contracting parties often basis for enforcement of reasonable provisions and serve as a counterargument to court efforts to dismiss liquidated damages clauses.
7) Damages associated with particular contracts and breaches:
a. Building contracts:
a.i. Assume the breaching party is the payor:
a.i.1. Full performance by builder-payor denies payment
a.i.1.a. Expectation measure-Contract price
a.i.2. No performance-anticipatory repudiation by owner
a.i.2.a. Lost profits (benefit of the bargain)
a.i.3. Part performance
a.i.3.a. Substantial performance-Contract price less the cost of breach (cost of completion; DOV)
a.i.3.b. Substantial performance of a divisible part
a.i.3.b.i. Price equivalent of the divisible part
a.i.3.b.ii. Contract must be capable of being broken into agreed equivalents
a.i.3.c. Part but not substantial performance, non-divisible
a.i.3.c.i. Duty to mitigate damages applies
a.i.3.c.ii. Expectation damages-Contract price less cost to complete
a.i.3.c.ii.1. What makes the builder whole?
a.i.3.c.ii.2. Covers expected profits and reliance to date
a.i.3.c.iii. Reliance damages-Cost of materials and labor
a.i.3.c.iv. Losing Contract
a.i.3.c.iv.1. Expectation-Contract price less cost to complete
Outline-Contracts-Belia-Fall 2009 a.i.3.c.iv.2. Reliance-excessive costs (not applicable in most jurisdictions when it exceeds the benefit that would have been conferred had the bargain been fulfilled)
a.i.3.c.iv.3. Restitution-Damages offset by savings of losing contract (= expectation measure)
a.ii. Breach by the Builder
a.ii.1. Incomplete performance: Cost of completion (if remediable)
a.ii.2. Deficient performance: Cost to repair
a.ii.3. DOV can be used as well
a.ii.4. No hard and fast rule exists discerning between the two, significant judicial discretion b. Real Estate Contracts:
1) Assume buyer repudiates contract:
a. Typical direct damage: Contract price – market price (mitigation) + incidental (costs of resale). This is usually avoided with earnest money and liquidated damages provisions.
b. Courts won’t enforce penalty clauses, only reasonable estimate of actual damages. c. Employment Contracts:
1) Termination of Contract
a. Contract less allowable offset (other employment through reasonable efforts that the employee could secure given that the employment is reasonably similar)
b. Difficult considerations for “comparable employment”
b.i. Belia
b.i.1. Teaching at another school-yes
b.i.2. Returning to private practice-probably
b.i.3. Teaching at high school
Outline-Contracts-Belia-Fall 2009 b.ii. Be aware of presumptions inherent in both sides of claim
b.iii. Employment must be similar and only available as a result of termination d. Contract for the Sale of Goods
1) UCC
a. Generally a very complicated inquiry
b. Seller has choice of remedies:
b.i. 2-706: Contract price less the resale price
b.ii. 2-708: Contract price less market price
b.iii. Neither accounts for the lost value of the sale itself (commodity goods)
b.iv. 2-708: When the breach causes lost volume, expected profits would be warranted
c. For specially made goods for whom there is no alternative market
c.i. 2-709: Complete performance yields contract price
c.ii. 2-709: No work yields expected profits
2) Breach by the Seller
a. 2-712: Cover-Replacement cost (cost of cover) less contract cost
b. Market price provision exists as well
Outline-Contracts-Belia-Fall 2009