Chapter 6: Contracts

equitable remedy

Sometimes when all elements of the contract are not present, the court will enforce the promise through an... to avoid a perceived injustice that would occur if the contract failed based on a formation defect.

strict performance

The contract must expressly require strict performance and the circumstances under which such a high standard is required must be reasonable.

delegation

The duties imposed on a party may be transferred to another party

assignment

The rights conveyed by the contract may be transferred to another party by

personal satisfaction

This means that the performance under the contract is scrutinized subjectively, either by one party to the contract or by a third-party beneficiary specified in the contract. If the subject of the contract is something for which approval is dependent on someone's subjective opinion, like personal taste, then assessment can be made on a subjective standard if this standard is clearly specified in the contract. This standard is unlike the substantial performance standard, which requires an objective assessment based on the reasonable person standard.

breach of the contract

When a party fails to perform under the terms of the contract without a legally justifiable reason

Fraud

a closely related concept, and it means that one party has used deception to acquire money or property.

Commercial impracticability

a defense that can be used when fulfilling a contract has become extraordinarily difficult or unfair for one party. Impracticability can arise when truly unforeseen events such as earthquakes, tsunamis, or civil riots dramatically affect the ability of a party to perform. These acts of God are known as events of force majeure and can be listed as excuses to performance in the contract. One should be careful if he or she sees a "best efforts" clause that binds a party to use their best efforts in performance—these clauses typically nullify any impracticability or force majeure application.

Undue influence

a defense that can be used when one party ceases to be able to exercise his or her free will due to the superior power and influence exerted over that party by the other. (Example: an unscrupulous person enters into an elderly person's life, exerts influence over the elderly so that she can no longer exercise free will, and the elderly person signs a contract transferring all her wealth to the other person.)

Impossibility

a defense that can be used when performing the contract has become truly impossible (Example: if the subject matter of the contract is destroyed)

Unconscionability

a defense used when the contract contains markedly unfair terms against the party with less bargaining power or sophistication than the party who created the terms and induced the other party to sign it. (Example: GM offers a car mechanic $100 for an engine he invented that runs on sea water)

contract

a legally enforceable promise: It can be a promise to do something (such as pay for a product) or a promise not to do something (such as a promise not to play your music too loud late at night). It doesn't have to be a formal agreement that you solemnly enter into by signing a document.

Infancy doctrine

a minor who enters into a contract with a party who has capacity may void the contract, but the other party may not. This means that any contract with a minor is voidable by the minor under the

Bilateral contract

a promise for a promise

Unilateral contract

a promise for an action

service contract

a service to build a house

Compensatory damages

a sum of money awarded in a civil action by a court to indemnify a person for the particular loss, detriment, or injury suffered as a result of the unlawful conduct of another.

integrated

a written contract contains the entire expression of the parties' agreement

acceleration clause

accelerates all payments due under the contract on breach. This allows the injured party—in this case, the landlord—to sue for all damages due for unpaid rent under that contract at once, rather than having to bring a new suit each month to seek monthly unpaid rent

liquidated damages clause

allows parties to set the amount of damages in the event of breach. Agreeing to a damage amount before any breach occurs can save money and time spent litigating. Providing that the liquidated damages clause does not look like a penalty, the clause will be valid and enforced by a court that hears a dispute arising under the contract.

exculpatory clause

an express limitation on potential or actual liability arising under the subject matter of the contract. These clauses are often employed when risk of injury exists. However, despite the existence of an exculpatory clause, liability will not be limited when the party who would benefit from the limitation on liability acted with gross negligence, committed an intentional tort, or possessed greatly unequal bargaining power, or if the limitation on liability violates public policy.

Consequential damages

are those that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages in a lawsuit, they must be a foreseeable result of an act.(In a contractual situation, consequential damages resulting from the seller's breach include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by obtaining a substitute.)

A noncompete clause

attempts to restrict competition for a specified period of time, within a certain geographic region, and for specified activities.

Economic duress

defense to contract that can be exercised when one party had no other reasonable alternative but to enter into a contract due to economic threat or pressure.

novation

essentially a new contract that transfers all rights and duties to the new party to the contract and releases the previous party from any further obligation arising from the original contract.

defenses

formation problems, lack of capacity, illegality of subject matter, impossibility, duress, unconscionability, undue influence, violation of the Statute of Frauds requirement that certain types of contracts must be in writing, exceeding the statute of limitations, mistake, misrepresentation, fraud, commercial impracticability, and frustration of purpose.

Common law

governs contracts for services (such as working for a company) as well as contracts not otherwise governed by the UCC.

UCC Article 2

governs the sale of goods, which is defined by §2-105 and includes things that are moveable, but not money or securities. It does not include land or houses. also governs contracts between merchants. §2-104 defines a merchant as a person who deals in goods or holds himself out as having special knowledge or skill regarding the practices or goods that are the subject of the transaction. (Because contract law is a state law issue, each state has different rules governing contracts. However, each state has adopted some form of the UCC.)

material breach

in a service contract is when a party has not substantially performed under the terms of the contract.

Promissory estoppel

is another equitable remedy. It is imposed on parties when one party detrimentally relied on another's promise, and to avoid injustice, the enforcement of the promise is required. Like quasi-contract, when promissory estoppel is used, there is some formation problem with the contract; so, technically speaking, no contract exists.

Duress

means that the party had no other reasonable alternative but to enter into the contract. The party was coerced into entering into the agreement.

restriction on assignment clause

necessary to prevent one from assigning his or her rights under the lease—one's rights to inhabit the premises—to another party. In delegation and in assignment, the original contracting party is not "off the hook" if it transfers its duties or rights to another party. The way to excuse oneself from liability is to form a three-way novation with the original party and the new party, thereby excusing the exiting party from future liability arising under the contract.

Mistake

rarely a successful defense to contract, but it is a defense nonetheless.

Specific performance

required under certain types of contracts: - contracts for the sale of land; - not an appropriate remedy for service contracts, given the prohibition against involuntary servitude in the Thirteenth Amendment to the U.S. Constitution.

Statute of Frauds

requires certain contracts to be in writing and signed by the defendant to be enforceable against the defendant. Contracts for any interest in land, in consideration of marriage, to pay the debts of another, that cannot be performed within one year, and contracts for the sale of goods with a price of five hundred dollars or more are all examples of contracts that are required to be in writing to be enforceable according to the Statute of Frauds. If those types of contracts are not in writing, that can be used as a defense to performance.

Performance

simply means completing the legal duties imposed by the terms of the contract.

Legal purpose

subject matter of a contract must have lawful purpose consistent with public policy. If the subject matter of a contract does not have a legal purpose, contract formation will fail.

parol evidence rule

that any statements or actions that are not captured within the four corners of the contract will not be used to interpret the meaning of the contract. The parol evidence rule doesn't invalidate contracts—it prohibits the introduction of verbal testimony in a trial that would seek to vary or modify the terms of a written contract.

substantial performance

the performing party acted in good faith and conveyed enough benefit of the contract to the other party so that the other party can use the benefit for its intended purpose, and the defects arising under the contract may be remedied by money damages.

Non-compete agreement

- An agreement not to compete with your employer after your employment is terminated. - If part of the original offer of employment, the non-compete agreement is supported by consideration. - if not part of the original offer, the employer must offer additional consideration.

invitation to bargain

- a request for people to make offers - places the power of acceptance on the merchant, who is free to reject offers or to choose to whom he sells. - advertisment

illusory promise

- a statement that looks likes a promise but is actually only an illusion of a promise because it is conditional or lacks a firm commitment. - does not constitute consideration because there is no legal detriment to the promisor - a legal detriment is a burden or obligation that is legally enforceable. - the other party must be able to rely on the promise for it to constitute valid consideration.

Capacity

- legal ability to enter into a contract.

Mirror image rule

- to be valid the acceptance must be precisely the same as the offer. If the acceptance is not the same, there is no acceptance, and no contract is formed.

the peppercorn rule

: consideration either exists or it doesn't—courts do not inquire into whether there has been enough consideration to support a contract.

Lack of Capacity

: when people lack the mental ability to understand

Uniform Commercial Code (UCC)

Article 2 governs contracts between merchants and the sale of goods. When analyzing a contracts issue, identification of the type of law that governs the contract should be addressed first. This is because you cannot know which rule applies unless you know which type of law is applicable.

Bankruptcy protection

Bankruptcy is a defense to performance of contract for debtors who file for bankruptcy protection. - When that party is required to pay a debt that was incurred before the bankruptcy was filed, that duty is suspended temporarily or permanently when the bankruptcy is filed through the court's automatic stay. - Under federal bankruptcy law many kinds of debts can be discharged in bankruptcy, with a few notable exceptions such as student loans.

option

Consideration is required for an... -the opportunity to buy at a future date

Legal purpose

For a contract to be valid, the subject matter of the contract must be for a legal purpose. (In all states, contracts that charge a higher than prescribed amount of interest on loans are not enforceable (this is called usury)). This requirement shows that a willing seller and a willing buyer are not enough to form a contract

counteroffer

If instead of accepting the offer, the offeree changes the terms

Illegality

If the subject matter of a contract or the terms of the contract are illegal, then the contract may be void at the outset, or it may become void if the subject matter or the terms of the contract become illegal after the contract is formed. (Example: a contract for the production of illegal drugs)

duty to mitigate

In any breach of contract case, the injured party has a...his damages. This means that one must avoid damages by making reasonable efforts to do so.

statute of limitations

Is an affirmative defense that can be raised by a defendant to argue that the complaint is being brought too late, by law, to do anything about it. This means that if a dispute arises under a contract, then the plaintiff must bring a complaint concerning that dispute within a certain time period. Every state has different statutes of limitations for different types of disputes. (Contracts statutes of limitations range from three to ten years.)

mandatory arbitration clause

very common in consumer contracts and employment contracts. Mandatory arbitration clauses frequently foreclose any possibility of appealing arbitration awards in court. As we discussed in Chapter 4, the Federal Arbitration Act (FAA) requires parties to engage in arbitration when those parties have entered into legally binding contracts with a mandatory arbitration clause, providing the subject of those contracts involves commerce. Supreme Court held that the FAA encompasses transactions within the broadest permissible exercise of congressional power under the Commerce Clause. This means that the FAA requires mandatory arbitration clauses to be enforceable for virtually any transaction involving interstate commerce

Damages

when a legally enforceable contract is broken the injured party can seek damages which usually means that the party who breaches the contract must pay the injured party an amount that would make that party whole again.

Misrepresentation

when a party makes a false statement that induces the other party to enter into the contract and can be innocent (the person making the false statement did not know it was false).

Revocation

when an offeree withdraws an offer before the offeree accepts. - time limitation for acceptance - reasonable lapse of time

mutual mistake

when both parties of a contract are mistaken as to the terms. Each believe they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found.

Quasi-contract

when one party will receive a benefit from the other unjustly (unjust enrichment), and the party who tendered the benefit reasonably expected to be paid for it. The party who received the benefit knew that the other party reasonably expected to be paid. The damages awarded in cases where the court imposes the equitable remedy of this are called quantum meruit, which means "as much as is deserved."

Frustration of purpose

when the contract has become essentially worthless to one party, though the event giving rise to that state was nonexistent or unknown to both parties to the contract at formation

minor breach

when the party has substantially performed but has not strictly performed.

unilateral mistake

where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake.

quantum meruit

"as much as is deserved."

boilerplate language

Merchants frequently use... in their individual purchase orders and invoices.

battle of the forms

Not every merchant's contract will contain the same language as those of other merchants. This can lead to discrepancies between terms that would be fatal in common-law contract formation

The Offer

creates the power of acceptance; and includes the agreement's essential elements, which must be definite and certain. (A musing or contemplation to sell something is not an offer because it does not create the power of acceptance).

The elements of common law contract formation

offer + acceptance + consideration = contract

consideration

there must be a bargained-for exchange of acts of promises, and both parties must incur new legal detriment or obligations as a result of the contract.

Complete performance

to full and perfect performance of the promises, obligations, and duties contained in a contract. After complete performance, parties are subsequently discharged from further duties arising under that contract.