BLAW EXAM 2

Bilateral (Mutual) Mistakes of Fact

A bilateral mistake is a "mutual misunderstanding concerning a basic assumption on which the contract was made."Note that, as with unilateral mistakes, the mistake must be about a material fact. Either Party Can Rescind the Contract-When both parties are mistaken about the same material fact, the contract can be rescinded by either party. When the Parties Reasonably Interpret a Term Differently-A word or term in a contract may be subject to more than one reasonable interpretation. If the par- ties to the contract attach materially different meanings to the term, a court may allow the contract to be rescinded because there has been no true "meeting of the minds."

Damages

A breach of contract entitles the nonbreaching party to sue for monetary damages. In contract law, damages compensate the nonbreaching party for the loss of the bargain (whereas tort law damages compensate for harm suffered as a result of another's wrongful act). Often, courts say that innocent parties are to be placed in the position they would have occupied had the contract been fully performed. Realize at the outset, though, that collecting damages through a court judgment requires litigation, which can be expensive and time consuming. Also keep in mind that court judgments are often difficult to enforce, particularly if the breaching party does not have sufficient assets to pay the damages awarded. For these reasons, most parties settle their lawsuits for damages (or other remedies) prior to trial.

Material Breach of Contract

A breach of contract is the nonperformance of a contractual duty. The breach is material when performance is not at least substantial. As mentioned earlier, when there is a material breach, the nonbreaching party is excused from the performance of contractual duties. That party can also sue the breaching party for damages resulting from the breach.

Charitable Subscriptions

A charitable subscription is a promise to make a donation to a religious, educational, or charitable institution. Traditionally, such promises were unenforceable because they are not supported by legally sufficient consideration. A gift, after all, is the opposite of bargained-for consideration. The modern view, however, is to make exceptions to the general rule by applying the doctrine of promissory estoppel.

Collateral Promises

A collateral promise, or secondary promise, is one that is ancillary (subsidiary) to a principal transaction or primary contractual relationship. In other words, a collateral promise is one made by a third party to assume the debts or obligations of a primary party to a contract if that party does not perform. Any collateral promise of this nature falls under the Statute of Frauds and therefore must be in writing to be enforceable. To understand this concept, it is important to distinguish between primary and secondary promises and obligations. A promise to pay another person's debt (or other obligation) that is not conditioned on the person's failure to pay (or perform) is a primary obligation. A promise to pay another's debt only if that party fails to pay is a secondary obligation. A contract in which a party assumes a primary obligation normally does not need to be in writing to be enforceable, whereas a contract assuming a secondary obligation does. An Exception—The "Main Purpose" Rule-An oral promise to answer for the debt of another is covered by the Statute of Frauds unless the guarantor's main purpose in incurring a secondary obligation is to secure a personal benefit. This type of contract need not be in writing. The assumption is that a court can infer from the circumstances of a particular case whether the "leading objective" of the guarantor was to secure a personal benefit. In this situation, the guarantor is, in effect, answering for (guaranteeing) her or his own debt.

Discharge by Settlement Agreement

A compromise, or settlement agreement, that arises out of a genuine dispute over the obligations under an existing contract will be recognized at law. The agreement will be substituted as a new contract and will either expressly or impliedly revoke and discharge the obligations under the prior contract. In contrast to a novation, a substituted agreement does not involve a third party. Rather, the two original parties to the contract form a different agreement to substitute for the original one.

Conditions Precedent

A condition that must be fulfilled before a party's performance can be required is called a condition precedent. The condition precedes the absolute duty to perform.

Contracts Involving Interests in Land

A contract calling for the sale of land is not enforceable unless it is in writing or evidenced by a written memorandum. Land is real property and includes all physical objects that are permanently attached to the soil, such as buildings, fences, trees, and the soil itself. The Statute of Frauds operates as a defense to the enforcement of an oral contract for the sale of land. The Statute of Frauds also requires written evidence of contracts for the transfer of other interests in land, such as mortgage agreements and leases. Similarly, an agreement that includes an option to purchase real property must be in writing for the option to be enforced. Generally, for a land sale contract to be enforceable under the Statute of Frauds, the contract must describe the property being transferred with sufficient certainty for it to be identified

Disaffirmance within a Reasonable Time

A contract can ordinarily be disaffirmed at any time during minority or for a reasonable period after the minor reaches the age of majority. What constitutes a "reasonable" time may vary, depending on the jurisdiction and to what extent the contract has been performed.

When the Contract Will Be Valid

A contract entered into by a mentally ill person (not previously declared incompetent) may be valid if the person had capacity at the time the contract was formed. Some people who are incompetent due to age or illness have lucid intervals—periods during which their intelligence, judgment, and will are temporarily restored. During such intervals, they will be considered to have legal capacity to enter into contracts.

What is a Contract?

A contract is "a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty." Put simply, a contract is an agreement that can be enforced in court. It is formed by two or more parties who agree to perform or to refrain from performing some act now or in the future. Generally, contract disputes arise when there is a promise of future performance. If the contractual promise is not fulfilled, the party who made it is subject to the sanctions of a court. That party may be required to pay damages for failing to perform the contractual promise. In a few instances, the party may be required to perform the promised act.

Third-Party Rights

A contract is a private agreement between the parties who have entered into it, and traditionally these parties alone have rights and liabilities under the contract. This principle is referred to as privity of a Contract. A third-party, one who is not a direct party to a particular con tract—normally does not have rights under that contract. There are exceptions to the rule of privity of contract. For instance, privity of contract is not required to recover damages under product liability laws. Hence, a person injured by a defective products can still recover damages even though she or he was not the buyer of the product.

Contract Provisions Limiting Remedies

A contract may include provisions stating that no dam- ages can be recovered for certain types of breaches or that damages will be limited to a maximum amount. A con- tract may also provide that the only remedy for breach is replacement, repair, or refund of the purchase price. Finally, a contract may provide that one party can seek injunctive relief if the other party breaches the contract. Provisions stating that no damages can be recovered are called exculpatory clauses. Provisions that affect the avail- ability of certain remedies are called limitation-of-liability clauses.

The One-Year Rule

A contract that cannot, by its own terms, be performed within one year from the day after the contract is formed must be in writing to be enforceable.2 The reason for this rule is that the parties' memory of their contract's terms is not likely to be reliable for longer than a year. Disputes are unlikely to occur until some time after the contracts are made, and if the terms have not been put into writing, resolving such disputes is difficult. The one-year period begins to run the day after the contract is made The test for determining whether an oral contract is enforceable under the one-year rule is whether performance is possible within one year. It does not matter whether the agreement is likely to be per- formed during that period. When performance of a contract is objectively impossible during the one-year period, the contract must be in writing (or a record) to be enforceable.

Writing Requirement

A contract that is otherwise valid may still be unenforceable if it is not in the proper form. Certain types of contracts are required to be in writing or evidenced by a memorandum or an electronic record. An agreement subject to the writing requirement does not necessarily have to be written on paper. An exchange of e-mails that evidences the parties' contract can be sufficient, provided that they are "signed," or agreed to, by the party against whom enforcement is sought.

Severable, or Divisible, Contracts

A contract that is severable, or divisible, consists of distinct parts that can be performed separately, with separate consideration provided for each part. With an indivisible contract, in contrast, complete performance by each party is essential, even if the contract contains a number of seemingly separate provisions. If a contract is divisible into legal and illegal portions, a court may enforce the legal portion but not the illegal one, so long as the illegal portion does not affect the essence of the bargain. This approach is consistent with the courts' basic policy of enforcing the legal intentions of the contracting parties whenever possible.

Discharge by Novation

A contractual obligation may also be discharged through novation. A novation occurs when both of the parties to a contract agree to substitute a third party for one of the original parties. The requirements of a novation are as follows: 1)A previous valid obligation. 2)An agreement by all parties to a new contract. 3)The extinguishing of the old obligation (discharge of the prior party). 4)A new contract that is valid A novation expressly or impliedly revokes and dis- charges a prior contract. The parties involved may expressly state in the new contract that the old contract is now discharged. If the parties do not expressly discharge the old contract, it will be impliedly discharged if the new contract's terms are inconsistent with the old con- tract's terms. It is this immediate discharge of the prior contract that distinguishes a novation

Counteroffer

A counteroffer is a rejection of the original offer and the simultaneous making of a new offer At common law, the mirror image rule requires the offeree's acceptance to match the offeror's offer exactly—to mirror the offer. Any change in, or addition to, the terms of the original offer automatically terminates that offer and substitutes the counteroffer. The counteroffer, of course, need not be accepted, but if the original offeror does accept the terms of the counteroffer, a valid contract is created.

Unconscionable Contracts or Clauses

A court ordinarily does not look at the fairness or equity of a contract (or inquire into the adequacy of consideration). Persons are assumed to be reasonably intelligent, and the courts will not come to their aid just because they have made unwise or foolish bargains. In certain circumstances, however, bargains are so oppressive that the courts relieve innocent parties of part or all of their duties. Such bargains are deemed unconscionable because they are so unscrupulous or grossly unfair as to be "void of conscience." A contract can be unconscionable on either procedural or substantive grounds

Ambiguity

A court will consider a contract to be unclear, or ambiguous, in the following situations: 1. When the intent of the parties cannot be determined from the contract's language. 2. When the contract lacks a provision on a disputed term. 3. When a term is susceptible to more than one interpretation. 4. When there is uncertainty about a provision.

Liquidated Damages versus Penalties

A liquidated damages provision in a contract specifies that a certain dollar amount is to be paid in the event of a future default or breach of contract. (Liquidated means determined, settled, or fixed.) Liquidated damages differ from penalties. Like liquidated damages, a penalty specifies a certain amount to be paid in the event of a default or breach of contract. Unlike liquidated damages, it is designed to penalize the breaching party, not to make the innocent party whole. Liquidated damages provisions usually are enforceable. In contrast, if a court finds that a provision calls for a penalty, the agreement as to the amount will not be enforced. Recovery will be limited to actual damages. To determine if a particular provision is for liquidated damages or for a penalty, a court must answer two questions: 1)When the contract was entered into, was it apparent that damages would be difficult to estimate in the event of a breach? 2)Was the amount set as damages a reasonable estimate and not excessive? If the answers to both questions are yes, the provision normally will be enforced. If either answer is no, the provision usually will not be enforced.

Authorized Means of Acceptance.

A means of communicating acceptance can be expressly authorized by the offeror or impliedly authorized by the facts and circumstances of the situation. An acceptance sent by means not expressly or impliedly authorized normally is not effective until it is received by the offeror. When an offeror specifies how acceptance should be made (for instance, by overnight delivery), express authorization is said to exist. The contract is not formed unless the offeree uses that specified mode of acceptance. Moreover, both offeror and offeree are bound in contract the moment this means of acceptance is employed If the offeror does not expressly authorize a certain mode of acceptance, then acceptance can be made by any reasonable means. Courts look at the prevailing business usages and the surrounding circumstances to determine whether the mode of acceptance used was reasonable. Usually, the offeror's choice of a particular means in making the offer implies that the offeree can use the same or a faster means for acceptance. Thus, if the offer is made via Priority U.S. mail, it would be reasonable to accept the offer via Priority mail or by a faster method, such as overnight delivery.

What Must Be Contained in the Writing?

A memorandum or note evidencing an oral contract need only contain the essential terms of the contract, not every term. There must, of course, also be some indication that the parties voluntarily agreed to the terms. As mentioned, under the UCC, a writing evidencing a contract for the sale of goods need only state the quantity and be signed by the party against whom enforcement is sought. Under most state laws, the writing must also name the parties and identify the subject matter, the consideration, and the essential terms with reasonable certainty. In addition, contracts for the sale of land often are required to state the price and describe the property with sufficient clarity to allow them to be determined without reference to outside sources. Note that because only the party against whom enforcement is sought must have signed the writing, a contract may be enforceable by one of its parties but not by the other. For instance, if a person borrows funds to purchase a home but does not sign a loan contract, the lender cannot enforce the contract but the borrower probably can

Substantial Performance

A party who in good faith performs substantially all of the terms of a contract can enforce the contract against the other party under the doctrine of substantial performance. The basic requirements for performance to qualify as substantial performance are as follows: 1)The party must have performed in good faith. Intentional failure to comply with the contract terms is a breach of the contract. 2)The performance must not vary greatly from the performance promised in the contract. An omission, variance, or defect in performance is considered minor if it can easily be remedied by compensation (monetary damages). 3)The performance must create substantially the same benefits as those promised in the contract.

Bankruptcy

A proceeding in bankruptcy attempts to allocate the debtor's assets to the creditors in a fair and equitable fashion. Once the assets have been allocated, the debtor receives a discharge in bankruptcy. A discharge in bankruptcy ordinarily prevents the creditors from enforcing most of the debtor's contracts. Partial payment of a debt after discharge in bankruptcy will not revive the debt.

Unilateral Mistakes of Fact

A unilateral mistake is made by only one of the parties. In general, a unilateral mistake does not give the mis- taken party any right to relief from the contract. Nor- mally, the contract is enforceable. This general rule has at least two exceptions. The contract may not be enforceable if: 1)The other party to the contract knows or should have known that a mistake of fact was made. 2)The error was due to a substantial mathematical mis- take in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence. If, for instance, a contractor's bid was significantly low because he or she made a mistake in addition when totaling the estimated costs, any contract resulting from the bid normally may be rescinded. Of course, in both situations, the mistake must still involve some material fact.

Promises Made in Consideration of Marriage

A unilateral promise to make a monetary payment or to give property in consideration of a promise to marry must be in writing. In other words, if a mother promises to pay a man $20,000 if he marries her daughter, that promise must be in writing to be enforceable. Evan promises to buy Celeste a condo in Maui if she marries him. Celeste would need written evidence of Evan's promise to enforce it. The same rule applies to prenuptial agreements— agreements made before marriage that define each partner's ownership rights in the other partner's property. Prenuptial agreements must be in writing to be enforceable

Contract Enforceability

A valid contract has the elements necessary to entitle at least one of the parties to enforce it in court. Those elements, as mentioned earlier, consist of (1) an agreement (offer and acceptance), (2) supported by legally sufficient consideration, (3) made by parties who have the legal capacity to enter into the contract, and (4) a legal purpose. Valid contracts may be enforceable, voidable, or unenforceable. Additionally, a contract may be referred to as a void contract. A enforceable contract is a valid contract that can be enforced because there are no legal defenses against it. A voidable contract is that a party has the option of avoiding or enforcing the contractual obligation. A valid contract but one that can be avoided at the option of one or both of the parties. The party having the option can elect either to avoid any duty to perform or to ratify (make valid) the contract. If the contract is avoided, both parties are released from it. If it is ratified, both parties must fully perform their respective legal obligations. For instance, contracts made by minors generally are voidable at the option of the minor (with certain exceptions). Contracts made by mentally incompetent persons and intoxicated persons may also be voidable. Additionally, contracts entered into under fraudulent conditions are voidable at the option of the defrauded party. Contracts entered into under legally defined duress or undue influence are also voidable. An unenforceable contract is one that cannot be enforced because of certain legal defenses against it. It is not unenforceable because a party failed to satisfy a legal requirement of the contract. Rather, it is a valid contract rendered unenforceable by some statute or law. For instance, certain contracts must be in writing, and if they are not, they will not be enforceable except in certain exceptional circumstances. A void contract is no contract at all. The terms void and contract are contradictory. None of the parties have any legal obligations if a contract is void. A contract can be void because one of the parties was determined by a court to be mentally incompetent, for instance, or because the purpose of the contract was illegal.

Pattern of Conduct Exception

A waiver can extend to subsequent defective performance if a reasonable person would conclude that similar defective performance in the future will be acceptable. Therefore, a pattern of conduct that waives a number of successive breaches will operate as a continued waiver. To change this result, the nonbreaching party should give notice to the breaching party that full performance will be required in the future.

What Constitutes a Writing?

A writing can consist of any order confirmation, invoice, sales slip, check, fax, or e-mail—or such items in combination. The written contract need not consist of a single document in order to constitute an enforceable contract. One document may incorporate another document by expressly referring to it. Several documents may form a single con- tract if they are physically attached, such as by staple, paper clip, or glue. Several documents may form a single contract even if they are only placed in the same envelope.

Sufficiency of the Writing

A written contract will satisfy the writing requirement, as will a written memorandum or an electronic record that evidences the agreement and is signed by the party against whom enforcement is sought. The signature need not be placed at the end of the document but can be anywhere in the writing. A signature can consist of a typed name or even just initials.

Acceptance

Acceptance is a voluntary act by the offeree that shows assent (agreement) to the terms of an offer. The offeree's act may consist of words or conduct. The acceptance must be unequivocal and must be communicated to the offeror. Generally, only the person to whom the offer is made or that person's agent can accept the offer and create a binding contract.

The Mailbox Rule

Acceptance takes effect, thus complet- ing formation of the contract, at the time the offeree sends or delivers the communication via the mode expressly or impliedly authorized by the offeror. This is the so-called mailbox rule, also called the deposited acceptance rule, which the majority of courts follow. Under this rule, if the authorized mode of communication is the mail, then an acceptance becomes valid when it is dispatched (placed in the control of the U.S. Postal Service)—not when it is received by the offeror. (Note, however, that if the offer stipulates when acceptance will be effective, then the offer will not be effective until the time specified.) The mailbox rule does not apply to instantaneous forms of communication, such as when the parties are dealing face to face, by telephone, by fax, and (usually) by e-mail. Under the Uniform Electronic Transactions Act, e-mail is considered sent when it either leaves the control of the sender or is received by the recipient. This rule takes the place of the mailbox rule when the parties have agreed to conduct transactions electronically and allows an e-mail acceptance to become effective when sent.

Adequacy of Consideration

Adequacy of consideration involves how much consideration is given. Essentially, adequacy of consideration concerns the fairness of the bargain. On the surface, when the items exchanged are of unequal value, fairness would appear to be an issue. Normally, however, a court will not question the adequacy of consideration based solely on the comparative value of the things exchanged. In other words, the determination of whether consideration exists does not depend on a comparison of the values of the things exchanged. Something need not be of direct economic or financial value to be considered legally sufficient consideration. In many situations, the exchange of promises and potential benefits is deemed to be sufficient consideration. Under the doctrine of freedom of contract, courts leave it up to the parties to decide what something is worth, and parties are usually free to bargain as they wish. If people could sue merely because they had entered into an unwise contract, the courts would be overloaded with frivolous suits. In Summary, Adequacy of consideration relates to how much consideration is given and whether a fair bargain was reached. Courts will inquire into the adequacy of consideration (if the consideration is legally sufficient) only when fraud, undue influence, duress, or the lack of a bargained-for exchange may be involved.

Impossibility of Performance

After a contract has been made, supervening events (such as a fire) may make performance impossible in an objective sense. This is known as impossibility of performance and can discharge a contract.13 The doctrine of impossibility of performance applies only when the parties could not have reasonably foreseen, at the time the contract was formed, the event that rendered performance impossible. Performance may also become so difficult or costly due to some unforeseen event that a court will consider it commercially unfeasible, or impracticable Objective impossibility ("It can't be done") must be distinguished from subjective impossibility ("I'm sorry, I simply can't do it"). An example of subjective impossibility occurs when a party cannot deliver goods on time because of freight car shortages or cannot make payment on time because the bank is closed. In effect, in each of these situations the party is saying, "It is impossible for me to perform," not "It is impossible for anyone to perform." Accordingly, such excuses do not discharge a contract, and the nonperforming party is normally held in breach of contract.

Ch.12

Agreement in Traditional and E-Contracts

Duress

Agreement to the terms of a contract is not voluntary if one of the parties is forced into the agreement. The use of threats to force a party to enter into a contract constitutes duress. Similarly, the use of blackmail or extortion to induce consent to a contract is duress. Duress is both a defense to the enforcement of a contract and a ground for the rescission of a contract. The Threatened Act Must Be Wrongful or Illegal-To establish duress, there must be proof of a threat to do something that the threatening party has no right to do. Generally, for duress to occur, the threatened act must be wrongful or illegal. It also must render the person who is threatened incapable of exercising free will. A threat to exercise a legal right, such as the right to sue someone, ordinarily does not constitute duress. Economic Duress-Economic need generally is not sufficient to constitute duress, even when one party exacts a very high price for an item that the other party needs. If the party exacting the price also creates the need, however, economic duress may be found.

Licensing Statutes

All states require members of certain professions—including physicians, lawyers, real estate brokers, accountants, architects, electricians, and stockbrokers—to have licenses. Some licenses are obtained only after extensive schooling and examinations, which indicate to the public that a special skill has been acquired. Others require only that the applicant be of good moral character and pay a fee. Whether a contract with an unlicensed person is legal and enforceable depends on the purpose of the licensing statute. If the statute's purpose is to protect the public from unauthorized practitioners (such as unlicensed attorneys and electricians), then a contract involving an unlicensed practitioner is generally illegal and unenforceable. If the statute's purpose is merely to raise government revenues, however, a court may enforce the contract and fine the unlicensed person.

Usuary

Almost every state has a statute that sets the maximum rate of interest that can be charged for different types of transactions, including ordinary loans. A lender who makes a loan at an interest rate above the lawful maximum commits usury. Although usurious contracts are illegal, most states simply limit the interest that the lender may collect on the contract to the lawful maximum interest rate in that state. In a few states, the lender can recover the principal amount of the loan but no interest. In addition, states can make exceptions to facilitate business transactions. For instance, many states exempt corporate loans from the usury laws, and nearly all states allow higher-interest-rate loans for borrowers who could not otherwise obtain loans.

Contracts Contrary to Public Policy

Although contracts involve private parties, some are not enforceable because of the negative impact they would have on society. These contracts are said to be contrary to public policy. Examples include a contract to commit an immoral act, such as selling a child, and a contract that prohibits marriage. Business contracts that may be against public policy include contracts in restraint of trade and unconscionable contracts or clauses.

Fraudulent Misrepresentation

Although fraud is a tort, the presence of fraud also affects the authenticity of the innocent party's consent to the contract. When an innocent party is fraudulently induced to enter into a contract, the contract usually can be avoided, because that party has not voluntarily consented to its terms. The innocent party can either rescind the contract and be restored to her or his original position or enforce the contract and seek damages for any harms resulting from the fraud. Generally, fraudulent misrepresentation refers only to misrepresentation that is consciously false and is intended to mislead another. The person making the fraudulent misrepresentation knows or believes that the assertion is false or knows that she or he does not have a basis (stated or implied) for the assertion.6 Typically, fraudulent misrepresentation consists of the following elements: 1)A misrepresentation of a material fact must occur. 2)There must be an intent to deceive. 3)The innocent party must justifiably rely on the misrepresentation. 4)To collect damages, a party must have been harmed as a result of the misrepresentation. Like other actions based in the common law, a cause of action based on fraud can be subject to a statute of limitations. Of course, a cause based on a statute can also be subject to a statute of limitations. The limitations periods governing these actions may be different.

Irrevocable Offers

Although most offers are revocable, some can be made irrevocable—that is, they cannot be revoked. One form of irrevocable offer is an option contract. An option contract is created when an offeror promises to hold an offer open for a specified period of time in return for a payment (consideration) given by the offeree. An option contract takes away the offeror's power to revoke the offer for the period of time specified in the option.

Limitations on Quasi Contractual Recovery

Although quasi contracts exist to prevent unjust enrichment, the party obtaining the enrichment is not held liable in some situations. In general, a party who has conferred a benefit on someone else unnecessarily or as a result of misconduct or negligence cannot invoke the principle of quasi contract. The enrichment in those situations will not be considered "unjust." The doctrine of quasi contract generally cannot be used when there is an actual contract that covers the matter in controversy. A remedy already exists if a party is unjustly enriched as a result of a breach of contract: the non- breaching party can sue the breaching party for breach of contract.

Federal Law on E-Signatures and E-Documents

An e-signature has been defined as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record."17 In 2000, Congress enacted the Electronic Signatures in Global and National Commerce Act (E-SIGN Act).18 The E-SIGN Act provides that no contract, record, or signature may be "denied legal effect" solely because it is in electronic form. In other words, under this law, an electronic signature is as valid as a signature on paper, and an e-document can be as enforceable as a paper one. For an e-signature to be enforceable, however, the contracting parties must have agreed to use electronic signatures. For an electronic document to be valid, it must be in a form that can be retained and accurately reproduced. Electronic documents can be signed in a number of ways. E-signature technologies include encrypted digital signatures, names intended as signatures at the end of e-mail messages, and clicks on a Web page if the clicks include some means of identification. Note that although courts do not question that documents can be signed electronically under the E-SIGN Act, some courts will question the validity of the signatures themselves. For instance, a court might find that a typed name at the bottom of e-mail is not admissible as the person's signature. For this reason, many businesses use special software, such as DocuSign or EchoSign, that is designed to create an e-signature that looks similar to a person's handwritten signature. The E-SIGN Act does not apply to all types of documents. Documents that are exempt include court papers, divorce decrees, evictions, foreclosures, health- insurance terminations, prenuptial agreements, and wills. Also, the only agreements governed by the UCC that fall under this law are those covered by Articles 2 and 2A (sales and lease contracts) and UCC 1-107 and 1-206. Despite these limitations, the E-SIGN Act has significantly expanded online contracting. One way that online sellers and buyers can prevent disputes over signatures in their e-contracts, as well as disputes over the terms and conditions of those contracts, is to form partnering agreements. In a partnering agreement, a seller and a buyer who frequently do business with each other agree in advance on the terms and conditions that will apply to all transactions subsequently conducted electronically. The partnering agreement can also establish special access and identification codes to be used by the parties when transacting business electronically. A partnering agreement reduces the likelihood that contract disputes will arise because the parties have agreed in advance to the terms and conditions that will accompany each sale. Furthermore, if a dispute does arise, a court or arbitration forum will be able to refer to the partnering agreement when determining the parties' intent.

Agreement

An essential element for contract formation is agreement—the parties must agree on the terms of the contract and manifest to each other their mutual assent (agreement) to the same bargain. Ordinarily, agreement is evidenced by two events: an offer and an acceptance. One party offers a certain bargain to another party, who then accepts that bargain. An agreement does not necessarily have to be in writing. Both parties, however, must manifest their assent, or voluntary consent, to the same bargain. Once an agreement is reached, if the other elements of a contract (consideration, capacity, and legality—discussed in subsequent chapters) are present, a valid contract is formed. Generally, the contract creates enforceable rights and duties between the parties Because words often fail to convey the precise meaning intended, the law of contracts generally adheres to the objective theory of contracts. Under this theory, a party's words and conduct are held to mean whatever a reasonable person in the offeree's position would think they meant.

Intended Benificiary

An intended third party beneficiary cannot enforce a contract against the original parties until the rights of the third party have vested, which means the rights have taken effect and cannot be taken away. Until these rights have vested, the original parties to the contract—the promisor and the promisee—can modify or rescind the contract without the consent of the third party.When do the rights of third parties vest? The majority of courts hold that the rights vest when any of the fol- lowing occurs: 1)When the third party demonstrates express consent to the agreement, such as by sending a letter, a note, or an e-mail acknowledging awareness of, and con- sent to, a contract formed for her or his benefit. 2)When the third party materially alters his or her position in detrimental reliance on the contract. For instance, a person contracts to have a home built in reliance on the receipt of funds promised to him or her in a donee beneficiary contract. 3)When the conditions for vesting are satisfied. For instance, the rights of a beneficiary under a life insur- ance policy vest when the insured person dies If the contract expressly reserves to the contracting parties the right to cancel, rescind, or modify the contract, the rights of the third party beneficiary are subject to any changes that result. If the original contract reserves the right to revoke the promise or change the beneficiary, the vesting of the third party's rights does not terminate that power. In most life insurance contracts, for instance, the policyholder reserves the right to change the designated beneficiary.

Temporary Impossibility

An occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases. Once the temporary event ends, the parties ordinarily must perform the contract as originally planned. Sometimes, the lapse of time and the change in circumstances surrounding the contract make it substantially more burdensome for the parties to perform the promised acts. In that situation, the contract is discharged. It can be difficult to predict how a court will—or should—rule on whether performance is impossible in a particular situation

Termination by Action of the Parties

An offer can be terminated by action of the parties in any of three ways: by revocation, by rejection, or by counteroffer. The offeror's act of revoking, or withdrawing, an offer is known as revocation. Unless an offer is irrevocable, the offeror usually can revoke the offer, as long as the revocation is communicated to the offeree before the offeree accepts. Revocation may be accomplished by either of the following: 1. Express repudiation of the offer (such as "I withdraw my previous offer of October 17"). 2. Performance of acts that are inconsistent with the existence of the offer and are made known to the offeree (for instance, selling the offered property to another person in the offeree's presence). In most states, a revocation becomes effective when the offeree or the offeree's agent (a person acting on behalf of the offeree) actually receives it. Therefore, a revocation sent via FedEx on April 1 and delivered at the offeree's residence or place of business on April 3 becomes effective on April 3. An offer made to the general public can be revoked in the same manner in which it was originally communicated. For instance, an offer made on specific Web sites or in particular newspapers can be revoked on the same Web sites or in the same newspapers.

Requirements of the Offer

An offer is a promise or commitment to do or refrain from doing some specified action in the future. The party making an offer is called the offeror, and the party to whom the offer is made is called the offeree. Under the common law, three elements are necessary for an offer to be effective: 1)The offeror must have a serious intention to become bound by the offer. 2)The terms of the offer must be reasonably certain, or definite, so that the parties and the court can ascertain the terms of the contract. 3)The offer must be communicated to the offeree. Once an effective offer has been made, the offeree's acceptance of that offer creates a legally binding contract (providing the other essential elements for a valid and enforceable contract are present).

Formal versus Informal Contracts

Another classification system divides contracts into formal contracts and informal contracts. Formal contracts are contracts that require a special form or method of creation (formation) to be enforceable. One example is negotiable instruments, which include checks, drafts, promissory notes, bills of exchange, and certificates of deposit. Negotiable instruments are formal contracts because, under the Uniform Commercial Code (UCC), a special form and language are required to create them. Letters of credit, which are frequently used in international sales contracts, are another type of formal contract. Letters of credit are agreements to pay contingent on the purchaser's receipt of invoices and bills of lading (documents evidencing receipt of, and title to, goods shipped). Informal contracts (also called simple contracts) include all other contracts. No special form is required (except for certain types of contracts that must be in writing), as the contracts are usually based on their substance rather than their form. Typically, businesspersons put their contracts in writing (including electronic records) to ensure that there is some proof of a contract's existence should disputes arise.

Third Party Beneficiaries

Another exception to the doctrine of privity of contract arises when the contract is intended to benefit a third party. The original parties to a contract can agree that the contract performance should be rendered to or directly benefit a third person. When this happens, the third person becomes an intended third party beneficiary of the contract. As the intended beneficiary of the contract, the third party has legal rights and can sue the promisor directly for breach of the contract. Who is the promisor?-In a bilateral contract, both parties to the contract make promises that can be enforced, so the court has to determine which party made the promise that benefits the third party. That person is the promisor. In effect, allowing a third party to sue the promisor directly circumvents the "middle person" (the promisee) and thus reduces the burden on the courts. Otherwise, the third party would sue the promisee, who would then sue the promisor.

Discharge by Agreement

Any contract can be discharged by agreement of the parties. The agreement can be contained in the original contract, or the parties can form a new contract for the express purpose of discharging the original contract.

Contracts to Commit a Crime

Any contract to commit a crime is in violation of a statute. Thus, a contract to sell illegal drugs in violation of criminal laws is unenforceable, as is a contract to hide a corporation's violation of securities laws or environmental regulations. Sometimes, the object or performance of a contract is rendered illegal by a statute after the parties entered into the contract. In that situation, the contract is considered to be discharged (terminated) by law.

Rights That Cannot Be Assigned

As a general rule, all rights can be assigned. Exceptions are made, however, under certain circumstances. Some of these exceptions are listed here and described in more detail in the following subsections: 1)The assignment is prohibited by statute. (When a statute expressly prohibits assignment of a particular right, that right cannot be assigned.) 2)The contract is personal.(If a contract is for personal services, the rights under the contract normally cannot be assigned unless all that remains is a monetary payment.) 3)The assignment significantly changes the risk or duties of the obligor. 4)The contract prohibits assignment. There are some exceptions: 1)A contract cannot prevent an assignment of the right to receive funds. This exception exists to encourage the free flow of funds and credit in modern business settings. 2)The assignment of rights in real estate often cannot be prohibited because such a prohibition is contrary to public policy in most states. 3)The assignment of negotiable instruments (such as checks and promissory notes) cannot be prohibited. 4)In a contract for the sale of goods, the right to receive damages for breach of contract or payment of an account owed may be assigned even though the sales contract prohibits such an assignment.

Duties That Cannot Be Delegated

As a general rule, any duty can be delegated. There are, however, some exceptions to this rule. Delegation is prohibited in the following circumstances: 1)When special trust has been placed in the obligor or when performance depends on the personal skill or talents of the obligor. 2)When performance by a third party will vary materi- ally from that expected by the obligee. 3)When the contract expressly prohibits delegation.

Parents' Liability

As a general rule, parents are not liable for contracts made by minor children acting on their own, except contracts for necessaries, which parents are legally required to provide. As a consequence, businesses ordinarily require parents to cosign any contract made with a minor. The parents then become personally obligated under the contract to perform the conditions of the contract, even if their child avoids liability.

Statutes of Limitations

As mentioned earlier in this text, statutes of limitations restrict the period during which a party can sue on a particular cause of action. After the applicable limitations period has passed, a suit can no longer be brought. The limitations period for bringing suits for breach of oral contracts usually is two to three years, and for written contracts, four to five years. Parties generally have ten to twenty years to file for recovery of amounts awarded in judgments, depending on state law. Lawsuits for breach of a contract for the sale of goods usually must be brought within four years after the cause of action has accrued.12 A cause of action for a sales con- tract generally accrues when the breach occurs, even if the aggrieved party is not aware of the breach. A breach of warranty normally occurs when the seller delivers the goods to the buyer. By their original agreement, the parties can reduce this four-year period to not less than one year, but they cannot agree to extend it.

Discharge by Mutual Rescission

As mentioned in previous chapters, rescission is the process by which a contract is canceled or terminated and the parties are returned to the positions they occupied prior to forming it. For mutual rescission to take place, the parties must make another agreement that also satisfies the legal requirements for a contract. There must be an offer, an acceptance, and consideration. Ordinarily, if the parties agree to rescind the original contract, their promises not to perform the acts stipulated in the original contract will be legal consideration for the second contract (the rescission).Agreements to rescind most executory contracts (in which neither party has performed) are enforceable, even if the agreement is made orally and even if the original agreement was in writing. Under the Uniform Commercial Code (UCC), however, agreements to rescind a sales contract must be in writing (or contained in an electronic record) when the contract requires a written rescission. Agreements to rescind contracts involving transfers of realty also must be evidenced by a writing or record. When one party has fully performed, an agreement to cancel the original contract normally will not be enforceable unless there is additional consideration. Because the performing party has received no consideration for the promise to call off the original bargain, additional consideration is necessary to support a rescission contract.

Assignments

Assignments are important because they are used in many types of business financing. Lending institutions, such as banks, frequently assign their rights to receive payments under their loan contracts to other firms, which pay for those rights. Financial institutions that make mortgage loans (loans to enable prospective home buyers to purchase land or a home) often assign their rights to collect the mortgage payments to a third party, such as PNC Mortgage. Following the assignment, the home buyers are notified that they must make future payments not to the bank that loaned them the funds but to the third party. Billions of dollars change hands daily in the business world in the form of assignments of rights in contracts. If it were not possible to transfer contractual rights, many businesses could not continue to operate.

Exceptions to the Parol Evidence Rule

Because of the rigidity of the parol evidence rule, the courts have created the following exceptions: 1)Contracts subsequently modified. Evidence of any subsequent modification (oral or written) of a written contract can be introduced in court. Oral modifications may not be enforceable under the Statute of Frauds, however (for instance, a modification that increases the price of the goods being sold to more than $500). Also, oral modifications will not be enforceable if the original contract provides that any modification must be in writing. 2)Voidable or void contracts. Oral evidence can be introduced in all cases to show that the contract was voidable or void (for example, induced by mistake, fraud, or misrepresentation). The reason is simple: if deception led one of the parties to agree to the terms of a written contract, oral evidence attesting to the fraud should not be excluded. Courts frown on bad faith and are quick to allow such evidence when it establishes fraud. 3)Contracts containing ambiguous terms. When the terms of a written contract are ambiguous and require interpretation, evidence is admissible to show the meaning of the terms. 4)Incomplete contracts. When the written contract is incomplete in that it lacks one or more of the essential terms, the courts allow additional evidence to "fill in the gaps." 5)Prior dealing, course of performance, or usage of trade. Under the UCC, evidence can be introduced to explain or supplement a written contract by showing a prior dealing, course of performance, or usage of trade. This is because when buyers and sellers deal with each other over extended periods of time, certain customary practices develop. These practices are often overlooked in writing the contract, so courts allow the introduction of evidence to show how the parties have acted in the past. Usage of trade—practices and customs generally followed in a particular industry—can also shed light on the meaning of certain contract provisions. Thus, evidence of trade usage may be admissible. 6)Contracts subject to an orally agreed-on condition precedent. Sometimes the parties agree that a condition must be fulfilled before a party is required to perform the contract. This is called a condition precedent. If the parties have orally agreed on a condition precedent that does not conflict with the terms of their written agreement, a court may allow parol evidence to prove the oral condition. The parol evidence rule does not apply here because the existence of the entire written contract is subject to an orally agreed-on condition. Proof of the condition does not alter or modify the written terms but affects the enforceability of the written contract. 7)Contracts with an obvious or gross clerical (or typo- graphic) error that clearly would not represent the agreement of the parties. Parol evidence is admissible to correct an obvious typographic error.

Measure of Damages

Because substantial performance is not perfect, the other party is entitled to dam- ages to compensate for the failure to comply with the contract. The measure of the damages is the cost to bring the object of the contract into compliance with its terms, if that cost is reasonable under the circumstances. What if the cost is unreasonable? Then the measure of damages is the difference in value between the performance rendered and the performance that would have been rendered if the contract had been performed completely.

Anticipatory Repudiation

Before either party to a contract has a duty to perform, one of the parties may refuse to carry out his or her contractual obligations. This is called anticipatory repudiation of the contract. When an anticipatory repudiation occurs, it is treated as a material breach of the contract, and the nonbreaching party is permitted to bring an action for damages immediately. The nonbreaching party can file suit even though the scheduled time for performance under the contract may still be in the future. Until the nonbreaching party treats an early repudiation as a breach, however, the repudiating party can retract the anticipatory repudiation by proper notice and restore the parties to their original obligations. An anticipatory repudiation is treated as a present, material breach for two reasons. First, the nonbreaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract. Second, the nonbreaching party should have the opportunity to seek a similar contract elsewhere and may have a duty to do so to minimize his or her loss.

Ch.19

Breach of Contract and Remedies

Settlement of Claims

Businesspersons and others often enter into contracts to settle legal claims. It is important to understand the nature of consideration given in these kinds of settlement agreements, or contracts. A claim may be settled through an accord and satisfaction, a release, or a covenant not to sue. Accord and Satisfaction-In an accord and satisfaction, a debtor offers to pay, and a creditor accepts, a lesser amount than the creditor originally claimed was owed. The accord is the agreement. In the accord, one party undertakes to give or perform, and the other to accept, in satisfaction of a claim, something other than that on which the parties originally agreed. Satisfaction is the performance (usually payment) that takes place after the accord is executed. A basic rule is that there can be no satisfaction unless there is first an accord. In addition, for accord and satisfaction to occur, the amount of the debt must be in dispute. If a debt is liquidated, accord and satisfaction cannot take place. A liquidated debt is one whose amount has been ascertained, fixed, agreed on, settled, or exactly determined. An unliquidated debt is the opposite of a liquidated debt. The amount of the debt is not settled, fixed, agreed on, ascertained, or determined, and reasonable persons may differ over the amount owed. In these circumstances, acceptance of a lesser sum operates as satisfaction, or discharge, of the debt because there is valid consideration. The parties give up a legal right to contest the amount in dispute. Release-A release is a contract in which one party forfeits the right to pursue a legal claim against the other party. It bars any further recovery beyond the terms stated in the release. A release will generally be binding if it meets the following requirements: 1)The agreement is made in good faith (honestly). 2)The release contract is in a signed writing (required in many states). 3)The contract is accompanied by consideration. Covenant Not To Sue-Unlike a release, a covenant not to sue does not always bar further recovery. The parties simply substitute a contractual obligation for some other type of legal action based on a valid claim.

Reasons for Waiving a Breach

Businesspersons often waive breaches of contract to obtain whatever benefit is still possible out of the contract.

Ch.14

Capacity and Legality

Frustration of Purpose

Closely allied with the doctrine of commercial impracticability is the doctrine of frustration of purpose. In principle, a contract will be discharged if supervening circumstances make it impossible to attain the purpose both parties had in mind when they made the contract. As with commercial impracticability and impossibility, the supervening event must not have been reasonably foreseeable at the time the contract was formed. There are some differences between these doctrines, however. Commercial impracticability usually involves an event that increases the cost or difficulty of performance. In contrast, frustration of purpose typically involves an event that decreases the value of what a party receives under the contract.

Express and Implied Conditions

Conditions can also be classified as express or implied in fact. Express conditions are provided for by the parties' agreement. Although no particular words are necessary, express conditions are normally prefaced by the words if, provided, after, or when. For instance, most automobile insurance policies include what is known as a cooperation clause. This clause states that if the insured person is involved in an accident, he or she must cooperate with the insurance company in the defense of any claim or lawsuit. Implied conditions are understood to be part of the agreement, but they are not found in the express lan- guage of the agreement. Courts may imply conditions from the purpose of the contract or from the intent of the parties. Conditions are often implied when they are inherent in the actual performance of the contract.

Ch.13

Consideration

What is Contract Law?

Contract law deals with, among other things, the formation and keeping of promises. A promise is a declaration by a person (the promisor) to do or not to do a certain act. As a result, the person to whom the promise is made (the promisee) has a right to expect or demand that something either will or will not happen in the future. Like other types of law, contract law reflects our social values, interests, and expectations at a given point in time. It shows, for instance, to what extent our society allows people to make promises or commitments that are legally binding. It distinguishes between promises that create only moral obligations (such as a promise to take a friend to lunch) and promises that are legally binding (such as a promise to pay for items ordered online). Contract law also demonstrates which excuses our society accepts for breaking certain types of promises. In addition, it indicates which promises are considered to be contrary to public policy—against the interests of society as a whole—and therefore legally invalid. When the person making a promise is a child or is mentally incompetent, for instance, a question will arise as to whether the promise should be enforced. Resolving such questions is the essence of contract law.

UNIT

Contracts and E-Contracts

Contract Performance

Contracts are also classified according to the degree to which they have been performed. A contract that has been fully performed on both sides is called an executed contract. A contract that has not been fully performed by the parties is called an executory contract. If one party has fully performed but the other has not, the contract is said to be executed on the one side and executory on the other, but the contract is still classified as executory.

Discriminatory Contracts

Contracts in which a party promises to discriminate on the basis of race, color, national origin, religion, gender, age, or disability are contrary to both statute and public policy. They are also unenforceable.

Mental Incompetence

Contracts made by mentally incompetent persons can be void, voidable, or valid. We look here at the circumstances that determine when each of these classifications applies.

Performance to the Satisfaction of Another

Contracts often state that completed work must personally satisfy one of the parties or a third person. The question then is whether this satisfaction becomes a condition precedent, requiring actual personal satisfaction or - approval for discharge, or whether the performance need only satisfy a reasonable person

Commercial Impracticability

Courts may also excuse parties from their performance when it becomes much more difficult or expensive than the parties originally contemplated at the time the con- tract was formed. In one classic case, for example, a court held that a contract could be discharged because a party would otherwise have had to pay ten times more than the original estimate to excavate a certain amount of gravel.17 For someone to invoke the doctrine of commercial impracticability successfully, however, the anticipated performance must become significantly more difficult or costly.18 In addition, the added burden of performing must not have been foreseeable by the parties when the contract was made

Compensatory Damages

Damages that compensate the nonbreaching party for the loss of the bargain are known as compensatory damages. These damages compensate the injured party only for damages actually sustained and proved to have arisen directly from the loss of the bargain caused by the breach of contract. They simply replace what was lost because of the wrong or damage and, for this reason, are often said to "make the person whole." There is a two-step process to determine whether a breach of contract has resulted in compensable damages. First, it must be established that there was a contract between the parties and a breach of that contract. Next, it must be proved that the breach caused damages. The standard measure of compensatory damages is the difference between the value of the breaching party's promised performance under the contract and the value of her or his actual performance. This amount is reduced by any loss that the injured party has avoided. Expenses that are caused directly by a breach of contract—such as those incurred to obtain performance from another source—are known as incidental damages.

Defenses to the Enforceability of a Contract

Even if all of the requirements listed above are satisfied, a contract may be unenforceable if the following requirements are not met. These requirements typically are raised as defenses to the enforceability of an otherwise valid contract. 1)Voluntary consent. The consent of both parties must be voluntary. For instance, if a contract was formed as a result of fraud, undue influence, mistake, or duress, the contract may not be enforceable. 2)Form. The contract must be in whatever form the law requires. Some contracts must be in writing to be enforceable.

Types of Contracts

Every contract involves at least two parties. The offeror is the party making the offer. The offeree is the party to whom the offer is made. Whether the contract is classified as bilateral or unilateral depends on what the offeree must do to accept the offer and bind the offeror to a contract. Bilateral Contracts- If the offeree can accept simply by promising to perform, the contract is a bilateral contract. Hence, a bilateral contract is a "promise for a promise." No performance, such as payment of funds or delivery of goods, need take place for a bilateral contract to be formed. The contract comes into existence at the moment the promises are exchanged. Unilateral Contracts-If the offer is phrased so that the offeree can accept the offer only by completing the contract performance, the contract is a unilateral con- tract. Hence, a unilateral contract is a "promise for an act." In other words, a unilateral contract is formed not at the moment when promises are exchanged but at the moment when the contract is performed. Contests, Lotteries, and Prizes-Contests, lotteries, and other competitions involving prizes are examples of offers to form unilateral contracts. If a person complies with the rules of the contest—such as by submitting the right lottery number at the right place and time—a unilateral contract is formed. The organization offering the prize is then bound to a contract to perform as promised in the offer. If the person fails to comply with the contest rules, however, no binding contract is formed. Revocation of Offers for Unilateral Contracts-A problem arises in unilateral contracts when the promisor attempts to revoke (cancel) the offer after the promisee has begun performance but before the act has been completed. In contract law, offers are normally revocable (capable of being taken back, or canceled) until accepted. Today, once performance has been substantially undertaken, the offeror cannot revoke the offer.

The Statute of Frauds

Every state has a statute that stipulates what types of contracts must be in writing. We refer to such a statute as the Statute of Frauds. The origins of these statutes can be traced to early English law

Exceptions to the Writing Requirement

Exceptions to the writing requirement are made in certain circumstances. We describe those situations here. Partial Performance-When a contract has been partially performed and the parties cannot be returned to their positions prior to the contract's formation, a court may grant specific performance. Specific performance is an equitable remedy that requires performance of the contract according to its precise terms. Courts may sometimes grant specific performance of an oral contract. The parties must prove that an oral contract existed, of course. In cases involving oral contracts for the transfer of interests in land, courts usually look at whether justice is better served by enforcing the oral contract when partial performance has taken place. For instance, if the purchaser has paid part of the price, taken possession, and made valuable improvements to the property, a court may grant specific performance. Partial performance is an unmistakable indication that one party believes there is a contract. Under the UCC, an oral contract for the sale of goods is enforceable to the extent that a seller accepts payment or a buyer accepts delivery of the goods. Admissions-If a party against whom enforcement of an oral contract is sought "admits" under oath that a contract for sale was made, the contract will be enforceable. The party's admission can occur at any stage of the court proceedings, such as during a deposition or other discovery, pleadings, or testimony. If a party admits a contract subject to the UCC, the contract is enforceable, but only to the extent of the quantity admitted. Promissory Estoppel-An oral contract that would otherwise be unenforceable under the Statute of Frauds may be enforced in some states under the doctrine of promissory estoppel. Recall that if a person justifiably relies on another's promise to his or her detriment, a court may estop (prevent) the promisor from denying that a contract exists. Section 139 of the Restatement (Second) of Contracts provides that in these circumstances, an oral promise can be enforce- able notwithstanding the Statute of Frauds. For the promise to be enforceable, the promisee must have justifiably relied on it to her or his detriment, and the reliance must have been foreseeable to the person making the promise. In addition, there must be no way to avoid injustice except to enforce the promise Special Exceptions under the UCC-Special exceptions to the writing requirement apply to sales contracts. Oral contracts for customized goods may be enforced in certain circumstances. Another exception has to do with oral contracts between merchants that have been confirmed in a written memorandum

Express Terms Usually Given the Most Weight

Express terms (terms expressly stated in the contract) are given the greatest weight, followed by course of performance, course of dealing, and custom and usage of trade—in that order. When considering custom and usage, a court will look at the trade customs and usage common to the particular business or industry and to the locale in which the contract was made or is to be performed.

Legality

For a contract to be valid and enforceable, it must be formed for a legal purpose. A contract to do something that is prohibited by federal or state statutory law is illegal and, as such, void from the outset and thus unenforceable. Additionally, a contract to commit a tortious act (such as an agreement to engage in defamation or fraud) is contrary to public policy and therefore illegal and unenforceable.

Consequential Damages

Foreseeable damages that result from a party's breach of contract are called consequential damages, or special damages. They differ from compensatory damages in that they are caused by special circumstances beyond the contract itself. They flow from the consequences, or results, of a breach. When a seller fails to deliver goods, knowing that the buyer is planning to use or resell those goods immediately, a court may award consequential damages for the loss of profits from the planned resale.

Gambling

Gambling is the creation of risk for the purpose of assuming it. Any scheme that involves the distribution of property by chance among persons who have paid valuable consideration for the opportunity (chance) to receive the property is gambling Traditionally, the states deemed gambling contracts illegal and thus void. Today, many states allow (and regulate) certain forms of gambling, such as horse racing, video poker machines, and charity-sponsored bingo. In addition, nearly all states allow state-operated lotteries and gambling on Native American reservations. Even in states that permit certain types of gambling, though, courts often find that gambling contracts are illegal.

Other Rules of Interpretation

Generally, a court will interpret the language to give effect to the parties' intent as expressed in their contract. This is the primary purpose of the rules of interpretation—to determine the parties' intent from the language used in their agreement and to give effect to that intent. A court normally will not make or remake a contract, nor will it interpret the language according to what the parties claim their intent was when they made it. The courts use the following rules in interpreting contractual terms: 1. As far as possible, a reasonable, lawful, and effective meaning will be given to all of a contract's terms. 2. A contract will be interpreted as a whole. Individual, specific clauses will be considered subordinate to the contract's general intent. All writings that are a part of the same transaction will be interpreted together. 3. Terms that were the subject of separate negotiation will be given greater consideration than standardized terms and terms that were not negotiated separately. 4. A word will be given its ordinary, commonly accepted meaning, and a technical word or term will be given its technical meaning, unless the parties clearly intended something else. 5. Specific and exact wording will be given greater consideration than general language. 6. Written or typewritten terms will prevail over pre- printed ones. 7. Because a contract should be drafted in clear and unambiguous language, a party who uses ambiguous expressions is held to be responsible for the ambiguities. Thus, when the language has more than one meaning, it will be interpreted against the party who drafted the contract. 8. Evidence of usage of trade, course of dealing, and course of performance may be admitted to clarify the meaning of an ambiguously worded contract.

Restitution

Generally, to rescind a contract, both parties must make restitution to each other by returning goods, property, or funds previously conveyed.11 If the property or goods can be returned, they must be. If the goods or property have been consumed, restitution must be made in an equivalent dollar amount. Essentially, restitution involves the plaintiff's recapture of a benefit conferred on the defendant that has unjustly enriched her or him.

Contractual Capacity

Historically, the law has given special protection to those who bargain with the inexperience of youth and those who lack the degree of mental competence required by law. A person who has been determined by a court to be mentally incompetent, for instance, cannot form a legally binding contract with another party. In other situations, a party may have the capacity to enter into a valid contract but also have the right to avoid liability under it. Minors—or infants, as they are commonly referred to in legal terminology—usually are not legally bound by contracts. In this section, we look at the effect of youth, intoxication, and mental incompetence on contractual capacity.

Extrinsic Evidence

If a contract term is ambiguous, a court may interpret the ambiguity against the party who drafted the term. The court may also consider extrinsic evidence when a term is ambiguous. Extrinsic evidence is any evidence not contained in the document itself—such as the testimony of parties and witnesses, additional agreements or communications, or other relevant information. The admissibility of extrinsic evidence can significantly affect the court's interpretation of ambiguous contractual provisions and thus the outcome of litigation. When a contract is clear and unambiguous, a court can- not consider extrinsic evidence.

The Plain Meaning Rule

If a court determines that the terms of the contract are clear from the written document alone, the plain meaning rule will apply, and the contract will be enforced according to what it clearly states. When a contract's writing is clear and unequivocal, a court will enforce it according to its obvious terms. The meaning of the terms must be determined from the face of the instrument—from the written document alone. This is sometimes referred to as the plain meaning rule. The words—and their plain, ordinary meaning—determine the intent of the parties at the time that they entered into the contract. A court is bound to give effect to the contract according to this intent.

When the Contract Will Be Voidable

If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed, the contract may be voidable. The contract is voidable if the person did not know he or she was entering into the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences. In such situations, the contract is voidable (or can be ratified) at the option of the mentally incompetent person but not at the option of the other party.

When the Contract Will Be Void

If a court has previously determined that a person is mentally incompetent, any contract made by that person is void—no contract exists. On determining that someone is mentally incompetent, the court appoints a guardian to represent the individual. Only the guardian can enter into binding legal obligations on behalf of the mentally incompetent person.

Effect of a Delegation

If a delegation of duties is enforceable, the obligee must accept performance from the delegatee. The obligee can legally refuse performance from the delegatee only if the duty is one that cannot be delegated. A valid delegation of duties does not relieve the del- egator of obligations under the contract. Although there are exceptions, generally the obligee can sue both the delegatee and the delegator for nonperformance.

Mistakes of Value

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable. The reason that mistakes of value do not affect the enforceability of contracts is that value is variable. Depending on the time, place, and other circumstances, the same item may be worth considerably different amounts. When parties form a contract, their agreement establishes the value of the object of their transaction— for the moment. Each party is considered to have assumed the risk that the value will change in the future or prove to be different from what he or she thought. Without this rule, almost any party who did not receive what she or he considered a fair bargain could argue mistake.

Time for Performance

If no time for performance is stated in a contract, a reasonable time is implied.9 If a specific time is stated, the parties must usually perform by that time. Unless time is expressly stated to be vital, though, a delay in performance will not destroy the performing party's right to payment. When time is expressly stated to be "of the essence" or vital, the parties normally must perform within the stated time period because the time element becomes a condition. Even when the contract states that time is of the essence, however, a court may find that a party who fails to complain about the other party's delay has waived the breach of the time provision.

Effect on Duty to Perform

If one party's performance is substantial, the other party's duty to perform remains absolute. In other words, the parties must continue performing under the contract. For instance, the party who substantially performed is entitled to payment. If performance is not substantial, there is a material breach (to be discussed shortly), and the nonbreaching party is excused from further performance.

Priority Issues

If the assignor assigns the same right to two different persons, the question arises as to which one has priority—that is, which one has the right to the performance by the obligor. The rule most often observed in the United States is that the first assignment in time is the first in right. Nevertheless, some states follow the English rule, which basically gives priority to the first assignee who gives notice.

Material versus Minor Breach

If the breach is minor (not material), the nonbreaching party's duty to perform is not entirely excused, but it can sometimes be suspended until the breach has been remedied. Once the minor breach has been cured, the nonbreaching party must resume performance of the contractual obligations.

Withdrawal from an Illegal Agreement

If the illegal part of a bargain has not yet been per- formed, the party rendering performance can withdraw from the contract and recover the performance or its value.

Rejection

If the offeree rejects the offer—by words or by conduct, the offer is terminated. Any subsequent attempt by the offeree to accept will be construed as a new offer, giving the original offeror (now the offeree) the power of acceptance.

Illusory Promises

If the terms of the contract express such uncertainty of performance that the promisor has not definitely promised to do anything, the promise is said to be illusory— without consideration and unenforceable. A promise is illusory when it fails to bind the promisor.

Assignments and Delegations

In a bilateral contract, the two parties have corresponding rights and duties. One party has a right to require the other to perform some task, and the other has a duty to perform it. The transfer of contractual rights to a third party is known as an assignment. The transfer of contractual duties to a third party is known as a delegation. An assignment or a delegation occurs after the original contract was made.

Sale of Goods.

In a contract for the sale of goods, the usual measure of compensatory damages is an amount equal to the difference between the contract price and the market price.

non compete agreement

In a variety of situations, an employer will often ask an employee to sign a noncompete agreement, also called a covenant not to compete. Under such an agreement, the employee agrees not to compete with the employer for a certain period of time after the employment relationship ends. When a current employee is required to sign a noncompete agreement, his or her employment is not sufficient consideration for the agreement, because the individual is already employed. To be valid, the agreement requires new consideration.

Discharge by Accord and Satisfaction

In an accord and satisfaction, the parties agree to accept performance that is different from the performance originally promised. An accord is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged.11 A satisfaction is the performance of the accord agreement. An accord and its satisfaction dis- charge the original contractual obligation. Once the accord has been made, the original obligation is merely suspended until the accord agreement is fully performed. If it is not performed, the obligee (the one to whom performance is owed) can file a lawsuit based on either the original obligation or the accord.

The Effect of an Assignment

In an assignment, the party assigning the rights to a third party is known as the assignor, and the party receiving the rights is the assignee. Other traditional terms used to describe the parties in assignment relationships are obligee (the person to whom a duty, or obligation, is owed) and obligor (the person who is obligated to perform the duty). When rights under a contract are assigned unconditionally, the rights of the assignor are extinguished. The third party (the assignee) has a right to demand performance from the other original party to the contract. The assignee takes only those rights that the assignor originally had, however. The assignee's rights are subject to the defenses that the obligor has against the assignor. In other words, the assignee obtains only those rights that the assignor originally had.

Express versus Implied Contracts

In an express contract, the terms of the agreement are fully and explicitly stated in words, oral or written. A signed lease for an apartment or a house is an express written contract. If one classmate calls another on the phone and agrees to buy her textbooks from last semester for $200, an express oral contract has been made. A contract that is implied from the conduct of the parties is called an implied contract (or sometimes an implied-in-fact contract). This type of contract differs from an express contract in that the conduct of the par- ties, rather than their words, creates and defines the terms of the contract. For an implied contract to arise, certain requirements must be met. Normally, if the following conditions exist, a court will hold that an implied contract was formed: 1)The plaintiff furnished some service or property. 2)The plaintiff expected to be paid for that service or property, and the defendant knew or should have known that payment was expected. 3)The defendant had a chance to reject the services or property and did not.

Mode and Timeliness of Acceptance

In bilateral contracts, acceptance must be timely. The general rule is that acceptance in a bilateral contract is timely if it is made before the offer is terminated. Problems may arise, though, when the parties involved are not dealing face to face. In such situations, the offeree should use an authorized mode of communication.

Ratification

In contract law, ratification is the act of accepting and giving legal force to an obligation that previously was not enforceable. A minor who has reached the age of majority can ratify a contract expressly or impliedly. Express ratification takes place when the individual, on reaching the age of majority, states orally or in writing that he or she intends to be bound by the contract. Implied ratification takes place when the minor, on reaching the age of majority, indicates an intent to abide by the contract. If a minor fails to disaffirm a contract within a reasonable time after reaching the age of majority, then the court must determine whether the conduct constitutes ratification or disaffirmance. Typically, courts presume that executed contracts (fully performed contracts) are ratified and that executory contracts (contracts not yet fully performed by both parties) are disaffirmed.

The Objective Theory of Contracts

In determining whether a contract has been formed, the element of intent is of prime importance. In contract law, intent is determined by what is called the objective theory of contracts, not by the personal or subjective intent, or belief, of a party. The theory is that a party's intention to enter into a legally binding agreement, or contract, is judged by outward, objective facts. The facts are as interpreted by a reasonable person, rather than by the party's own secret, subjective intentions. Objective facts may include: 1)What the party said when entering into the contract. 2)How the party acted or appeared (intent may be manifested by conduct as well as by oral or written words). 3)The circumstances surrounding the transaction.

Intended versus Incidental Beneficiaries

In determining whether a third party beneficiary is an intended or an incidental beneficiary, the courts focus on intent, as expressed in the contract language and implied by the surrounding circumstances. Any beneficiary who is not deemed an intended beneficiary is considered incidental. Although no single test can embrace all possible situations, courts often apply the reasonable person test: Would a reasonable person in the position of the beneficiary believe that the promisee intended to confer on the beneficiary the right to enforce the contract? In addition, the presence of one or more of the following factors strongly indicates that the third party is an intended beneficiary to the contract: 1)Performance is rendered directly to the third party. 2)The third party has the right to control the details of performance. 3)The third party is expressly designated as a benefi- ciary in the contract.

Integrated Contracts

In determining whether to allow parol evidence, courts consider whether the written contract is intended to be the complete and final statement of the terms of the agreement. If it is, the contract is referred to as an inte- grated contract, and extraneous evidence (evidence from outside the contract) is excluded. A contract can be either completely or partially inte- grated. If it contains all of the terms of the parties' agreement, it is completely integrated. If it contains only some of the terms that the parties agreed on and not others, it is partially integrated. If the contract is only partially integrated, evidence of consistent additional terms is admissible to supplement the written agreement. Note that for both completely and partially integrated contracts, courts exclude any evidence that contradicts the writing. Parol evidence is allowed only to add to the terms of a partially integrated contract.

Form of the Assignment.

In general, an assignment can take any form, oral or written. Naturally, it is more difficult to prove that an oral assignment occurred, so it is advisable to put all assignments in writing. Of course, assignments covered by the Statute of Frauds—such as an assignment of an interest in land—must be in writing to be enforceable. In addition, most states require contracts for the assignment of wages to be in writing.4 There are other assignments that must be in writing as well.

Effect of Illegality

In general, an illegal contract is void—that is, the contract is deemed never to have existed, and the courts will not aid either party. In most illegal contracts, both parties are considered to be equally at fault—in pari delicto. If the contract is executory (not yet fulfilled), neither party can enforce it. If it has been executed, neither party can recover damages. Usually, the courts are not concerned if one wrongdoer in an illegal contract is unjustly enriched at the expense of the other. The main reason for this hands-off attitude is the belief that a plaintiff who has broken the law by entering into an illegal bargain should not be allowed to obtain help from the courts. Another justification is the hoped-for deterrent effect. A plaintiff who suffers a loss because of an illegal bargain will presumably be deterred from entering into similar illegal bargains in the future. There are, however, exceptions to the general rule that neither party to an illegal bargain can sue for breach and neither party can recover for performance rendered. We look at these exceptions next.

Conditions

In most contracts, promises of performance are not expressly conditioned or qualified. Instead, they are absolute promises. They must be performed, or the par- ties promising the acts will be in breach of contract. In some situations, however, performance is conditioned. A condition is a qualification in a contract based on a possible future event. The occurrence or nonoccurrence of the event will trigger the performance of a legal obligation or terminate an existing obligation under a contract. If the condition is not satisfied, the obligations of the parties are discharged. Three types of conditions can be present in contracts: conditions precedent, conditions subsequent, and con- current conditions. Conditions can also be classified as express or implied.

Mitigation of Damages

In most situations, when a breach of contract occurs, the innocent injured party is held to a duty to mitigate, or reduce, the damages that he or she suffers. Under this doctrine of mitigation of damages, the duty owed depends on the nature of the contract. Rental Agreements-Some states require a landlord to use reasonable means to find a new tenant if a tenant abandons the premises and fails to pay rent. If an accept- able tenant is found, the landlord is required to lease the premises to this tenant to mitigate the damages recover- able from the former tenant. The former tenant is still liable for the difference between the amount of the rent under the original lease and the rent received from the new tenant. If the land- lord has not taken reasonable steps to find a new tenant, a court will likely reduce any award made by the amount of rent the landlord could have received had he or she done so. Employment Contracts-In the majority of states, a person whose employment has been wrongfully terminated owes a duty to mitigate the damages that he or she suffered. In other words, a wrongfully terminated employee has a duty to take a similar job if one is available. If the employee fails to mitigate, the damages awarded will be equivalent to the person's former salary less the income he or she would have received in a similar job obtained by reasonable means. The employer has the burden of proving that such a job existed and that the employee could have been hired. Normally, the employee is under no duty to take a job of a different type and rank.

Recovery Based on Quasi Contract

In some situations, when no actual contract exists, a court may step in to prevent one party from being unjustly enriched at the expense of another party. Quasi contract is a legal theory under which an obligation is imposed in the absence of an agreement. The legal obligation arises because the law considers that the party accepting the benefits has made an implied promise to pay for them. Generally, when one party has conferred a benefit on another party, justice requires that the party receiving the benefit pay the reasonable value for it. The party conferring the benefit can recover in quantum meruit, which means "as much as he or she deserves."

Intoxication

Intoxication is a condition in which a person's normal capacity to act or think is inhibited by alcohol or some other drug. A contract entered into by an intoxicated person can be either voidable or valid (and thus enforceable). If the person was sufficiently intoxicated to lack mental capacity, then the agreement may be voidable even if the intoxication was purely voluntary. If, despite intoxication, the person understood the legal consequences of the agreement, the contract will be enforceable. Courts look at objective indications of the intoxicated person's condition to determine if he or she possessed or lacked the required capacity. It is difficult to prove that a person's judgment was so severely impaired that he or she could not comprehend the legal consequences of entering into a contract. Therefore, courts rarely permit contracts to be avoided due to intoxication. Disaffirmance-If a contract is voidable because one party was intoxicated, that person has the option of dis- affirming it while intoxicated and for a reasonable time after becoming sober. The person claiming intoxication typically must be able to return all consideration received unless the contract involved necessaries. Contracts for necessaries are voidable, but the intoxicated person is liable in quasi contract for the reasonable value of the consideration received. Ratification-An intoxicated person, after becoming sober, may ratify a contract expressly or impliedly, just as a minor may do on reaching majority. Implied ratification occurs when a person enters into a contract while intoxicated and fails to disaffirm the contract within a reasonable time after becoming sober. Acts or conduct inconsistent with an intent to disaffirm—such as the continued use of property purchased under a voidable contract—will also ratify the contract.

Mistakes of Fact

It is important to distinguish between mistakes of fact and mistakes of value or quality. Only a mistake of fact makes a contract voidable. Also, the mistake must involve some material fact—a fact that a reasonable per- son would consider important when determining his or her course of action. Mistakes of fact occur in two forms—bilateral and unilateral. A unilateral mistake is made by only one of the parties. A bilateral, or mutual, mistake is made by both of the contracting parties.

Delegations

Just as a party can transfer rights through an assignment, a party can also transfer duties. Duties are not assigned, however, they are delegated. The party delegating the duties is the delegator, and the party to whom the duties are delegated is the delegatee. Normally, a delegation of duties does not relieve the delegator of the obligation to perform in the event that the delegatee fails to do so. No special form is required to create a valid delegation of duties. As long as the delegator expresses an intention to make the delegation, it is effective. The delegator need not even use the word delegate.

Liquidated Damages Common in Certain Con- tracts

Liquidated damages provisions are frequently used in construction contracts. For instance, a provision requiring a construction contractor to pay $300 for every day he or she is late in completing the project is a liquidated damages provision. Such provisions are also common in contracts for the sale of goods.8 In addition, contracts with entertainers and professional athletes often include liquidated damages provisions.

Covenants Not to Compete and the Sale of an Ongoing Business

Many contracts involve a type of restraint called a covenant not to compete, or a restrictive covenant (promise). A covenant not to compete may be created when a merchant who sells a store agrees not to open a new store in a certain geographic area surrounding the old business. Such an agreement enables the seller to sell, and the purchaser to buy, the goodwill and reputation of an ongoing business without having to worry that the seller will open a competing business a block away. Provided the restrictive covenant is reasonable and is an ancillary part of the sale of an ongoing business, it is enforceable.

Ch.15

Mistakes, Fraud, and Voluntary Consent

Injury to the Innocent Party

Most courts do not require a showing of injury when the action is to rescind the contract. These courts hold that because rescission returns the parties to the positions they held before the contract was made, a showing of injury to the innocent party is unnecessary. In contrast, to recover damages caused by fraud, proof of harm is universally required. The measure of damages is ordinarily equal to the property's value had it been delivered as represented, less the actual price paid for the property. (Additionally, because fraud actions necessarily involve wrongful conduct, courts may also sometimes award punitive damages, which are not ordinarily available in contract actions.)

Reasonable Person Standard

Most other con- tracts need to be performed only to the satisfaction of a reasonable person unless they expressly state otherwise. When the subject matter of the contract is mechanical, courts are more likely to find that the performing party has performed satisfactorily if a reasonable person would be satisfied with what was done. When contracts require performance to the satisfaction of a third party with superior knowledge or training in the subject matter—such as a supervising engineer— the courts are divided. A majority of courts require the work to be satisfactory to a reasonable person, but some courts require the personal satisfaction of the third party designated in the contract. (Again, the personal judgment must be made honestly, or the condition will be excused.)

The Modern View

Most third party beneficiaries do not fit neatly into either the creditor beneficiary or the donee beneficiary category. Thus, the modern view adopted by the Restatement (Second) of Contracts does not draw clear lines between the types of intended beneficiaries. Today, courts frequently distinguish only between intended beneficiaries (who can sue to enforce contracts made for their benefit) and incidental beneficiaries (who cannot sue)

Ch.11

Nature and Terminology

The Function of Contract Law

No aspect of modern life is entirely free of contractual relationships. You acquire rights and obligations, for example, when you borrow funds, buy or lease a house, obtain insurance, and purchase goods or services. Contract law is designed to provide stability and predictability, as well as certainty, for both buyers and sellers in the marketplace. Contract law assures the parties to private agreements that the promises they make will be enforceable. Clearly, many promises are kept because the parties involved feel a moral obligation to keep them or because keeping a promise is in their mutual self-interest. The promisor (the person making the promise) and the promisee (the person to whom the promise is made) may also decide to honor their agreement for other reasons. In business agreements, the rules of contract law are often followed to avoid potential disputes. By supplying procedures for enforcing private contractual agreements, contract law provides an essential condition for the existence of a market economy. With- out a legal framework of reasonably assured expectations within which to make long-run plans, businesspersons would be able to rely only on the good faith of others. Duty and good faith are usually sufficient to obtain compliance with a promise. When price changes or adverse economic factors make contract compliance costly, however, these elements may not be enough. Contract law is necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief.

Mixed Contracts with Express and Implied Terms.

Note that a contract may be a mixture of an express contract and an implied contract. In other words, a contract may contain some express terms and some implied terms. During the construction of a home, for instance, the homeowner often asks the builder to make changes in the original specifications. Among other implied terms, all contracts include an implied covenant of good faith and fair dealing. This implied term requires the parties to perform in accord with the contract and the parties' reasonable expectations under it.

Underlying Policy

Note that any breach entitles the nonbreaching party to sue for damages, but only a material breach discharges the nonbreaching party from the con- tract. The policy underlying these rules allows a contract to go forward when only minor problems occur but allows it to be terminated if major difficulties arise.

Agreement in E-Contracts

Numerous contracts are formed online. Electronic con- tracts, or e-contracts, must meet the same basic requirements (agreement, consideration, contractual capacity, and legality) as paper contracts. Disputes concerning e-contracts, however, tend to center on contract terms and whether the parties voluntarily agreed to those terms. Online contracts may be formed not only for the sale of goods and services but also for licensing. The "sale" of software generally involves a license, or a right to use the software, rather than the passage of title (ownership rights) from the seller to the buyer.

Exculpatory Clauses

Often closely related to the concept of unconscionability are exculpatory clauses, which release a party from liability in the event of monetary or physical injury no matter who is at fault. Indeed, courts sometimes refuse to enforce such clauses on the ground that they are unconscionable. Often Violate Public Policy-Most courts view exculpatory clauses with disfavor. Exculpatory clauses found in rental agreements for commercial property are frequently held to be contrary to public policy, and such clauses are almost always unenforceable in residential property leases. Courts also usually hold that exculpatory clauses are against public policy in the employment context. Thus, employers frequently cannot enforce exculpatory clauses in contracts with employees or independent contractors to avoid liability for work-related injuries. When Courts Will Enforce Exculpatory Clauses-Courts do enforce exculpatory clauses if they are reasonable, do not violate public policy, and do not protect parties from liability for intentional misconduct. The language used must not be ambiguous, and the parties must have been in relatively equal bargaining positions. Businesses such as health clubs, racetracks, amusement parks, skiing facilities, horse-rental operations, golf-cart concessions, and skydiving organizations frequently use exculpatory clauses to limit their liability for patrons' injuries. Because these services are not essential, the companies offering them have no relative advantage in bargaining strength, and anyone contracting for their services does so voluntarily. Courts also may enforce reasonable exculpatory clauses in loan documents, real estate contracts, and trust agreements.

Contract Illegal through Fraud, Duress, or Undue Influence

Often, one party to an illegal con- tract is more at fault than the other. When one party uses fraud, duress, or undue influence to induce another party to enter into an illegal bargain, the second party will be allowed to recover for the performance or its value

Notice of Assignment

Once a valid assignment of rights has been made, the assignee should notify the obligor of the assignment. Giving notice is not legally necessary to establish the validity of the assignment: an assignment is effective immediately, whether or not notice is given. Two major problems arise, however, when notice of the assignment is not given to the obligor.

Dispute-Settlement Provisions

Online offers frequently include provisions relating to dispute settlement. For instance, an offer might include an arbitration clause specifying that any dispute arising under the contract will be arbitrated in a designated forum. The parties might also select the forum and the law that will govern any disputes. Many online contracts contain a forum-selection clause indicating the forum, or location (such as a court or jurisdiction), in which contract disputes will be resolved. Significant jurisdictional issues may arise when parties are at a great distance, as they often are when they form contracts via the Internet. A forum- selection clause will help to avert future jurisdictional problems and also help to ensure that the seller will not be required to appear in court in a distant state. Some online contracts may also include a choice-of-law clause, specifying that any contract dispute will be settled according to the law of a particular jurisdiction, such as a state or country. Choice-of-law clauses are particularly common in international con- tracts, but they may also appear in e-contracts to specify which state's laws will govern in the United States.

Waiver of Breach and Subsequent Breaches

Ordinarily, a waiver by a contracting party will not operate to waive subsequent, additional, or future breaches of contract. This is always true when the subsequent breaches are unrelated to the first breach.

Sale of Land.

Ordinarily, because each parcel of land is unique, the remedy for a seller's breach of a contract for a sale of real estate is specific performance. That is, the buyer is awarded the parcel of property for which she or he bargained. (Specific performance will be discussed more fully later in this chapter.) The majority of states follow this rule. When the buyer is the party in breach, the measure of damages is typically the difference between the contract price and the market price of the land. The same measure is used when specific performance is not available (because the seller has sold the property to someone else, for example).

Silence as Acceptance

Ordinarily, silence cannot constitute acceptance, even if the offeror states, "By your silence and inaction, you will be deemed to have accepted this offer." An offeree should not be obligated to act affirmatively to reject an offer when no consideration (nothing of value) has passed to the offeree to impose such a duty. In some instances, however, the offeree does have a duty to speak, and her or his silence or inaction will operate as an acceptance. Silence can constitute an acceptance when the offeree has had prior dealings with the offeror

Ch.18

Performance and Discharge

Procedural Unconscionability

Procedural unconscionability often involves inconspicuous print, unintelligible language ("legalese"), or the lack of an opportunity to read the contract or ask questions about its meaning. This type of unconscionability typically arises when a party's lack of knowledge or understanding of the contract terms deprived him or her of any meaningful choice. Procedural unconscionability can also occur when there is such disparity in bargaining power between the two parties that the weaker party's consent is not voluntary. This type of situation often involves an adhesion contract, which is a contract written exclusively by one party and presented to the other on a take-it-or-leave-it basis.11 In other words, the party to whom the contract is presented (usually a buyer or borrower) has no opportunity to negotiate its terms.

Punitive Damages

Punitive damages are very seldom awarded in lawsuits for breach of contract. Because punitive damages are designed to punish a wrongdoer and set an example to deter similar conduct in the future, they have no legitimate place in contract law. A contract is simply a civil relationship between the parties. The law may compensate one party for the loss of the bargain—no more and no less. When a person's actions cause both a breach of contract and a tort (such as fraud), however, punitive damages may be available.

When Quasi Contract Is Used

Quasi contract allows a court to act as if a contract exists when there is no actual contract or agreement between the parties. Therefore, if the parties have entered into a contract concerning the matter in controversy, a court normally will not impose a quasi contract. A court can also use this theory when the parties entered into a con- tract, but it is unenforceable for some reason. Quasi-contractual recovery is often granted when one party has partially performed under a contract that is unenforceable. It provides an alternative to suing for damages and allows the party to recover the reasonable value of the partial performance. Depending on the case, the amount of the recovery may be measured either by the benefit received or by the detriment suffered.

Quasi Contracts

Quasi contracts, or contracts implied in law, are not actual contracts. Rather, they are fictional contracts that courts can impose on the parties "as if" the parties had entered into an actual contract. (The word quasi is Latin for "as if.") Quasi contracts are equitable rather than legal con- tracts. Usually, they are imposed to avoid the unjust enrichment of one party at the expense of another. The doctrine of unjust enrichment is based on the theory that individuals should not be allowed to profit or enrich themselves inequitably at the expense of others

Anticipatory Repudiation and Market Prices

Quite often, anticipatory repudiation occurs when performance of the contract would be extremely unfavorable to one of the parties because of a sharp fluctuation in market prices. Can still treat the repudiation as a material breach and immediately pursue remedies

Reformation

Reformation is an equitable remedy used when the par- ties have imperfectly expressed their agreement in writing. Reformation allows a court to rewrite the contract to reflect the parties' true intentions. Fraud or Mutual Mistake Is Present-Courts order reformation most often when fraud or mutual mistake (for example, a clerical error) is present. Typically, a party seeks reformation so that some other remedy may then be pursued. Written Contract Incorrectly States the Parties' Oral Agreement-A court will also reform a contract when two parties enter into a binding oral contract but later make an error when they attempt to put the terms into writing. Normally, a court will allow into evidence the correct terms of the oral contract, thereby reforming the written contract. Covenants Not to Compete-Courts also may reform contracts that contain a written covenant not to compete. Such covenants are often included in contracts for the sale of ongoing businesses and in employment contracts. The agreements restrict the area and time in which one party can directly compete with the other party. A covenant not to compete may be for a valid and legitimate purpose, but may impose unreasonable area or time restraints. In such instances, some courts will reform the restraints by making them reasonable and will then enforce the entire contract as reformed. Other courts will throw out the entire restrictive covenant as illegal. Thus, when businesspersons create restrictive covenants, they must make sure that the restrictions imposed are reasonable.

Rescission

Rescission is essentially an action to undo, or terminate, a contract—to return the contracting parties to the posi- tions they occupied prior to the transaction.When fraud, a mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is present, unilateral rescission is available. Rescission may also be available by statute. The failure of one party to perform entitles the other party to rescind the contract. The rescinding party must give prompt notice to the breaching party.

Restitution Is Not Limited to Rescission Cases

Restitution may be appropriate when a contract is rescinded, but the right to restitution is not limited to rescission cases. Because an award of restitution basically returns something to its rightful owner, a party can seek restitution in actions for breach of contract, tort actions, and other types of actions. Restitution can be obtained, for instance, when funds or property have been transferred by mistake or because of fraud or incapacity. Similarly, restitution may be available when there has been misconduct by a party in a confidential or other special relationship. Even in criminal cases, a court can order restitution of funds or property obtained through embezzlement, conversion, theft, or copyright infringement.

Online Offers

Sellers doing business via the Internet can protect themselves against contract disputes and legal liability by creating offers that clearly spell out the terms that will govern their transactions if the offers are accepted. All important terms should be conspicuous and easy to view. Displaying the Offer-The seller's Web site should include a hypertext link to a page containing the full contract so that potential buyers are made aware of the terms to which they are assenting. The contract generally must be displayed online in a readable format, such as a twelve- point typeface. All provisions should be reasonably clear. Provisions to Include-An important point to keep in mind is that the offeror (the seller) controls the offer and thus the resulting contract. The seller should therefore anticipate the terms he or she wants to include in a con-tract and provide for them in the offer. In some instances, a standardized contract form may suffice. At a minimum, an online offer should include the following provisions: 1)Acceptance of terms. A clause that clearly indicates what constitutes the buyer's agreement to the terms of the offer, such as a box containing the words "I accept" that the buyer can click. 2)Payment. A provision specifying how payment for the goods (including any applicable taxes) must be made. 3)Return policy. A statement of the seller's refund and return policies. 4)Disclaimer. Disclaimers of liability for certain uses of the goods. For instance, an online seller of business forms may add a disclaimer that the seller does not accept responsibility for the buyer's reliance on the forms rather than on an attorney's advice. 5)Limitation on remedies. A provision specifying the remedies available to the buyer if the goods are found to be defective or if the contract is otherwise breached. Any limitation of remedies should be clearly spelled out. 6)Privacy policy. A statement indicating how the seller will use the information gathered about the buyer. 7)Dispute resolution. Provisions relating to dispute set- tlement

Negligent Misrepresentation

Sometimes, a party makes a misrepresentation through carelessness, believing the statement is true, which can constitute negligent misrepresentation. Negligent misrepresentation occurs if the party does not exercise reasonable care in uncovering or disclosing facts, or use the skill and competence required by his or her business or profession In almost all states, such negligent misrepresentation is equal to scienter, or knowingly making a misrepresentation. In effect, negligent misrepresentation is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful. In negligent misrepresentation, culpable ignorance of the truth supplies the intention to mislead, even if the defendant can claim, "I didn't know."

Incidental Beneficiaries

Sometimes, a third person receives a benefit from a contract even though that person's benefit is not the reason the contract was made. Such a person is known as an incidental beneficiary. Because the benefit is unintentional, an incidental beneficiary cannot sue to enforce the contract.

The Parol Evidence Rule

Sometimes, a written contract does not include—or contradicts—an oral understanding reached by the parties before or at the time of contracting. For instance, a land- lord might tell a person who agrees to rent an apartment that cats are allowed, whereas the lease contract clearly states that no pets are permitted. In deciding such disputes, the courts look to a common law rule called the parol evidence rule Under the parol evidence rule, if a court finds that a written contract represents the complete and final statement of the parties' agreement, it will not allow either party to present parol evidence. Parol evidence is testimony or other evidence of communications between the parties that is not contained in the contract itself. A party normally cannot present any evidence of the following if that evidence contradicts or varies the terms of the written contract: 1)Negotiations prior to contract formation. 2)Agreements prior to contract formation. 3)Oral agreements contemporaneous with (at the same time as) contract formation.

Covenants Not to Compete in Employment Contracts.

Sometimes, agreements not to compete (also referred to as noncompete agreements) are included in employment contracts. People in middle- or upper-level management positions commonly agree not to work for competitors or not to start competing businesses for a specified period of time after termination of employment. Noncompete agreements are legal in most states so long as the specified period of time (of restraint) is not excessive in duration and the geographic restriction is reasonable. What constitutes a reasonable time period may be shorter in the online environment than in conventional employment contracts. Because the geographical restrictions apply worldwide, the time restrictions may be shorter. The laws governing the enforceability of covenants not to compete vary significantly from state to state. In some states, including Texas, such a covenant will not be enforced unless the employee has received some benefit in return for signing the noncompete agreement. This is true even if the covenant is reasonable as to time and area. If the employee receives no benefit, the covenant will be deemed void. Occasionally, depending on the jurisdiction, courts will reform covenants not to compete. If a covenant is found to be unreasonable in time or geographic area, the court may convert the terms into reasonable ones and then enforce the reformed covenant. Such court actions present a problem, though, in that the judge implicitly becomes a party to the contract. Consequently, courts usually resort to contract reformation only when necessary to prevent undue burdens or hardships.

Equitable Remedies

Sometimes, damages are an inadequate remedy for a breach of contract. In these situations, the nonbreaching party may ask the court for an equitable remedy. Equitable remedies include rescission and restitution, specific performance, and reformation.

Agreements That Lack Consideration

Sometimes, one of the parties (or both parties) to an agreement may think that consideration has been exchanged when in fact it has not. Here, we look at some situations in which the parties' promises or actions do not qualify as contractual consideration. Preexisting Duty-Under most circumstances, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. The preexisting legal duty may be imposed by law or may arise out of a previous contract. A sheriff, for instance, has a duty to investigate crime and to arrest criminals. Hence, a sheriff cannot collect a reward for providing information leading to the capture of a criminal. Likewise, if a party is already bound by contract to perform a certain duty, that duty cannot serve as con- sideration for a second contract. Unforeseen Difficulties-Nonetheless, if, during performance of a contract, extraordinary difficulties arise that were totally unforeseen at the time the contract was formed, a court may allow an exception to the rule. The key is whether the court finds that the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made Rescission and New Contract-The law recognizes that two parties can mutually agree to rescind, or cancel, their contract, at least to the extent that it is executory (still to be carried out). Rescission is the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made. Sometimes, parties rescind a contract and make a new contract at the same time. When this occurs, it is often difficult to determine whether there was consideration for the new contract, or whether the parties had a preexisting duty under the previous contract. If a court finds there was a preexisting duty, then the new contract will be invalid because there was no consideration. Past Consideration-Promises made in return for actions or events that have already taken place are unenforceable. These promises lack consideration in that the element of bargained- for exchange is missing. In short, you can bargain for something to take place now or in the future but not for something that has already taken place. Therefore, past consideration is no consideration.

Justifiable Ignorance of the Facts

Sometimes, one of the parties to a contract has no reason to know that the contract is illegal and thus is relatively innocent. That party can often recover any benefits conferred in a partially executed contract. In this situation, the courts will not enforce the contract but will allow the parties to return to their original positions. Sometimes, a court may permit an innocent party who has fully performed under the contract to enforce the contract against the guilty party.

Option-to-Cancel Clauses

Sometimes, option-to-cancel clauses in contracts present problems in regard to consideration. When the promisor has the option to cancel the contract before performance has begun, the promise is illusory.

Interpretation of Contracts

Sometimes, parties agree that a contract has been formed but disagree on its meaning or legal effect. One reason this may happen is that one of the parties is not familiar with the legal terminology used in the con- tract. To an extent, plain language laws (enacted by the federal government and a majority of the states) have helped to avoid this difficulty. Sometimes, though, a dispute may arise over the meaning of a contract simply because the rights or obligations under the contract are not expressed clearly—no matter how "plain" the language used.

Substitute Method of Acceptance.

Sometimes, the offeror authorizes a particular method of acceptance, but the offeree accepts by a different means. In that situation, the acceptance may still be effective if the substituted method serves the same purpose as the authorized means. Acceptance by a substitute method is not effective on dispatch, however. No contract will be formed until the acceptance is received by the offeror.

Adhesion Contracts and Unconscionability

Sometimes, the terms of a contract are dictated by a party with overwhelming bargaining power. The signer must agree to those terms or go without the commodity or service in question. In these situations, questions concerning voluntary consent may arise. (Many such contracts include arbitration provisions, as discussed in this chapter's Ethics Today feature.) Adhesion contracts are written exclusively by one party and presented to the other party on a take-it-or- leave-it basis. These contracts often use standard forms, which give the adhering party no opportunity to negotiate the contract terms. •Adhesion contracts are mostly unconscionable

Standard-Form Contracts

Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by one party to the other. A variety of businesses use such contracts. Life insurance policies, residential leases, loan agreements, and employment agency contracts are often standard- form contracts. To avoid enforcement of the contract or of a particular clause, the plaintiff normally must show that the contract or particular term is unconscionable.

Exceptions to a Minor's Right to Disaffirm

State courts and legislatures have carved out several exceptions to the minor's right to disaffirm. For public-policy reasons, some contracts, such as marriage contracts and contracts to enlist in the armed services, cannot be avoided. In addition, although ordinarily minors can disaffirm contracts even when they have misrepresented their age, a growing number of states have enacted laws to prohibit disaffirmance in such situations. Other states prohibit disaffirmance by minors who misrepresented their age while engaged in business as an adult. Finally, a minor who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the goods. Necessaries are basic needs, such as food, clothing, shelter, and medical services. What is a necessary for one minor, however, may be a luxury for another, depending on the minors' customary living standard. Contracts for necessaries are enforceable only to the level of value needed to maintain the minor's standard of living.

Promises to Pay Debts Barred by a Statute of Limitations

Statutes of limitations in all states require a creditor to sue within a specified period to recover a debt. If the creditor fails to sue in time, recovery of the debt is barred by the statute of limitations. A debtor who promises to pay a previous debt even though recovery is barred by the statute of limitations makes an enforceable promise. The promise needs no consideration. (Some states, however, require that it be in writing.) In effect, the promise extends the limitations period, and the creditor can sue to recover the entire debt or at least the amount promised. The promise can be implied if the debtor acknowledges the barred debt by making a partial payment.

Contracts Contrary to Statute

Statutes often set forth rules specifying what may be included in contracts and what is prohibited.

Substantive Unconscionability

Substantive unconscionability occurs when contracts, or portions of contracts, are oppressive or overly harsh. Courts generally focus on provisions that deprive one party of the benefits of the agreement or leave that party without a remedy for non- performance by the other. Substantive unconscionability can arise in a wide variety of business contexts. For instance, a contract clause that gives the business entity unconstrained access to the courts but requires the other party to arbitrate any dispute with the firm may be unconscionable.

The Uniform Electronic Transactions Act

The National Conference of Commissioners on Uniform State Laws and the American Law Institute promulgated the Uniform Electronic Transactions Act (UETA) in 1999. The UETA has been adopted, at least in part, by forty-eight states, resulting in more uniformity among state laws governing electronic transactions. Among other things, the UETA declares that a signature may not be denied legal effect or enforceability solely because it is in electronic form. The primary purpose of the UETA is to remove barriers to e-commerce by giving the same legal effect to electronic records and signatures as is given to paper documents and signatures. As mentioned, the UETA broadly defines an e-signature as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record."19 A record is "information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable [visual] form." The UETA does not create new rules for electronic con- tracts. Rather, it establishes that records, signatures, and contracts may not be denied enforceability solely due to their electronic form. The UETA does not apply to all writings and signatures. It covers only electronic records and electronic signatures relating to a transaction. A transaction is defined as an interaction between two or more people relating to business, commercial, or governmental activities.21 The act specifically does not apply to wills or testamentary trusts or to transactions governed by the UCC (other than those covered by Articles 2 and 2A).22 In addition, the provisions of the UETA allow the states to exclude its application to other areas of law. Under the UETA, if an electronic record or signature is the act of a particular person, the record or signature may be attributed to that person. If a person types her or his name at the bottom of an e-mail purchase order, for instance, that name qualifies as a "signature." The signature is therefore attributed to the person whose name appears on the purchase order. The UETA does not contain any express provisions about what constitutes fraud or whether an agent is authorized to enter into a contract. Under the UETA, other state laws control if any issues relating to agency, authority, forgery, or contract formation arise. If existing state law requires a document to be notarized, the UETA provides that this requirement is satisfied by the electronic signature of a notary public or other person authorized to verify signatures. The UETA encourages, but does not require, the use of security procedures (such as encryption) to verify changes to electronic documents and to correct errors. The parties themselves may agree to use a security procedure. If they do, and if one party does not follow the procedure and thus fails to detect an error, the party that followed procedure can legally avoid the effect of the error. When the parties have not agreed to use a security procedure, then other state laws (including contract law governing mistakes) will determine the effect of the error. To avoid the effect of errors, a party must promptly notify the other party of the error and of her or his intent not to be bound by the error. In addition, the party must take reasonable steps to return any benefit received. Parties cannot avoid a transaction if they have benefited. An electronic record is considered sent when it is properly directed to the intended recipient in a form readable by the recipient's computer system. Once the electronic record leaves the control of the sender or comes under the control of the recipient, the UETA deems it to have been sent. An electronic record is considered received when it enters the recipient's processing system in a read- able form—even if no individual is aware of its receipt.

Online Acceptances

The Restatement (Second) of Contracts, which is a compilation of common law contract principles, states that parties may agree to a contract "by written or spoken words or by other action or by failure to act. The Uniform Commercial Code (UCC), which governs sales contracts, has a similar provision. Section 2-204 of the UCC states that any contract for the sale of goods "may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." The courts have used these provisions in determining what constitutes an online acceptance. The courts have concluded that the act of clicking on a box labeled "I accept" or "I agree" can indicate acceptance of an online offer. The agreement resulting from such an acceptance is often called a click-on agreement (sometimes referred to as a click-on license or click-wrap agreement). Generally, the law does not require that the parties have read all of the terms in a contract for it to be effective. Therefore, clicking on a box that states "I agree" to certain terms can be enough. The terms may be contained on a Web site through which the buyer is obtaining goods or services. They may also appear on a screen when software is downloaded from the Internet. With a shrink-wrap agreement (or shrink-wrap license), the terms are expressed inside the box in which the goods are packaged. (The term shrink-wrap refers to the plastic that covers the box.) Usually, the party who opens the box is told that she or he agrees to the terms by keeping whatever is in the box. Similarly, when a purchaser opens a software package, he or she agrees to abide by the terms of the limited license agreement. Like the terms of click-on agreements, browse-wrap terms can occur in trans- actions conducted over the Internet. Unlike click-on agreements, however, browse-wrap terms do not require Internet users to assent to the terms before downloading or using certain software. In other words, a person can install the software without clicking "I agree" to the terms of a license. Browse-wrap terms are often unenforceable because they do not satisfy the agreement requirement of contract formation.

Contracts for the Sale of Goods

The Uniform Commercial Code (UCC) includes Statute of Frauds provisions that require written evidence or an electronic record of a contract for the sale of goods priced at $500 or more. (This low threshold amount may be increased in the future.) A writing that will satisfy the UCC requirement need only state the quantity term (6,000 boxes of cotton gauze, for instance). The contract will not be enforceable for any quantity greater than that set forth in the writing. Other agreed-on terms can be omitted or stated imprecisely in the writing, as long as they adequately reflect both parties' intentions. A written memorandum or series of communications evidencing a contract will suffice, provided that the writing is signed by the party against whom enforcement is sought. The writing normally need not designate the buyer or the seller, the terms of payment, or the price.

The UCC Allows Sales Contracts to Limit Remedies

The Uniform Commercial Code (UCC) provides that in a contract for the sale of goods, remedies can be limited.

Contracts in Restraint of Trade

The United States has a strong public policy favoring competition in the economy. Thus, contracts in restraint of trade (anticompetitive agreements) generally are unenforceable because they are contrary to public policy. (Reduce Competition)Typically, such contracts also violate one or more federal or state antitrust statutes. An exception is recognized when the restraint is reasonable and is contained in an ancillary (secondary or subordinate) clause in a contract. Such restraints often are included in contracts for the sale of an ongoing business and for employment contracts.

Ch.16

The Writing Requirement in Our Digital World

Sources of Contract Law

The common law governs all contracts except when it has been modified or replaced by statutory law, such as the Uniform Commercial Code (UCC), or by administrative agency regulations. Contracts relating to services, real estate, employment, and insurance, for instance, generally are governed by the common law of contracts. Contracts for the sale and lease of goods, however, are governed by the UCC—to the extent that the UCC has modified general contract law.

Termination of the Offer

The communication of an effective offer to an offeree gives the offeree the power to transform the offer into a binding, legal obligation (a contract) by an acceptance. This power of acceptance does not continue forever, though. It can be terminated either by action of the par- ties or by operation of law.

Situations in Which Intent May Be Lacking

The concept of intention can be further clarified by looking at statements that are not offers and situations in which the parties' intent to be bound might be questionable. 1. Expressions of opinion. An expression of opinion is not an offer. It does not indicate an intention to enter into a binding agreement. 2. Statements of future intent. A statement of an intention to do something in the future (such as "I plan to sell my Verizon stock") is not an offer. 3. Preliminary negotiations. A request or invitation to negotiate is not an offer. It only expresses a willingness to discuss the possibility of entering into a contract. Statements such as "Will you sell your farm?" or "I wouldn't sell my car for less than $8,000" are examples. 4. Invitations to bid. When a government entity or private firm needs to have construction work done, contractors are invited to submit bids. The invitation to submit bids is not an offer. The bids that contractors submit are offers, however, and the government entity or private firm can bind the contractor by accepting the bid. 5. Advertisements and price lists. In general, representations made in advertisements and price lists are treated not as offers to contract but as invitations to negotiate. 6. Live and online auctions. In a live auction, a seller "offers" goods for sale through an auctioneer, but this is not an offer to form a contract. Rather, it is an invitation asking bidders to submit offers. In the context of an auction, a bidder is the offeror, and the auctioneer is the offeree. The offer is accepted when the auctioneer strikes the hammer.

Specific Performance

The equitable remedy of specific performance calls for the performance of the act promised in the contract. This remedy is attractive to a nonbreaching party because it provides the exact bargain promised in the contract. It also avoids some of the problems inherent in a suit for damages, such as collecting a judgment and arranging another contract. In addition, the actual performance may be more valuable than the monetary damages. Normally, however, specific performance will not be granted unless the party's legal remedy (monetary dam- ages) is inadequate.12 For this reason, contracts for the sale of goods rarely qualify for specific performance. The legal remedy—monetary damages—is ordinarily adequate in such situations because substantially identical goods can be bought or sold in the market. Only if the goods are unique will a court grant specific performance. For instance, paintings, sculptures, or rare books or coins are so unique that monetary damages will not enable a buyer to obtain substantially identical substitutes in the market. Sale of Land-A court may grant specific performance to a buyer in an action for a breach of contract involving the sale of land. In this situation, the legal remedy of monetary damages may not compensate the buyer adequately. After all, every parcel of land is unique: the same land in the same location obviously cannot be obtained elsewhere. Only when specific performance is unavailable (such as when the seller has sold the property to someone else) will monetary damages be awarded instead. Contracts for Personal Services-Contracts for personal services require one party to work personally for another party. Courts generally refuse to grant specific performance of personal-service contracts. One reason is that to order a party to perform personal services against his or her will amounts to a type of involuntary servitude. Moreover, the courts do not want to monitor contracts for personal services, which usually require the exercise of personal judgment or talent.

Misrepresentation Has Occurred

The first element of proving fraud is to show that misrepresentation of a material fact has occurred. This misrepresentation can occur by words or actions. For instance, the statement "This sculpture was created by Michelangelo" is a misrepresentation of fact if another artist sculpted the statue. Similarly, if a customer asks to see only paintings by Jasper Johns and the gallery owner immediately leads the customer to paintings that were not done by Johns, the owner's actions can be a misrepresentation. Misrepresentation by Conduct-Misrepresentation also occurs when a party takes specific action to conceal a fact that is material to the contract.Therefore, if a seller, by her or his actions, prevents a buyer from learning of some fact that is material to the contract, such behavior constitutes misrepresentation by conduct. Statements of Opinion-Statements of opinion and representations of future facts (predictions) generally are not subject to claims of fraud. Statements such as "This land will be worth twice as much next year" and "This car will last for years and years" are statements of opinion, not fact. A fact is objective and verifiable, whereas an opinion is usually subject to debate. Contracting parties should know the difference and should not rely on statements of opinion Misrepresentation of Law-Misrepresentation of law ordinarily does not entitle a party to relief from a con- tract(People are assumed to know). Exceptions to this rule occur when the misrepresenting party is in a profession that is known to require greater knowledge of the law than the average citizen possesses. For instance Misrepresentation by Silence-Ordinarily, neither party to a contract has a duty to come forward and disclose facts. Therefore, courts typically do not set aside contracts because a party did not volunteer pertinent information Example:Jim is selling a car that has been in an accident and has been repaired. He does not need to volunteer this information to a potential buyer. If, however, the purchaser asks Jim if the car has had extensive bodywork and he lies, he has committed a fraudulent misrepresentation. In general, if a seller knows of a serious potential problem that the buyer cannot reasonably be expected to dis- cover, the seller may have a duty to speak. Usually, the seller must disclose only latent defects—that is, defects that could not readily be ascertained. Because a buyer of a house could easily discover the presence of termites through an inspection, for instance, termites may not qualify as a latent defect. Also, when the parties are in a fiduciary relation- ship—one of trust, such as partners, physician and patient, or attorney and client—they have a duty to disclose mate- rial facts. Failure to do so may constitute fraud.

Intention

The first requirement for an effective offer is a serious intent on the part of the offeror. Serious intent is not determined by the subjective intentions, beliefs, and assumptions of the offeror. Rather, it is determined by what a reasonable person in the offeree's position would conclude that the offeror's words and actions meant. Offers made in obvious anger, jest, or undue excitement do not meet the serious-and-objective-intent test. A reasonable person would realize that such offers were not made seriously. Because these offers are not effective, an offeree's acceptance does not create an agreement.

Elements of a Contract

The following list briefly describes the four requirements that must be met before a valid contract exists. If any of these elements is lacking, no contract will have been formed. 1)Agreement-An agreement to form a contract includes an offer and an acceptance. One party must offer to enter into a legal agreement, and another party must accept the terms of the offer. 2)Consideration-Any promises made by the parties to the contract must be supported by legally sufficient and bargained-for consideration (something of value received or promised, such as money, to convince a person to make a deal) 3)Contractual Capacity-Both parties entering into the contract must have the contractual capacity to do so. The law must recognize them as possessing characteristics that qualify them as competent parties. 4)Legality-The contract's purpose must be to accomplish some goal that is legal and not against public policy. An agreement to form a contract can modify the terms of a previous contract. When a dispute concerns whether this occurred, the offer and acceptance of both agreements can be reviewed to determine their effect. As in every case involving a contract, the parties' subjective beliefs with respect to the terms are irrelevant, particularly in the absence of any evidence to support those beliefs.

Contracts That Require a Writing

The following types of contracts are generally required to be in writing or evidenced by a written memorandum or electronic record: 1)Contracts involving interests in land 2)Contracts that cannot by their terms be performed within one year from the day after the date of formation. 3)Collateral, or secondary, contracts, such as promises to answer for the debt or duty of another and promises by the administrator or executor of an estate to pay a debt of the estate personally—that is, out of her or his own pocket.(SURETYSHIP) 4)Promises made in consideration of marriage. 5)Under the Uniform Commercial Code (UCC), con- tracts for the sale of goods priced at $500 or more.

Discharge by Performance

The great majority of contracts, as noted earlier, are dis- charged by performance. The contract comes to an end when both parties fulfill their respective duties by per- forming the acts they have promised. Performance can also be accomplished by tender. Tender is an unconditional offer to perform by a person who is ready, willing, and able to do so. Therefore, a seller who places goods at the disposal of a buyer has tendered delivery and can demand payment. A buyer who offers to pay for goods has tendered payment and can demand delivery of the goods. Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. If the other party then refuses to perform, the party making the tender can sue for breach of contract. There are two basic types of performance— complete performance and substantial performance.

Types of Intended Beneficiaries

The law traditionally recognized two types of intended third party beneficiaries: creditor beneficiaries and donee beneficiaries.

Disaffirmance

The legal avoidance, or setting aside, of a contractual obligation is referred to as disaffirmance. To disaffirm, a minor must express his or her intent, through words or conduct, not to be bound to the con- tract. The minor must disaffirm the entire contract, not merely a portion of it. For instance, the minor cannot decide to keep part of the goods purchased under a con- tract and return the remaining goods. Note that an adult who enters into a contract with a minor cannot avoid his or her contractual duties on the ground that the minor can do so. Unless the minor exercises the option to disaffirm the contract, the adult party normally is bound by it

Construction Contracts.

The measure of damages in a building or construction contract varies depending on which party breaches and when the breach occurs. Breach by owner. The owner may breach at three different stages—before, during, or after performance. If the owner breaches before performance has begun, the contractor can recover only the profits that would have been made on the contract. (Profits equal the total contract price less the cost of materials and labor.) If the owner breaches during performance, the contractor can recover the profits plus the costs incurred in partially constructing the building. If the owner breaches after the construction has been completed, the contractor can recover the entire contract price, plus interest. Breach by contractor. When the construction contractor breaches the contract—either by failing to begin construction or by stopping work partway through the project—the measure of damages is the cost of completion. The cost of completion includes reason- able compensation for any delay in performance. If the contractor finishes late, the measure of damages is the loss of use. Breach by both owner and contractor. When the performance of both parties—the construction contractor and the owner—falls short of what their contract required, the courts attempt to strike a fair balance in awarding damages.

Performance and Discharge

The most common way to Discharge or Terminate Contractual Duties is by the performance of those duties. In a perfect world, every party who signed a contract would perform his or her duties completely and in a timely manner thereby discharging the contract. The real world is more complicated. Events often occur that affect our performance of our ability to perform contractual duties. In addition, the duty to perform under a contract is not always absolute. It may instead be conditioned on the occurrence or nonoccurrence of a certain event. The legal environment of business requires the identification of some point at which the parties can reasonably know that their duties have ended.

Effect on the Contract

The party who has rendered defective or less-than-full performance remains liable for the damages caused by the breach of contract. In effect, the waiver operates to keep the contract going. The waiver prevents the nonbreaching party from declaring the contract at an end or rescinding the contract. The contract continues, but the nonbreaching party can recover damages caused by the defective or less-than-full performance.

Termination by Operation of Law

The power of the offeree to transform the offer into a binding, legal obligation can be terminated by operation of law through the occurrence of any of the following events: 1)Lapse of time. 2)Destruction of the specific subject matter of the offer. 3)Death or incompetence of the offeror or the offeree. 4)Supervening illegality of the proposed contract. (A statute or court decision that makes an offer illegal automatically terminates the offer.)

Bargained-for Exchange

The second element of consideration is that it must provide the basis for the bargain struck between the contracting parties. That is, the item of value must be given or promised by the promisor (offeror) in return for the promisee's promise, performance, or promise of performance. This element of bargained-for exchange distinguishes contracts from gifts

Intent to Deceive

The second element of fraud is knowledge on the part of the misrepresenting party that facts have been falsely represented. This element, normally called scienter, or "guilty knowledge," signifies that there was an intent to deceive. Scienter clearly exists if a party knows that a fact is not as stated. Scientorr also exists if a party makes a statement that he or she believes is not true or makes a statement recklessly, without regard to whether it is true or false. Finally, this element is met if a party says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not.

Definiteness of Terms

The second requirement for an effective offer involves the definiteness of its terms. An offer must have reasonably definite terms so that a court can determine if a breach has occurred and give an appropriate remedy. The specific terms required depend, of course, on the type of contract. Generally, a contract must include the following terms, either expressed in the contract or capable of being reasonably inferred from it: 1. The identification of the parties. 2. The identification of the object or subject matter of the contract (also the quantity, when appropriate), including the work to be performed, with specific identification of such items as goods, services, and land. 3. The consideration to be paid. 4. The time of payment, delivery, or performance.

Origins of the Statute

The statute, passed by the English Parliament in 1677, was known as "An Act for the Prevention of Frauds and Perjuries." The act established that certain types of con- tracts, to be enforceable, had to be evidenced by a writing and signed by the party against whom enforcement was sought. The primary purpose of the statute was to ensure that, for certain types of contracts, there was reliable evidence of the contracts and their terms. Today, although each state has a statute modeled after the English act, the statutes vary slightly from state to state. All states require certain types of contracts to be in writing or evidenced by a written memorandum or an electronic record. In addition, the party or parties against whom enforcement is sought must have signed the contract, unless certain exceptions apply. The actual name of the Statute of Frauds is misleading because the statute does not apply to fraud. Rather, it denies enforceability to certain contracts that do not comply with its writing requirements. The primary purpose of the statute is to prevent harm to innocent parties by requiring written evidence of agreements concerning important transactions. A contract that is oral when it is required to be in writing is normally voidable by a party who later does not wish to follow through with the agreement.

Justifiable Reliance on the Misrepresentation

The third element of fraud is reasonably justifiable reliance on the misrepresentation of fact. The deceived party must have a justifiable reason for relying on the misrepresentation. Also, the misrepresentation must be an important factor (but not necessarily the sole factor) in inducing the deceived party to enter into the contract. Reliance is not justified if the innocent party knows the true facts or relies on obviously extravagant statements (such as, "this pickup truck will get fifty miles to the gallon").

Communication

The third requirement for an effective offer is communication—the offer must be communicated to the offeree. Ordinarily, one cannot agree to a bargain without knowing that it exists.

Types of Damages

There are four broad categories of damages: 1. Compensatory (to cover direct losses and costs). 2. Consequential (to cover indirect and foreseeable losses). 3. Punitive (to punish and deter wrongdoing). 4. Nominal (to recognize wrongdoing when no monetary loss is shown).

Exceptions to the Consideration Requirement

There are some exceptions to the rule that only promises supported by consideration are enforceable. The following types of promises may be enforced despite the lack of consideration: 1)Promises that induce detrimental reliance, under the doctrine of promissory estoppel 2)Promises to pay debts that are barred by a statute of limitations. 3)Promises to make charitable contributions

Ch.17

Third-Party Rights

Capacity and Legality

This chapter examines the 3rd and 4th requirement of a contract, which is capacity and Legality. Contractual Capacity is the legal ability to enter into a contractual relationship, as contracts calling for the performance of an illegal act are illegal thus void, no contract at all.

When Performance Is Impossible

Three basic types of situations may qualify as grounds for the discharge of contractual obligations based on impossibility of performance: 1)n one of the parties to a personal contract dies or becomes incapacitated prior to performance. 2)When the specific subject matter of the contract is destroyed. 3)n a change in law renders performance

Material Alteration of the Contract

To discourage parties from altering written contracts, the law allows an innocent party to be discharged when the other party has materially altered a written contract without consent. For instance, suppose that a party alters a material term of a contract, such as the stated quantity or price, without the knowledge or consent of the other party. In this situation, the party who was unaware of the alteration can treat the contract as discharged.

Unequivocal Acceptance

To exercise the power of acceptance effectively, the offeree must accept unequivocally. This is the mirror image rule previously discussed. An acceptance may be unequivocal even though the offeree expresses dissatisfaction with the contract. For instance, "I accept the offer, but can you give me a better price?" or "I accept, but please send a written contract" is an effec- tive acceptance.' An acceptance cannot impose new conditions or change the terms of the original offer. If it does, the acceptance may be considered a counteroffer, which is a rejection of the original offer. For instance, the state- ment "I accept the offer but only if I can pay on ninety days' credit" is a counteroffer and not an unequivocal acceptance.

The Requirements of Quasi Contract

To recover under the theory of quasi contract, the party seeking recovery must show the following: 1)The party has conferred a benefit on the other party. 2)The party conferred the benefit with the reasonable expectation of being paid. 3)The party did not act as a volunteer in conferring the benefit. 4)The party receiving the benefit would be unjustly enriched if allowed to retain the benefit without pay- ing for it.

Minors

Today, in almost all states, the age of majority (when a person is no longer a minor) for contractual purposes is eighteen years. In addition, some states provide for the termination of minority on marriage. Minority status may also be terminated by a minor's emancipation, which occurs when a child's parent or legal guardian relinquishes the legal right to exercise control over the child. Normally, minors who leave home to support themselves are considered emancipated. Several jurisdictions permit minors themselves to petition a court for emancipation. For business purposes, a minor may petition a court to be treated as an adult. The general rule is that a minor can enter into any contract that an adult can, except contracts prohibited by law for minors (such as contracts to purchase tobacco or alcoholic beverages). A contract entered into by a minor, however, is voidable at the option of that minor, subject to certain exceptions. To exercise the option to avoid a contract, a minor need only manifest (clearly show) an intention not to be bound by it. The minor "avoids" the contract by disaffirming it.

Agreements to Agree

Traditionally, agreements to agree—that is, agreements to agree to the material terms of a contract at some future date—were not considered to be binding contracts. The modern view, however, is that agreements to agree may be enforceable agreements (contracts) if it is clear that the parties intended to be bound by the agreements. In other words, under the modern view the emphasis is on the parties' intent rather than on form.

Waiver of Breach

Under certain circumstances, a nonbreaching party may be willing to accept a defective performance of the contract. This knowing relinquishment of a legal right (that is, the right to require satisfactory and full performance) is called a waiver.

Discharge by Operation of Law

Under specified circumstances, contractual duties may be discharged by operation of law. These circumstances include material alteration of the contract, the running of the statute of limitations, bankruptcy, and the impossibility or impracticability of performance.

Consideration

Under the common law, a primary basis for the enforcement of promises is consideration. Consideration usually is defined as the value given in return for a promise (in a bilateral contract) or in return for a performance (in a unilateral contract). It is the inducement, price, or motive that causes a party to enter into an agreement. As long as consideration is present, the courts generally do not interfere with contracts based on the amount of consideration paid. It is up to the contracting parties to determine how much their bargain is worth. Often, consideration is broken down into two parts: (1) something of legally sufficient value must be given in exchange for the promise, and (2) there must be a bargained-for exchange. To be legally sufficient, consideration must be something of value in the eyes of the law. The "something of legally sufficient value" may consist of the following: 1)A promise to do something that one has no prior legal duty to do. 2)The performance of an action that one is otherwise not obligated to undertake. 3)The refraining from an action that one has a legal right to undertake (called a forbearance). Consideration in bilateral contracts normally consists of a promise in return for a promise. In a contract for the sale of goods, for instance, the seller promises to ship specific goods to the buyer, and the buyer promises to pay for those goods. Each of these promises constitutes consideration for the contract. In contrast, unilateral contracts involve a promise in return for a performance (an action)

Promissory Estoppel

Under the doctrine of promissory estoppel (also called detrimental reliance), a person who has reasonably and substantially relied on the promise of another may be able to obtain some measure of recovery. Promissory estoppel is applied in a wide variety of contexts in which a promise is otherwise unenforceable, such as when a promise is made without consideration. Under this doctrine, a court may enforce an otherwise unenforceable promise to avoid the injustice that would otherwise result. Requirements to Establish Promissory Estoppel: 1)There must be a clear and definite promise 2)The promisor should have expected that the promisee would rely on the promise. 3)The promisee reasonably relied on the promise by acting or refraining from some act. 4)The promisee's reliance was definite and resulted in substantial detriment. 5)Enforcement of the promise is necessary to avoid injustice. If these requirements are met, a promise may be enforced even though it is not supported by consideration

Undue Influence

Undue influence arises from relationships in which one party can greatly influence another party, thus overcoming that party's free will. A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable One Party Dominates the Other-In various types of relationships, one party may have the opportunity to dominate and unfairly influence another party. Minors and elderly people, for instance, are often under the influence of guardians (persons who are legally responsible for them). If a guardian induces a young or elderly ward (a person whom the guardian looks after) to enter into a contract that benefits the guardian, the guardian may have exerted undue influence. Undue influence can arise from a number of fiduciary relation- ships, such as physician-patient, parent-child, husband- wife, or guardian-ward situations. The essential feature of undue influence is that the party being taken advantage of does not, in reality, exercise free will in entering into a contract. It is not enough that a person is elderly or suffers from some physical or mental impairment. There must be clear and convincing evidence that the person did not act out of her or his free will. Similarly, the existence of a fiduciary relationship alone is insufficient to prove undue influence. Presumption of Undue Influence in Certain Situations-When the dominant party in a fiduciary relationship benefits from that relationship, a presumption of undue influence arises. The dominant party must exercise the utmost good faith in dealing with the other party. When a contract enriches the dominant party, the court will often presume that the contract was made under undue influence.

Potential for Discharge by Performance to the Wrong Party

Until the obligor has notice of an assignment, the obligor can discharge his or her obligation by per- formance to the assignor (the obligee). Performance by the obligor to the assignor constitutes a discharge to the assignee. Once the obligor receives proper notice, however, only performance to the assignee can discharge the obligor's obligations.

Meeting of the Minds

Voluntary consent may be lacking because of a mistake, misrepresentation, undue influence, or duress—in other words, because there is no true "meeting of the minds." Generally, a party who demonstrates that he or she did not truly agree to the terms of a contract has a choice. That party can choose either to carry out the contract or to rescind (cancel) it and thus avoid the entire transaction. In this chapter, we examine the kinds of factors that may indicate a lack of voluntary consent.

Mistakes

We all make mistakes, so it is not surprising that mistakes are made when contracts are formed. In certain circumstances, contract law allows a contract to be avoided on the basis of mistake.

Innocent Misrepresentation

What if a person makes a statement that she or he believes to be true but that actually misrepresents material facts? In this situation, the person is guilty only of an innocent misrepresentation, not of fraud. When an innocent misrepresentation occurs, the aggrieved party can rescind the contract but usually cannot seek damages.

Conditions Subsequent

When a condition operates to terminate a party's absolute promise to perform, it is called a condition subsequent. The condition follows, or is subsequent to, the time at which the absolute duty to perform arose. If the condition occurs, the party's duty to perform is discharged.

Donee Beneficiary

When a contract is made for the express purpose of giving a gift to a third party, the third party (the donee beneficiary) can sue the promisor directly to enforce the promise. The most common donee beneficiary contract is a life insurance contract.

Assignment of "All Rights"

When a contract provides for an "assignment of all rights," this wording may create both an assignment of rights and a delegation of duties. Typically, this occurs when general words are used, such as "I assign the contract" or "I assign all my rights under the contract." A court normally will construe such words as implying both an assignment of rights and a delegation of any duties of performance. Thus, the assignor remains liable if the assignee fails to perform the contractual obligations.

Complete Performance

When a party performs exactly as agreed, there is no question as to whether the contract has been performed. When a party's performance is perfect, it is said to be complete. Normally, conditions expressly stated in a contract must fully occur in all respects for complete performance (strict performance) of the contract to take place. Any deviation breaches the contract and discharges the other party's obligation to perform.

Members of Protected Classes

When a statute is clearly designed to protect a certain class of people, a member of that class can enforce a contract in violation of the statute even though the other party cannot. Example:Statutes prohibit certain employees (such as flight attendants and pilots) from working more than a certain number of hours per month. An employee who is required to work more than the maximum can recover for those extra hours of service.

Consequences of a Waiver of Breach

When a waiver of a breach of contract occurs, the party waiving the breach cannot take any later action on it. In effect, the waiver erases the past breach, and the contract continues as if the breach had never occurred. Of course, the waiver of breach of contract extends only to the matter waived and not to the whole contract.

Concurrent Conditions

When each party's performance is conditioned on the other party's performance or tender of performance (offer to perform), concurrent conditions are present. These conditions exist only when the contract expressly or impliedly calls for the parties to perform their respective duties simultaneously.

Nominal Damages

When no actual damage or financial loss results from a breach of contract and only a technical injury is involved, the court may award nominal damages to the innocent party. Awards of nominal damages are often small, such as one dollar, but they do establish that the defendant acted wrongfully. Most lawsuits for nominal damages are brought as a matter of principle under the theory that a breach has occurred and some damages must be imposed regardless of actual loss.

Breach of Contract and Remedies

When one party breaches a contract, the other party— the nonbreaching party— can choose one or more of several remedies. A remedy is the relief provided for an innocent party when the other party has breached the contract. It is the means employed to enforce a right or to redress an injury. The most common remedies avail- able to a nonbreaching party include damages, rescission and restitution, specific performance, and reformation. Courts distinguish between remedies at law and remedies in equity. The remedy at law normally is monetary damages. Usually, a court will not award equitable remedies—such as rescission and restitution, specific performance, and reformation, unless the remedy at law is inadequate.

When the Contract Is Personal

When the subject matter of the contract is personal, the obligation is conditional, and performance must actually satisfy the party specified in the contract. For instance, contracts for portraits, works of art, and tailoring are considered personal because they involve matters of personal taste. Therefore, only the personal satisfaction of the party fulfills the condition. (An exception exists, of course, if a court finds that the party is expressing dissatisfaction simply to avoid payment or otherwise is not acting in good faith.)

When Voluntary Consent May Be Lacking

When there is a large disparity in the amount or value of the consideration exchanged, it may raise a red flag for a court to look more closely at the bargain. Shockingly inadequate consideration can indicate that fraud, duress, or undue influence was involved Disparity in the consideration exchanged may also cause a judge to question whether the contract is so one sided that it is unconscionable. For instance, an experienced appliance dealer induces a consumer to sign a contract written in complicated legal language. If the contract requires the consumer to pay twice the market value of the appliance, the disparity in value may indicate that the sale involved undue influence or fraud. A judge would thus want to make sure that the person voluntarily entered into this agreement.

Enforceability of Limitation-of-Liability Clauses

Whether a limitation-of-liability clause in a contract will be enforced depends on the type of breach that is excused by the provision. Normally, a provision excluding liability for fraudulent or intentional injury will not be enforced. Likewise, a clause excluding liability for illegal acts, acts that are contrary to public policy, or violations of law will not be enforced. A clause that excludes liability for negligence may be enforced in some situations when the parties have roughly equal bargaining positions.

Communication of Acceptance

Whether the offeror must be notified of the acceptance depends on the nature of the contract. In a unilateral contract, the full performance of some act is called for. Acceptance is usually evident, and notification is therefore unnecessary (unless the law requires it or the offeror asks for it). In a bilateral contract, in contrast, communication of acceptance is necessary, because acceptance is in the form of a promise. The bilateral contract is formed when the promise is made rather than when the act is performed.

Creditor Beneficiary

a creditor beneficiary benefits from a contract in which one party (the promisor) promises another party (the promisee) to pay a debt that the promisee owes to a third party (the creditor beneficiary).

Preliminary Agreements.

constitutes a binding contract if the parties have agreed on all essential terms and no disputed issues remain to be resolved Increasingly, the courts are holding that a preliminary agreement constitutes a binding contract if the parties have agreed on all essential terms and no disputed issues remain to be resolved. In contrast, if the parties agree on certain major terms but leave other terms open for further negotiation, a preliminary agreement is not binding. The parties are bound only in the sense that they have committed themselves to negotiate the undecided terms in good faith in an effort to reach a final agreement.