Law Exam 2

Elements of a Contract

A contract is a legally enforceable agreement. For a contract to be enforceable, seven key characteristics must be present. 1. Offer 2. Acceptance 3. Consideration 4. Legality 5. Capacity 6. Consent 7. Writing

Unliquidated Debt

A debt is unliquidated for either of two reasons: 1. The parties dispute whether any money is owed, or 2. The parties agree that some money is owed but dispute how much. When a debt is unliquidated for either reason, the parties may enter into a binding agreement to settle for less than what the creditor demands.

Forbearance

A forbearance is, in essence, the opposite of an act. A person forbears if he agrees not to do something he had a legal right to do.

Liquidated Debt

A liquidated debt is one in which there is no dispute about the amount owed. A loan is a typical example. (In cases of liquidated debt, if the creditor agrees to take less than the full amount as full payment, her agreement is not binding.)

Restitution

A mentally infirm party who seeks to void a contract must make restitution. If a party succeeds with a claim of mental impairment, the court will normally void the contract but will require the impaired party to give back whatever she got.

Timing of Disaffirmance

A minor may disaffirm a contract anytime before she reaches age 18. She also may disaffirm within a reasonable time after turning 18.

Rescind

A minor may go further—he can undo a contract that has already been completed by filing a suit to rescind the contract; that is, to have a court formally cancel it.

Restitution

A minor who disaffirms a contract must return the consideration he has received, to the extent he is able. Restoring the other party to its original position is called restitution.

Disaffirm

A minor who wishes to escape from a contract generally may disaffirm it; that is, he may notify the other party that he refuses to be bound by the agreement.

Uniform Commercial Code (UCC Article 2)

For our purposes in studying contracts, the most important part of the Code is Article 2, which governs the sale of goods. "Goods" means anything movable, except for money, securities, and certain legal rights.

Mistake of Value

Here is one case in which it pays to know less. Suppose that Fiona the flea market vendor sold the nineteenth-century masterpiece for $100 to Marguerite, a financial analyst with no inkling of its real worth. Both Fiona and Marguerite shared the same mistake in their estimate of the painting's market value. Sadly for Fiona, Marguerite will reap the benefit of her bargain, because a mistaken value alone is not enough to take back a deal.

Plaintiff's Remedies for Fraud

In the case of fraud, the injured party generally has a choice of rescinding the contract or suing for damages or, in some cases, doing both. The contract is voidable, which means that injured party is not forced to rescind the deal but may if he wants. Fraud permits the injured party to cancel. Alternatively, the injured party can sue for damages—the difference between what the contract promised and what it delivered.

Reality of Consent

In this section, we look at four claims that parties make in an effort to rescind a contract based on lack of valid consent: fraud, mistake, duress, and undue influence.

Conscious Uncertainty

No rescission is permitted where one of the parties knows he is taking on a risk; that is, he realizes there is uncertainty about the quality of the thing being exchanged. Rufus offers 10 acres of mountainous land to Priscilla. "I can't promise you anything about this land," he says, "but they've found gold on every adjoining parcel." Priscilla, eager for gold, buys the land, digs long and hard, and discovers—mud. She may not rescind the contract. She understood the risk she was assuming, and there was no mutual mistake.

Special Problem: Silence (omission)

Nondisclosure of a fact amounts to misrepresentation in these four cases: 1. where disclosure is necessary to correct a previous assertion, 2. where disclosure would correct a basic mistaken assumption that the other party is relying on, 3. where disclosure would correct the other party's mistaken understanding about a writing, or 4. where there is a relationship of trust between the two parties.

Reasonable Certainty

The written document must be clear and complete (not vague and incomplete).

CONSIDERATION

There are two basic rules of consideration: --Value: Both parties must get something of measureable value from the contract. --Bargained for Exchange: The two parties must have bargained for whatever was exchanged.

Exception: Different Performance

There is one important exception to this rule. If the debtor offers a different performance to settle the liquidated debt, and the creditor agrees to take it as full settlement, the agreement is binding.

Duress

True consent is also lacking when one party agrees to a contract under duress. If one party makes an improper threat that causes the victim to enter into a contract, and the victim had no reasonable alternative, the contract is voidable.

Two Basic Elements of Consideration

Value Bargained-for Exchange

Value

Value Consideration requires legal benefit to the promisor or legal detriment to the promisee. Legal benefit means receiving something of measureable value. That thing can be money, groceries, insurance, a promise not to sue, or anything else of value to the promisee.

Exception: Additional Work

When a party agrees to do something above and beyond what he is obligated to do, his promise is generally valid consideration.

Unconscionability

When enforcing the contract would result in exploitation or unfairness, contracts are voidable.

Intoxication

When one party is so intoxicated that he cannot understand the nature and consequences of the transaction, the contract is voidable.

Promise to Pay the Debt of Another

When one person agrees to pay the debt of another as a favor to that debtor, it is called a collateral promise, and it must be in writing to be enforceable.

Exception: The Leading Object Rule

When the promisor guarantees to pay the debt of another and the leading object of the promise is some benefit to the promisor himself, then the contract will be enforceable even if unwritten. In other words, if the promisor makes the guarantee not as a favor to the debtor, but primarily out of self-interest, the Statute of Frauds does not apply.

Exception: Unforeseen Circumstances

When unforeseen circumstances cause a party to make a promise regarding an unfinished project, that promise is generally valid consideration.

Undue Influence

Where one party has used undue influence, the contract is voidable at the option of the injured party. There are two elements to the plaintiff's case. To prove undue influence, the injured party must demonstrate: --A relationship between the two parties either of trust or of domination, and --Improper persuasion by the stronger party.

The Common Law Statute of Frauds: What the Writing Must Contain

--Must be signed by the defendant, and --Must state with reasonable certainty the name of each party, the subject matter of the agreement, and all of the essential terms and promises.

Past Consideration

A completed act cannot be the basis for consideration.

Agreements for an Interest in Land

A contract for the sale of any interest in land must be in writing to be enforceable. Notice the phrase "interest in land." This means any legal right regarding land.

Mutual Mistake

A mutual mistake occurs when both contracting parties share the same mistake. If the contract is based on a fundamental factual error by both parties, the contract is voidable by either one.

Exception: Necessaries

A necessary is something essential to a minor's life and welfare. Food, clothing, housing, and medical care are necessaries. In some circumstances, courts have considered less essential items, like legal advice, automobiles, and tuition, to be necessaries. On a contract for necessaries, a minor must pay for the value of the benefit received. In other words, the minor may still disaffirm the contract and return whatever is unused. But he is liable to pay for whatever benefit he obtained from the goods while he had them.

Not Duty to Investigate

A party to a contract has no obligation to investigate the other party's factual statements.

Mentally Impaired Persons

A person suffers from a mental impairment if, by reason of mental illness or defect, he is unable to understand the nature and consequences of the transaction. The mental impairment can be due to some mental illness, such as schizophrenia, or to mental retardation, brain injury, senility, or any other cause that renders the person unable to understand the nature and consequences of the contract. A party suffering a mental impairment usually creates only a voidable contract. The impaired person has the right to disaffirm the contract just as a minor does. But again, the contract is voidable, not void. The mentally impaired party generally has the right to full performance if she wishes.

Promise Made in Consideration of Marriage

A promise made in consideration of marriage must be in writing to be enforceable.

Unilateral Mistake

A unilateral mistake occurs when one party enters a contract under a mistaken assumption; the other is not mistaken. It is not easy for the mistaken party to rescind a contract—the more astute party may simply have made a better bargain. So, to rescind a contract, a mistaken party must show something more than just a regrettable deal. To rescind for unilateral mistake, the mistaken party must demonstrate that he entered the contract because of a basic factual error and that: --the nonmistaken party knew or had reason to know of the error, or --the mistake is mathematical or mechanical alone, or --enforcing the contract would be unconscionable.

Bargained-for Exchange

According to Supreme Court Justice Oliver Wendell Holmes, Jr., the essence of consideration is that "the promise must induce the detriment and the detriment must induce the promise." Consideration involves reciprocity. The parties must have bargained for whatever was exchanged and struck a deal: "If you do this, I'll do that."

What is Value?

Act, Forbearance, Promise to Act or Forbear.

Promise Made by an Executor of an Estate

An executor's promise to use her own funds to pay a debt of the deceased must be in writing to be enforceable.

Fraud

An injured person must show the following: 1. The defendant knew that his statement was false, or that he made the statement recklessly and without knowledge of whether it was false; 2. The false statement was material; and 3. The injured party justifiably relied on the statement.

Illusory Promises

Annabel calls Jim and says, "I'll sell you my bicycle for 325 bucks. Interested?" Jim says, "I'll look at it tonight in the bike rack. If I like what I see, I'll pay you in the morning." At sunrise, Jim shows up with the $325, but Annabel refuses to sell. Can Jim enforce their deal? No. He said he would buy the bicycle if he liked it, keeping for himself the power to get out of the agreement for any reason at all. He is not committing himself to do anything, and the law considers his promise illusory—that is, not really a promise at all. An illusory promise is not consideration. Because he has given no consideration, there is no contract, and neither party can enforce the deal.

Minors

Because a minor lacks legal capacity, she normally can create only a voidable contract. A voidable contract may be canceled by the party who lacks capacity.

Bilateral Contract

Both parties make a promise.

VOIDABLE CONTRACT

Capacity and consent are different contract issues that can lead to the same result: a voidable contract. A voidable agreement is one that can be canceled by a party who lacks legal capacity or who did not give true consent.

Capacity

Capacity is the legal ability to enter into a contract.

Consideration

Consideration is the inducement, price, or promise that causes a person to enter into a contract and forms the basis for the parties' exchange.

Agreements That Cannot Be Performed within One Year

Contracts that cannot be performed within one year are unenforceable unless they are in writing. This one-year period begins on the date the parties make the agreement. The critical word here is "cannot." If a contract could possibly be completed within one year, it need not be in writing.

Electronic Contracts and Signatures

E-signatures are valid in all 50 states. Almost every state has adopted the Uniform Electronic Transactions Act (UETA), which makes electronic contracts and signatures as enforceable as those on paper. In other words, the normal rules of contract formation apply, and neither party can avoid a deal merely because it originated electronically. A federal statute, the Electronic Signatures in Global and National Commerce Act (E-SIGN) extends UETA's principles to interstate and foreign commerce.

Exception: Promissory Estoppel

If a promisor makes an oral promise that should reasonably cause the promisee to rely on it, and the promisee does rely, the promisee may be able to enforce the promise, despite the Statute of Frauds, if that is the only way to avoid injustice. This exception potentially applies to any contract that must be written, such as those for land, those that cannot be performed within one year, and so forth.

Innocent Misrepresentation

If all elements of fraud are present except the misrepresentation of fact was not made intentionally or recklessly, then innocent misrepresentation has occurred. So, if a person misstates a material fact and induces reliance, but he had good reason to believe that his statement was true, then he has not committed fraud. Most states allow rescission of a contract, but not damages, in such a case.

Preexisting Duty

If someone provides a service that she is already obligated to do, that act does not count as consideration.

Knowledge of the Error

If the nonmistaken party knows or has reason to know of the other party's error, courts will not allow him to profit by snapping it up.

Exception: Full Performance by the Seller

If the seller completely performs her side of a contract for an interest in land, a court is likely to enforce the agreement even if it was oral.

Three Consideration Exceptions

Illusory promises Preexisting duties Past consideration

Unilateral Contact

In a unilateral contract, one party makes a promise that the other party can accept only by actually doing something.

Economic Duress

In analyzing a claim of economic duress, courts look at these factors: --Acts that have no legitimate business purpose --Greatly unequal bargaining power --An unnaturally large gain for one party --Financial distress to one party

UCC §2-721 (sale of goods)

In fact, this last option—rescinding and still suing for damages—is available in all states when a contract is for the sale of goods. UCC §2-721 permits a party to rescind a contract and then sue for damages when fraud is committed.

Promissory Estoppel

In promissory estoppel cases, the defendant made a promise that the plaintiff relied on. Even when there is no contract, a plaintiff may use promissory estoppel to enforce the defendant's promise if he can show that: --The defendant made a promise knowing that the plaintiff would likely rely on it; --The plaintiff did rely on the promise; and --The only way to avoid injustice is to enforce the promise.

Quasi-Contracts

In quasi-contract cases, the defendant received a benefit from the plaintiff. Even when there is no contract, a court may use quasi-contract to compensate a plaintiff who can show that: --The plaintiff gave some benefit to the defendant; --The plaintiff reasonably expected to be paid for the benefit and the defendant knew this; and --The defendant would be unjustly enriched if he did not pay.

Exception: Parties Agree in Advance

Past consideration is valid consideration when the parties agree that it will be in advance.

Exception: Promissory Estoppel

Promissory estoppel is a theory courts use to enforce promises that are not contracts. It applies when a defendant makes a promise, which the plaintiff reasonably relied on, and enforcing that promise is the only way to avoid injustice.

Ratification

Ratification is made by any words or action indicating an intention to be bound by the contract.

Prediction Error

Sherwood and Walker were both wrong about Rose's reproductive ability, and the error was basic enough to cause a tenfold difference in price. Walker, the injured party, was entitled to rescind the contract. Note that the error must be factual. Suppose Walker sold Rose thinking that the price of beef was going to drop, when in fact the price rose 60 percent in five months. That would be simply a prediction that proved wrong, and Walker would have no right to rescind.

Moral Consideration

Some promises should not be broken. No one wants to live in a society where donors to charity go back on their word or promises to widows and orphans are ignored. These are commitments whose obligation is moral, not necessarily legal, in nature. Under some circumstances, courts will uphold agreements with "moral consideration."

Exception: Misrepresentation of Age

States have been troubled by this problem, and there is no clear rule. A few states will still permit Dan to disaffirm the contract entirely. The theory is that a minor must be saved from his own poor judgment, including his foolish lie. Many states, though, will prohibit Dan from disaffirming the contract. They take the reasonable position that the law was intended to protect childhood innocence, not calculated deceit.

Accord and Satisfaction

Such a compromise will be enforced if: --The debt is unliquidated; --The parties agree that the creditor will accept as full payment a sum less than she has claimed; and --The debtor pays the amount agreed upon. This agreement is called an accord and satisfaction. The accord is the agreement to settle for less than the creditor claims. The satisfaction is the actual payment of that compromised sum. An accord and satisfaction is valid consideration to support the creditor's agreement to drop all claims. Each party is giving up something: the creditor gives up her full claim, and the debtor gives up his assertion that he owed little or nothing.

The Statute of Frauds

The Statute of Frauds: A plaintiff may not enforce any of the following agreements unless the agreement, or some memorandum of it, is in writing and signed by the defendant. The agreements that must be in writing are those: --For any interest in land; --That cannot be performed within one year; --To pay the debt of another; --Made by an executor of an estate to pay the debt of the estate; --Made in consideration of marriage; and --For the sale of goods of $500 or more. Once a contract is fully executed, it makes no difference that it was unwritten.

Exception: Part Performance by the Buyer

The buyer of land may be able to enforce an oral contract if she paid part of the purchase price and either entered upon the land or made improvements to it.

Element Three: Justifiable Reliance

The injured party also must show that she actually did rely on the false statement and that her reliance was reasonable. The reliance must be justifiable—that is, reasonable.

Element Two: Materiality

The injured party must demonstrate that the statement was material, or important. A minor misstatement does not meet this second element of fraud. Was the misstatement likely to influence the decision of the misled party significantly? If so, it was material.

Element One: Intentional or Reckless Misrepresentation of Fact

The injured party must show a false statement of fact. Opinions and "puffery" do not amount to fraud. An opinion is not a statement of fact.

Impairment Exception: "adjudicated incompetent"

The law creates an exception: If a person has been adjudicated incompetent, then all of his future agreements are void. "Adjudicated incompetent" means that a judge has made a formal finding that a person is mentally incompetent and has assigned the person a guardian by court order.

What Is a Bargained-for Exchange?

The parties must bargain for the consideration. Something is Bargained for if it is sought by the promisor and given by the promisee in exchange for their respective promises.