Contracts

Introduction • : a promise or set of promises for the breach of which • Types of • The (UCC) applies to transactions the law provides a remedy, or the performance of which the law • Unilateral contract: Promise in exchange for performance. Only in goods. UCC 2-102. applies to service recognizes as a duty. Restatement (Second) of Contracts (Rest.) 1. means of acceptance is full performance (examples include contracts. Contract = offer + acceptance + rewards, prizes, or where the offer specifies that the only means of • Goods: Things that are movable at the time of contracting. • Hawkins v. McGee: Hawkins burned his hand; McGee (doctor) acceptance is full performance). UCC 2-105. promised that he could fix it and give Hawkins a “100% good • Bilateral contract: Promise in exchange for promise. Can be hand.” The skin graft did not work. Doctor’s promise was accepted by promising to perform or beginning performance. enforceable. (The “hairy hand” case.) O er Acceptance Consideration

Definition Overview and notice requirement Definition: Each party to a contract gets something from the contract. Consideration is a bargained-for exchange or legal detriment. Rest. 17, 71. Offer: A manifestation of intent to enter into a bargain, • Offeror is the “master of his offer” and can invite a particular so made as to justify another in understanding that his • Hammer v. Sidway: Uncle promised nephew $5,000 if mode of acceptance. Rest. 30. assent to that bargain is invited and will conclude it. Rest. 24. he refrained from drinking and smoking until he turned 21. Nephew complied. Uncle tried to hold onto money Person who makes the offer. person who Offeror: Offeree: • Look at the type of contract: In general, the offeree must until nephew became more responsible. Court upheld receives the offer. exercise reasonable diligence to notify the offeror of uncle’s original promise. Refraining from an act that one acceptance or the offeror must receive the acceptance has a legal right to do is consideration. seasonably. Creation Rest. 56. • The following are not consideration: a promise to make In general, notice is not required to make acceptance of a a gift, a moral obligation, past consideration, or an unilateral contract effective, unless requested by the offeror. There must be objective manifestation of intent to enter into . Rest. 54. a contract plus (e.g., , , identity Moral obligation: Mills v. Wyman: Mills took care of Wyman specific terms price quantity • Carlill v. Carbolic Smoke Ball Co.: A large reward was of the ). And, it must be to the offeree. until he died. Wyman’s father promised to pay Mills back. parties communicated offered to anyone who contracted the flu while using the A few notes: When Wyman’s father didn’t pay, Mills sued. No consideration smoke ball according to directions. Carlill used the smoke • Whether one has the intent to enter a contract is judged for father’s promise. ball according to directions and contracted flu. Court held by a reasonable person standard. • Exception: A moral obligation is sufficient consideration Lucy v. Zehmer. that where offer can be accepted by performance only, • A price quote or advertisement is not an offer. to support a subsequent promise to pay where the notification of acceptance does not need to precede promisor received a material benefit. Webb v. McGowin; Owen v. Tunison. the performance. Exception: When a price quote is specific in quantity and Rest. 86. in response to a customer inquiry, it is an offer. Past consideration generally is not consideration. Fairmount Glass Works v. Crunden-Martin Wooden Feinberg v. Pfeiffer Co. Ware Co. E ectiveness of acceptance Illusory promises: Whether to perform or not is entirely • An offer generally can only be accepted by the offeree. at the option of the performing party. No consideration. • Strong v. Sheffield: Uncle promised not to Boulton v. Jones. • General rule: Acceptance is effective when sent (the mailbox collect debt until he wanted his money. This is illusory. rule). Rest. 63. Note: a satisfaction clause does not render a contract illusory. Termination of an o er • an (acceptance effective Exceptions: Preexisting-duty rule: The performance of a preexisting upon receipt), or if a then an is mailed rejection acceptance legal duty is not consideration unless it falls into an There are four ways to terminate an offer: (generally, the one received first controls). exception (e.g., unforeseen difficulty, a settlement of a lawsuit, a good faith payment in full of 1. Lapse of time: An offer lapses after a reasonable time. • : Buyer’s offer to purchase can be accepted by UCC a due and disputed debt, a written promise to pay a Rest. 41. promising to ship or by shipping the goods. UCC 2-206. time-barred debt, or if the duty was owed to a third Preparing to ship is not acceptance. Silence generally does person). Rest. 73. 2. Rejection: includes counteroffer, which is a rejection and not constitute an acceptance unless past dealings or other • Alaska Packers v. Domenico: Workers signed contracts a new offer (see mirror-image rule). circumstances indicate otherwise. Rest. 69. and moved to Alaska. Once there, they demanded more money. The workers had a preexisting duty to perform 3. Revocation of an offer: An offer can be revoked before acceptance unless it falls into one of the (FOUR) categories: their jobs. There is no consideration for the additional pay. Terms of acceptance • Modification: Consideration is needed to modify a common law contract. Only is needed to Firm offer: Offer by a merchant in a signed writing under good faith modify a UCC contract. the UCC. This offer can be held open for a maximum of • Common law: The acceptance must be the “mirror image” of • Promise to pay does not need to induce three months. UCC 2-205. : Rewards: the offer. Rest. 59. Last-shot doctrine if the parties perform as if performance; performer simply must know about the reward. Option contract: A promise to hold open the offer plus a contract exists, the last form sent is treated as containing the consideration for that promise. Rest. 87. Rest. 81. contract terms. • (a substitute for consideration): If there is a Unilateral contract: if the offeree begins performance on Reliance promise and foreseeable and justifiable reliance, enforcement will be a unilateral contract, the offer is held open for a • An acceptance does not need to mirror the offer and UCC: granted as necessary to avoid injustice. Rest. 90. reasonable time. may have additional or different terms. Between merchants, • Ricketts v. Scothorn: Grandfather told granddaughter she Reasonably foreseeable substantial reliance on the offer. an additional term will be a part of the contract unless it Elsinore Union Elementary Sch. Dist. v. Kastorff. could quit her job and he would give her $2,000 per year. materially alters it, the offeror objects within a reasonable time, Even though no consideration (illusory), she relied on his or the offer limits acceptance to the terms of the offer. Under promise. Therefore, it is enforceable. 4. Death or incapacity of offeror. the majority rule, a different term is knocked out and replaced with gap fillers (battle of the forms). UCC 2-207. Defenses (SOF) defenses : unfair persuasion where a person in a position of trust, confidence, or dominance uses • Rule: The SOF requires a writing signed by the party to be charged that evidences a contract. that position to convince another to enter into a contract that is not in that party’s best interest. Tip: the “party to be charged” generally means the defendant. • Which contracts fall into the SOF? (MYLEGS) Contracts made in consideration of marriage, Lack of contract formation defenses contracts that cannot be performed within a year, contracts for the sale of land, promises made by an Mutual : If both parties are mistaken about a basic assumption of fact that materially affects the executor to pay a debt from his own , contracts for the sale of goods over $500, and agreed upon exchange and neither bears the risk, the contract is voidable. Rest. 152. surety contracts. Unilateral mistake: if a party knew or had reason to know of the other party’s mistake, the contract • Exceptions—where no signed writing is required: is voidable. • Land: part performance (when one’s actions a contract; e.g., the buyer does two of the Mutual misunderstanding: there is no contract if both parties have a different understanding of a material following three things: takes possession of the property, improves the land significantly, or pays a term that is open to at least two reasonable interpretations and neither party has any reason to know of the substantial amount of the purchase price). meaning attached by the other. • Sale of goods: The four exceptions are: (1) merchant confirmatory memo exception, (2) when the Illegal subject matter (e.g., selling drugs): The contract is void. If it is for an illegal purpose (e.g., leasing seller has made a substantial beginning in manufacture or commitments for specially manufactured a car to transport drugs), it is voidable by the party who didn’t have the illegal purpose (e.g., the car owner) goods not suitable for sale to others in the seller’s ordinary course of business, (3) judicial admissions if he didn’t know the purpose or knew of the purpose but didn’t facilitate it and it doesn’t involve “serious (one admits in his pleadings, testimony, or in court that there is a contract—it is enforceable up to the moral turpitude.” quantity admitted), and (4) part performance (one pays for or accepts a part of a contract). : There are two necessary elements: Procedural unconscionability (an unfair bargaining • Surety: a promise to pay the debt of another if the other does not pay; falls within the SOF unless process—e.g., hidden or incomprehensible terms) and substantive unconscionability (grossly unfair terms). the main purpose of the surety promise is to serve a pecuniary interest of the person making the This is voidable. promise. • A price term alone can make a contract unconscionable. Jones v. Star Credit Corp. • Cannot be performed within year: full performance on one side will serve as a substitute for a : one party intentionally misrepresents material facts to the other party and the other signed writing. party justifiably relies on those facts or those facts induce assent to contract. defenses • The misrepresentation must be a statement of fact, not opinion. Nondisclosure: Generally, bare nondisclosure is not actionable. Swinton v. Whitinsville Sav. Bank. Incapacity: For minors, mentally incompetent, or intoxicated persons. Rest. 15. Contracts are However, in the context of sale of real estate, most jurisdictions have statutes that require disclosure of voidable; not automatically void. But, the party without capacity may remain liable for “necessities.” certain defects. Duress: When a party threatens to commit a wrongful act that would threaten other party’s • Nondisclosure plus: once a seller makes some representations and the buyer relies on those finances, property, well-being, or life. Rest. 175. representations, the seller must disclose more if failing to disclose additional facts would amount

• Majority view: The duress must be created by the other party. Minority: anyone taking to intentional deception. advantage of another is enough.

Interpretation

• General rule: Express terms control. Then courts look to course of performance, course of dealing, • No oral modification (NOM) clause: At common law, even if a contract has a NOM clause, it can and trade usage. Tip: pay very close attention to the express language of the contract. be orally modified. Under the UCC, if there is a NOM clause, modifications must be in writing. • Gap fillers: the UCC has default rules for terms that govern contracts for the sale of goods if no But a failed modification (i.e., no writing) might be a waiver. UCC 2-209. term is stated in the contract (e.g., if nothing is said as to price, the price is a reasonable price at the time of delivery).

• Keeping terms out with the (PER): the PER applies when a party wants to add a term from preliminary negotiations (or contemporaneous oral terms) to a final written agreement.

PER doesn’t apply. If a party is using evidence to interpret a term, first determine whether the writing is ambiguous. If it is ambiguous, extrinsic evidence PER doesn’t apply. will be admitted and the question of interpretation will go to the jury. Parol evidence may Two approaches to determine whether ambiguity exists: be admitted. (1) Four-corners rule (New York rule): see whether the writing is ambiguous on its face. (2) California test: see whether there is an ambiguity, given the context of the transaction.

Trade usage: Commonly accepted interpretations within the trade will be used to interpret ambiguous contract terms. (Course of performance and course of dealing will also be permitted for this purpose.) No • Frigaliment Importing Co., Ltd. v. B.N.S. International Sales Corp.: Defendant contracted to sell “chicken” to Plaintiff and sent stewing chickens. Plaintiff contends that the word “chicken” means broiler chickens and frying chickens, but not stewing chickens. Plaintiff failed to establish that “chicken” meant only broilers and fryers.

Is there a written The PER doesn’t apply contract? to modifications. PER doesn’t apply if one alleges the PER doesn’t apply. agreement isn’t valid—e.g., fraud, mistake, or showing that no duties Is a party trying to No No arose due to a condition precedent. Is the writing “integrated” Yes introduce evidence Is the written (i.e., a final expression)? No to ADD a term to the agreement valid? written agreement? Yes Yes Is the term that a party wants to add No from before the written contract was created, or oral and at the same time Yes the written contract was created? Yes

Complete Partial Is the integration complete or partial? Use a few approaches: • Williston approach: look at the writing itself (the “four corners”) to see if writing is complete. If there is a complete integration, If there is a partial integration, • Corbin approach: admit evidence of prior negotiations no terms will be admitted into consistent additional terms are to determine whether writing is complete. evidence. admitted. Rest. 216. No • Contract is a partial integration (default) unless parties contradictory terms. Rest. 215. intended writing to be a complete integration. UCC 2-202. Performance, Breach, & Discharge

Common law: one must substantially perform one’s duties in order for the other Excusing performance and conditions: A party is excused from performing if the other party party’s duty to arise. If there is a material breach, there is no substantial performance. breaches. An occurs when a party unequivocally breaches. Generally, if this • Jacob & Youngs Inc. v. Kent: Plaintiffs contracted with builder to construct a house; occurs, the other party can sue immediately, suspend performance and wait to sue, treat the Plaintiffs demanded the builder use “Reading” pipe. Builder did not. Court held that contract as discharged, or urge the other party to perform. UCC 2-610. A prospective inability to builder substantially performed because the builder used a pipe of the same value; perform is when a party has reasonable grounds for insecurity that the other will not perform. thus, buyers had to pay. The insecure party can demand adequate assurances that performance will take place. UCC 2-609. Exception: Express condition (e.g., “I will buy it if I like it” or “I will buy it if Note that conditions can also be waived. An election waiver (after condition should have occurred) I can get a 10% interest rate”). These must be complied with exactly. cannot be retracted. An waiver (before condition should have occurred) may be retracted. Tip: courts find that most conditions are “constructive” and substantial Discharging duties: A duty can be discharged by: performance is enough. Occurrence of a condition subsequent: this is a condition that cuts off a duty. (E.g., “I will paint UCC: Seller must provide perfect tender of the goods (or buyer can reject the the house until it starts to rain.” The rain is a condition subsequent that cuts off the duty to paint goods). UCC 2-601. Rejection must be timely and buyer must notify seller. UCC 2-602. the house.) If seller does not provide perfect tender and buyer rejects the goods, seller only has an Agreement: examples include (a new party steps into the shoes of an existing party), automatic right to cure if (1) there is time left to perform under the contract, or (2) seller modification, release, (the parties agree to new or different reasonably believed that buyer would accept the nonconforming goods with or without consideration), and rescission (the contract is undone). a money allowance such as a discount (e.g., seller sent better goods). UCC 2-508. o Waiver vs. modification: If the parties agree to change the terms, it is a modification Exception: Installment contract. Buyer may reject an installment if there is a (requires new consideration). If one party acts contradictory to the terms and the “substantial impairment” and seller cannot cure the installment. UCC 2-612. other party does not object, it might be a waiver. Exception: Divisible contract. If the contract is divisible (identifiable portions : The primary purpose of the contract known by both parties at the of performance to which price may be apportioned), seller may collect for the time of contracting is substantially frustrated by an unforeseeable event that occurred after portions that are performed. Gill v. Johnstown Lumber Co. the contract was entered into. Krell v. Henry: Plaintiff rented apartment to watch coronation Note on revocation: If buyer accepts goods, he may not reject them. However, proceedings. The king got sick and coronation was postponed. The purpose of the contract he may later revoke his acceptance. Revocation is a higher standard than rejection was frustrated. as it requires showing that the defect substantially impairs the value of the goods to : An event that renders performance impossible occurs after the contract was made, him, among other things. UCC 2-608. it was not reasonably foreseeable at the time of the contract, the nonoccurrence was a basic assumption of the parties, neither party is at fault, and neither party bears the risk. Rest. 261. Remedies

• General rule: The damaged party recovers . This is the loss of value of • Equitable remedies the breaching party’s performance plus incidental damages plus consequential damages minus is not usually available unless the goods are unique or if it is a land any expenses saved as a result of the breach. Mitigation of damages is required. contract. UCC 2-716. • Incidental damages are those related to avoiding the loss from the breach (e.g., storing goods An injunction is an equitable remedy that tells a party to do or not do something. after a breach). UCC 2-715(1). Rescission is undoing the contract when the contract is void or voidable or because it is • Consequential damages: those foreseen at the time the contract is entered into. UCC 2-715(2). impossible to perform. • UCC formulas: Buyer’s remedies: UCC 2-711. Seller’s remedies: UCC 2-703. Reformation is a remedy either party may seek when the contract does not reflect the terms Seller breaches and buyer has goods: Buyer gets value of goods as contracted for to which the parties agreed. minus value of goods as delivered plus incidental and consequential damages. UCC 2-714. • clauses are enforced if the damages are difficult to estimate at the time of Seller breaches and seller has goods: Buyer gets the difference between the market price the contract and a reasonable forecast of damages. Penalties are not permitted under contract law. (or replacement price: UCC 2-712) and contract price plus incidental and consequential Dave Gustafson & Co. v. State. damages minus expenses saved. UCC 2-713. • Restitution means the plaintiff recovers the value of the benefit conferred. This remedy may be Buyer breaches and buyer has goods: Seller gets the contract price. UCC 2-708. sought when the contract is breached, when it is unenforceable, or when there is no contract. Buyer breaches and seller has goods: Seller gets the difference between the contract price Restitution is granted in contracts that are implied in law (i.e., quasi-contracts), which arise and market price (or resale price, see UCC 2-708) plus incidental damages minus expenses when the plaintiff has conferred a benefit on the defendant, the plaintiff reasonably expected to be saved. UCC 2-706. paid, and the defendant would be unjustly enriched otherwise. : seller gets lost profits plus incidentals. © JD Advising, Inc. WWW.JDadvising.com