Fin 331 (14,15,16,17,18)

Elements of a Contract

(1) a voluntary agreement (offer and acceptance), (2) supported by consideration, (3) based on mutual consent (i.e., a "meeting of the minds") that is (4) between parties with "legal capacity," (5) made for a lawful purpose, and (6) in the form required by law, if any.

To determine whether a material breach has occurred, court considers 2 issues:

(1) the intent of the parties with respect to the disputed provision, and (2) the equitable factors and circumstances surrounding the breach of the provision.

Most states require only a signed memorandum of the parties' agreement stating the essential terms:

- (a) identity of parties, (b) subject matter identified with reasonable certainty, and (c) signed by the party accused of breach (i.e., the Defendant). - Memorandum need not be made at the same time the contract is formed.

Illegality

- A contract is deemed illegal if the agreement involves an act or promise that violates a law or is against public policy. - Even if there was voluntary consent between two parties who have capacity to contract. - Effect: the contract is void and therefore there is no remedy for breach of an illegal agreement.

Condition Precedent

- A future, uncertain event that, if it happens, creates a duty to perform. - Example: Buyer contracts to buy Seller's house on the condition that she is able to obtain financing. She is obligated to purchase the house only if she obtains financing; otherwise she is discharged.

Condition Subsequent

- A future, uncertain event that, if it happens, discharges the duty to perform. - Example: John agrees to work as Wayne's realtor until he sells Wayne's house. Wayne's house sold yesterday. John's duty is discharged. - When a duty is subject to a condition subsequent, the duty to perform arises but is discharged if the future, uncertain event occurs.

Agreements that violate court-developed public policy include:

- Agreements that restrict competition (i.e., restraint of competition). - Question: When is such an agreement enforceable and when is it not enforceable? - Answer: What is the purpose of the agreement? Is the sole purpose to restrain competition, or is there some legitimate business interest?

Agreements that violate public policy of a statute include:

- Agreements to commit a crime Ex.: a contract to commit murder. Agreements that violate public policy of a statute include (con't): - A statute may require a person to obtain a license, permit, or registration before engaging in a certain business or profession. - Ex.: Allen enters into a contract to render a service to Baker for which Allen is not properly licensed. - Q: When is the agreement enforceable and when is it not enforceable? - A: What is the purpose of the statute? Is the statute "regulatory" or merely intended to raise revenue for the government?

Exculpatory Clauses

- An exculpatory clause in a contract attempts to relieve one party from damages for tort liability. - Ex.: A contract provision which states that A cannot sue B if B commits a tort against A. - Courts are suspect of exculpatory clauses on public policy grounds, but are reluctant to interfere with the agreement if it does not threaten public health or safety. - General Rule: An exculpatory clause can only protect a party from liability for their negligence.

Details of Assignment

- Assignments may be made in any way sufficient to show assignor's intent to assign. - No formal language is necessary, and no writing is necessary, unless required by the statue of frauds. - Assignee does not need to give consideration to assignor in exchange for the assignment (i.e., a gratuitous assignment).

One Year Rule

- Bilateral executory contracts that cannot be fully performed by both parties within one year from the date of their formation (one year rule). - Ex.: Jack enters into a contract to provide consulting services for ABC Corp. for 13 months - this must be in writing. - Exception: if one party has fully performed.

A condition may be classified as a:

- Condition precedent - Condition concurrent - Condition subsequent

Sale of Goods of $500 or more

- Contracts for the sale of goods for a price of $500 or more. [VA Code §8.2-201 (1)] - Includes agreements to modify existing sales contracts if contract as modified is for a price of $500 or more [VA Code §8.2-209(3)] - Ex.: Original contract is for sale of goods for $490 (not within SOF), but is then modified by increasing price to $510. A signed writing is required to be enforceable.

Is the statute regulatory or intended merely to raise revenue?

- Depends on the intent of the legislature. - Regulatory: required education and testing, proof of character and skill, penalties imposed for violation of licensing. - To raise revenue: only requirement is payment of a license fee (i.e., anyone who pays the required fee receives the license). - Courts must balance public policy promoted by the statute vs. burden on the unlicensed person.

Third-Party Beneficiaries

- General Rule: Only the original parties to a contract, or their assignees, can enforce a contract. - However, if one or both parties intended to benefit a 3/P, the law will permit the 3/P to enforce the contract ("3/P Beneficiary"). - 3/P must prove intent, based on facts and circumstances. - If proven, then 3/P is an "intended beneficiary." - If not proven, then 3/P is merely an "incidental beneficiary."

Consequences

- If a contract is "within the SOF" (i.e., covered by the SOF) but does not satisfy the requirements of the statute of frauds, the contract is unenforceable. - However, a person injured by the unenforceable contract may pursue an action based on quasi-contract or promissory estoppel (see slides 9-21, et. al.)

Right to Disaffirm or Ratify

- If a contract is voidable due to mental incapacity, the person may disaffirm the contract. - Upon disaffirmance, the person must return to the other any consideration (money, goods) that he or she received, and is liable for reasonable value of any necessaries. - If the person later regains capacity, he or she may ratify the contract.

Determining Materiality

- If material breach occurs, injured party can sue for damages caused by the breach AND has no duty to perform AND is discharged from any further obligations. - If the breach is not material, only remedy is to sue for damages. - Material breach occurs when the breach significantly deprives the injured party of what he bargained for. - Standard for determining materiality is flexible, based on the facts and circumstances, the seriousness of the breach and timing for performance. - Ex.: if contract contains a deadline or a "time is of the essence" provision, any delay by either party is a material breach. - Ex.: if the time for performance is not stated and is not important, promisee must accept late performance if it's within reasonable time after it was due, but may deduct losses caused by delay (not a material breach).

Duties Upon Disaffirmance

- If neither party has performed (i.e., an executory contract), contract is canceled. - If one or both parties have performed, then they have a duty to return to the other any consideration (money, goods) that they received. c.f. VA Code §8.2-403 - If the consideration given by the adult to the minor has been lost, damaged, destroyed, or depreciated in value, most states require that the minor must make restitution to the adult.

Donee Beneficiaries

- If the promisee's primary purpose is to make a gift to a 3/P, then the 3/P is a donee beneficiary. - Ex.: Husband purchases a life insurance policy on his life, naming Wife as the beneficiary of the policy. Wife is a donee beneficiary of the contract between Husband (promisee) and insurance company (promisor), and can sue insurance company if Husband dies & insur. co. does not pay the insurance proceeds. Wife cannot sue Husband's estate. Husband's primary purpose is to make a gift of the insurance proceeds to Wife.

(Licensing Statutes) Regulatory:

- If the purpose of the statute is to protect the public against dishonest or incompetent practitioners, then an agreement with an unlicensed person is void. - If client refuses to pay, contract is void. - Required education and passing an exam. Ex: attorney, physician, architect. - Where the licensing statute is intended merely to raise revenue for the government rather than to protect the public, then an agreement with an unlicensed person is enforceable. - Ex. Where a licensed professional failed to pay the annual renewal fee and the client refuses to pay, the contract is enforceable. Ex. Newport News Ordinance §37-2(A) requiring payment of $5 for yard sale license.

Agreements in Restraint of Competition

- If the sole purpose of an agreement is to restrain competition, it violates public policy and is illegal and therefore unenforceable. - Ex.: A and B own competing businesses and agree not to sell to the other's customers. - If the restraint on competition was part of an otherwise legal contract, the parties may have a legitimate interest to be protected by the restriction on competition. - Ex.: If A purchases B's business, then A has a legitimate interest in making sure that B does not open a competing business soon after the sale. - Ex.: If A hires C as an employee, discloses trade secrets to C and C has access to A's customer list, A has a legitimate interest in making sure C doesn't quit and then work for a competitor.

2 excuses for non-performance:

- Impossibility - Impracticability

The Statute of Frauds

- In 17th Century England, law prohibited parties from testifying in their own cases. - A dispute regarding oral contracts required the testimony of third parties. - Resulted in widespread fraud & false testimony. - The Statute of Frauds was enacted in 1677 to prevent fraud and perjury by requiring signed, written evidence in order to enforce certain types of contracts. - Only applies to executory contracts. - Effect of failure to comply with SOF: contract is unenforceable.

Contracts of Intoxicated Persons

- Intoxication, from either alcohol or drugs, is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the bargaining process. - Can be ratified after person regains mental capacity. - Note: courts are not sympathetic.

Capacity & Mental Impairment

- Like minors, those who suffer from mental illness are unable to protect their interests, however, their contracts are either voidable or void. - Did the person have "sufficient mental capacity" at the time he entered into the contract such that he did not understand the nature of the contract? If yes: valid contract If no: voidable contract - If the person was declared mentally incompetent before entering into the contract (i.e., if a guardian was previously appointed): void.

Delegation of Duties (Example)

- Mike contracts to mow Janet's lawn on a weekly basis for $25 per week. Mike becomes ill and arranges for Sonny to mow Janet's lawn. - Janet is the obligee (the one to whom the duty is owed). - Mike is the both the obligor (the one who owes the duty to perform) and the delegator (the one who delegates the duty). - Sonny is the delegatee (the one to whom the duty is delegated).

Other Reasons for Discharge

- Mutual agreement by both parties. - Settlement of an unliquidated debt by accord and satisfaction (see slide 12-23). - A debt where the promisor has a good faith dispute about the existence or amount of the debt, and the promisee agrees to accept an amount different from that originally agreed upon. - Waiver of promisee. Ex.: where one party accepts incomplete or defective performance without objection. - Intentional, material alteration of a written contract by one party without the other party's consent. - Expiration of the statute of limitations: - The period of time in which a party must commence a lawsuit. - VA Code §8.01-246: - Written contract: 5 years from date of breach. - Oral contract: 3 years from date of breach. - VA Code §8.2-725: 4 years from date of breach involving the sale of goods. - Discharge by decree of bankruptcy.

Remedies for Breach of Contract

- Objective: to compensate the injured party, not to punish the breaching party. - Legal remedies (money damages) - Compensatory damages, nominal damages, liquidated (contractual) damages. - Equitable remedies (only when money damages will not adequately compensate the injured party). - Specific performance or injunction - Restitution (Quasi-contract): Defendant must return any property or pay for any benefits that the plaintiff has given him.

When can the minor disaffirm?

- Real estate contracts: not until age of majority - All other contracts: as soon as contract is formed - Minor's power to disaffirm does not end on day he or she reaches age of majority, but continues for a reasonable time thereafter. - If minor wants to enforce the contract, adult party must perform.

Conditions in a Contract

- Sometimes a promisor's duty to perform depends on the occurrence of some event or condition (an uncertain, future event). - The condition will affect the party's duty to perform. - Compare a conditional duty to duties that are unconditional or absolute in which the duty to perform does not depend on the occurrence of any further event other than the passage of time - A condition is an uncertain, future event that affects a party's duty to perform

Agreements That Violate Statutes

- State legislatures may enact statutes that declare certain types of agreements void. - Ex.: If a statute limits the amount of interest that can be charged on consumer loans, then a loan agreement charging a higher interest rate is void.

Which standard of performance is required of the promisor? 2 standards of performance:

- Strict Performance - Substantial Performance

Example of disaffirmance:

- Stroupes v. The Finish Line, Inc. - Court ruled that a minor's employment contract, which included an arbitration clause, was voidable by the minor. - Minor may avoid contracts even if the minor is married and employed full-time. Stroupes was 16 and worked at The Finish Line, Inc. until she quit alleging sexual harassment. The company tried to compel arbitration under an arbitration clause in the written employment contract. The court stated: "...under Tennessee law, a minor's employment contracts, including arbitration agreements, are voidable by the minor. The court finds that Lindsey's employment contract with Finish Line was voidable by Lindsey, and was voided by filing this action."

Effect of an Assignment

- The assignee "steps into the shoes" of the assignor. The assignee acquires all of the rights and benefits that the assignor had under the contract. - An assignment extinguishes the assignor's rights and transfers them to the assignee, so if the obligor does not perform, the assignee may sue for breach of contract. - The obligor may also assert any defense (i.e., misrepresentation, fraud, mistake, duress, etc.) against the assignee that he could have asserted against the assignor. - The assignee should immediately notify the obligor of the assignment and that the obligor should now render performance directly to the assignee. - An obligor who renders performance to the assignor without notice of the assignment has no further liability under the contract. - Ex.: Sampson borrows $500 from Jordan, promising to repay the debt in 1 year. Jordan assigns the promissory note to Ryan, but no one informs Sampson of the assignment. If Sampsons repays Jordan, Sampson's debt is discharged and he has no further liability.

Incidental Beneficiary:

- The benefit derived by the 3/P was merely an unintended by-product of the contract, and has no legal rights. - Ex.: Father contracts with Contractor to build house for Son. Son is the intended donee beneficiary, and may sue Contractor if Contractor breaches the contract. Son's girlfriend, who will also be residing in the house, is an incidental beneficiary, and may not sue.

The Parol Evidence Rule

- The parol evidence rule provides that, when parties enter into a written contract that they intend as a complete integration (a complete and final statement of their entire agreement), a court will not permit the use of evidence of prior or contemporaneous statements to add to, alter, or contradict the terms of the written contract. - This is a CL rule and a UCC rule.

Occurrence of condition will be excused:

- The party whose duty is conditional will still have to perform (or if not, can be sued for breach) even though the condition has not occurred: - When the occurrence of condition was prevented or hindered by the party benefiting from the condition (by taking some affirmative action to prevent or hinder, or by failing to take action that is required). - Ex.: Buyer fails to submit a mortgage application and financial info to bank in order to obtain mortgage approval. - Waiver - estoppel

Non-competition clauses

- These are known as covenants not to compete, or non-competition clauses, and are enforceable if: 1. It serves a legitimate business purpose (i.e., to protect goodwill, trade secrets, customer lists) and is part of an otherwise valid contract (i.e., sale of business, employment contract), and 2. The restriction is reasonable in time, geographic area, and scope (i.e., the restriction cannot be any greater than is necessary to protect the legitimate interest), and 3. It does not impose an undue hardship on the public or the party whose ability to compete is being restrained.

Impracticability:

- UCC 2-615, when unforeseen developments make performance highly impracticable, unreasonably expensive, or of little value to promisee. - Events beyond the scope of the risks that the parties contemplated at the time of contracting. - Ex: : drastic price increases or severe shortages of goods due to war or crop failure.

Unconscionable Agreements

- Unconscionable contract or clause. (1) "If the court as a matter of law finds the contract, or any clause of the contract, to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause" or it may modify the contract to avoid an unconscionable result. Ex: fine print in a contract. - Has been extended by the common law to all contracts.

Good Faith and Fair Dealing

- VA Code §8.1A-304: Obligation of Good Faith: - "Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement." - Courts have held that this implied covenant of good faith and fair dealing applies to every contract (not just sale of goods) and imposes an obligation on both parties to act fairly and in good faith with each other.

When does someone who is not an original party to a contract have legally enforceable rights under the contract?

- When a contract has been assigned (transferred) to the 3/P, or - When a contract is intended to benefit a 3/P (a "third-party beneficiary").

Breach of Contract

- When a person's performance is due, any failure (any deviation) that is not excused is a breach of contract. - Q: Big breach or little breach? - Little breach ("non-material" breach): the injured party can only sue for damages caused by the breach, but she must still perform. - Big breach ("material" breach): sue AND additional legal remedies are available.

Condition Concurrent

- When the contract calls for parties to perform at the same time. - Example: Buyer promises to buy Seller's car for $5,000. Seller must give Buyer the car when Buyer gives Seller $5,000. - When the contract calls for the parties to perform at the same time, each person's performance is conditioned on the performance or tender of performance (offer of performance) by the other.

Non-breaching party may:

- Withhold his own performance and immediately sue for damages for total breach of contract. - Wait to sue until time for performance in case other party changes mind and decides to perform. - Waive his right to performance and cancel contract.

Parol Evidence

- any prior statements, promises, proposals, etc., either written or oral, that are not contained in the final written contract. - written or spoken statements not contained in the written contract

Effect of a Delegation of Duties

- does not extinguish the duty owed by the delegator. - The delegator remains liable to the obligee unless the obligee agrees to release the delegator from his promise and to substitute the delegatee (novation). - However, full performance by the delegatee will also discharge the delegator. - Delegations may be made in any way sufficient to show delegator's intent to delegate. - No formal language is necessary, and no writing is necessary, unless required by the statue of frauds.

Nonperformance of a duty generally

- generally is a breach of contract, but nonperformance may be excused or discharged and not result in breach of contract when: - Non-occurrence of a condition precedent or condition concurrent. - Occurrence of a condition subsequent. - Material breach by the other party. - Anticipatory repudiation by the other party. - Excuse due to impossibility or impracticability. - "Other reasons"

An exculpatory clause cannot relieve a party for:

- intentional torts (i.e., battery, assault, fraud), - any tort liability, including negligence, if the party owes a duty to the general public (common carrier, i.e., airline), - an obligation imposed by statute (i.e., requiring an employer to provide workers compensation insurance or requiring a landlord to maintain a leased property in habitable condition).

Contracts of Adhesion

- is a contract, usually on a standardized, pre-printed form, offered by a party who is in a superior bargaining position or with greater business sophistication, on a "take-it-or-leave-it" basis. - Ex.: During the housing boom, a contract prepared by the builder to purchase a new construction home. - Courts will enforce the contract unless it is unconscionable (oppressively unfair to one party or unreasonably advantageous to the other).

Exceptions to Parol Evidence

- is admissible - To prove additional terms in a partially integrated contract (a final statement as to some, but not all, of the terms of their agreement) - Q: Is the contract partial or complete?; - To explain ambiguities in the written contract - Ex: Seller and Buyer enter into contract to buy "Seller's truck," but Seller owns 2 trucks; - To prove that a contract is voidable or void - Ex.: to prove misrepresentation, fraud, mistake, duress, undue influence, or lack of capacity; - To prove the existence of a condition Seller and Buyer enter into contract to buy Seller's house on condition that Buyer obtains financing (mortgage) from bank; - To prove subsequent (later) agreements that add to, alter or contradict the terms of the written contract.

Anticipatory repudiation

- occurs when a party indicates before the time when his performance is due that he is unwilling or unable to perform. - is a material breach.

Ratification

- occurs when a person who reaches majority indicates that she intends to be bound by the contract made while a minor and gives up her right to disaffirm. - terminates the former-minor's ability to rescind the contract. - may be express (written or oral statement) or implied by conduct (accepting the benefits of the contract or continuing to perform after majority).

Substantial performance

- standard is a slightly lower standard applied to duties that are difficult to perform without some minor deviation, as long as perfection (strict performance) is not an express condition. - A deviation of substantial performance is either a "big" breach or a "little" breach. - When applied, the promisor who has substantially performed is discharged, and the performance triggers the other party's duty to pay the contract price less any damages resulting from the defects in performance. - Ex.: promise to construct a building: Builder built a new home for Jason. Builder met all of the other contract terms except he didn't paint the base molding the correct shade of white. This is a "little" breach. Builder built a new home for Jason. Builder met all of the other contract terms except he didn't install an HVAC system in the house. This is a "big" breach. - Ex.: promise to provide personal or professional services. - The most common example of this type of obligation is a promise to construct a building. Other examples include promises to construct roads, to cultivate crops, and to render some types of personal or professional services.

Strict performance

- standard requires perfect compliance with the contract terms. - Any failure of strict performance (any deviation from perfection) is a "big" breach. - Ex.: promise to complete a service by a specific date: - Painter promises to paint Homeowner's house for $500 "on condition that" Painter will complete the job by June 1. - Ex.: promise to pay money, to deliver deeds & to deliver goods. - If the promisor does not render perfect performance (in other words, if we have a failure of strict performance), then the promisor cannot sue the promisee for breach, but the promisor may be able to recover the reasonable value of benefits he conferred on the promisee by suing for quasi-contract.

Satisfying the Statute of Frauds (VA Code §8.2-201 (1): )

- the memorandum must indicate that a contract for a sale has been made between the parties, signed by the party accused of breach, and must indicate the quantity of goods to be sold. - Ex.: A sales receipt satisfies the requirement. Several documents, taken together, can satisfy the memorandum requirement. - If there is no signed memorandum, then SOF may be satisfied by: - (2): a "confirmatory memo" (i.e., a fax) between merchants, if signed by the sender and not objected to by the receiver w/in 10 days; - (3)(c): partial payment or partial delivery; - (3)(b): admission in pleadings or in court; and - (3)(a): specially manufactured goods that are not suitable for sale to others.

Estoppel:

- when a person whose duty is conditional tells the other party to disregard the condition. - Ex.: Seller agrees to sell his business to Buyer on condition that Buyer submit financial docs by July 15. On July 7, Seller tells Buyer that he can submit docs by July 30. Relying on that statement, Buyer submits docs by July 25. Seller would be prevented (estopped) from claiming that the condition did not occur.

Waiver:

- when a person whose duty is conditional voluntarily gives up his right to the condition. - Ex.: Seller agrees to sell his car to Buyer on condition that Buyer pay $2000 by July 1. If Buyer fails to pay by July 1, but instead Seller accepts payment on July 15, Seller has waived the condition of payment by July 1 and must transfer the car to Buyer.

Impossibility:

- when some unexpected event arises after contract formation that makes performance objectively impossible ("it cannot be done by anyone"). - Not simply because it's unprofitable or more difficult. - Ex: illness or death of one who has promised to perform personal services; subsequent illegality; destruction of the subject matter of the contract. - N/A to illness or death of one who has promised to pay money or sell real estate or deliver goods.

Groups lacking capacity:

-Minors: those under the age of 18 -Those suffering from a mental incapacity -Those who are intoxicated - Effect -- a person who contracts without the requisite capacity may avoid (i.e., rescind) the contract at his or her option. The contract is voidable.

Creditor Beneficiaries:

-The promisor's performance is intended to satisfy a legal duty that the promisee owes to a 3/P. - Ex.: Steven purchases a house and obtains a mortgage loan from Bank. Steven later sells the house to Brian, who assumes the mortgage (i.e., Steven delegates his duty to pay the mortgage to Brian). Bank (3/P) is a creditor beneficiary of the contract between Steven (promisee) and Brian (promisor), and can sue both Steven and Brian if Brian does not pay. - Brian's performance (to pay the mortgage) is intended to satisfy a legal duty that Steven owes to the Bank.

Types of Illegal Contracts

1. Agreements that violate statutes. 2. Agreements that violate public policy. 3. Unconscionable agreements and contracts of adhesion.

Covered Contracts

1. Collateral contracts 2. Contracts for the sale of real estate 3. Contracts for more than one year 4. Contracts for sale of goods of $500 or more 5. Executor's promise 6. Marriage as consideration

Contracts covered by the Statute of Frauds:

1. Collateral contracts in which a person promises to perform the obligations (i.e., pay the debts) of another person. VA Code §11-2 (4) 2. Contracts for the sale of an interest in real estate (or for a lease for more than 1 year). VA Code §11-2 (6) 3. Bilateral contracts that cannot be fully performed by both parties within one year from the date of their formation. VA Code §11-2 (8) 4. Contracts for the sale of goods for a price of $500 or more. VA Code §8.2-201 (1) 5. Contracts in which an executor or administrator promises to be personally liable for the debt of an estate. VA Code §11-2 (3) 6. Contracts in which marriage is the consideration. VA Code §11-2 (5)

Real Estate

1. Contracts for the sale (or mortgage) of an interest in real estate (or a lease for more than 1 year). - Exceptions to the SOF (i.e., an oral contract is enforceable): 1. Full performance by the Seller: - If the Seller has signed and delivered the deed to the Buyer, Seller can enforce the oral contract. 2. Partial Performance by the Buyer: - a. If the Buyer has reasonably relied on the oral contract - paid part or all of purchase price, and - made substantial improvements, and - took possession of the property; and - b. Enforcement of the oral contract (specific performance) is the only way to prevent injustice, then the Buyer can enforce the oral contract.

A delegation will not be effective if:

1. It violates public policy. 2. The contract duty involved an element of personal skill or character. - Ex.: Susan contracts with Picasso to paint a portrait of her for $5,000, and then Picasso delegates the contract duty to Bubba. 3. It violates a non-delegation clause in the contract.

(Limitations on Assignment) Assignment will not be effective if it?

1. Violates public policy. Ex.: A and B own competing businesses and they enter into a contract which provides that they will not to sell to each other's customers. Later, A sells his business to C, and as part of the sale, A assigns his rights under the "A-B" contract to C. 2. Adversely affects obligor in some significant way (materially changes obligor's duties or increases obligor's burden or risk). Ex.: Farmer agrees to sell to Joe's General Store "all of Joe's requirements" for tomatoes, then Joe assigns its rights to Walmart, which has a much larger requirement. 3. The contract involved a personal relationship between the parties. Ex.: Picasso contracts with Susan to paint a portrait of her for $5,000, and then Susan assigns the contract right to Mary. 4. It would violate a non-assignment clause in the contract. Ex.: Leases usually contain non-assignment cl.

2-step analysis: (Necessaries)

1: As a matter of law (for the judge), is the item a necessity? 2: As a matter of fact (for the jury), is the item a necessity for this minor?

Definition of Capacity

A person must have the ability to give consent before he can be legally bound to an agreement.

Exculpatory Clauses (Example)

Ex.: McCune v. Myrtle Beach Indoor Shooting Range, Inc., in which plaintiff, before participating in a paintball game at defendant's range, signed a waiver that released defendant of liability, except for recklessness or intentional misconduct. Plaintiff's mask did not fit properly, came loose, and plaintiff was hit in the eye and rendered blind. Trial court granted defendant's motion for summary judgment. Plaintiff appealed. Held: Plaintiff voluntarily signed the waiver, expressly assuming the risk, and voluntarily participated in the activity. Affirmed.

Intended Beneficiary:

Ex.: Michael contracts with Florist to deliver flowers to Cathy. Cathy is the intended beneficiary, and may sue Florist if Florist breaches the contract. Michael may also sue Florist. Ex.: Father contracts with Contractor to build house for Son. Son is the intended beneficiary, and may sue Contractor if Contractor breaches the contract. Father may also sue Contractor.

Non-competition clauses (Example)

Ex.: Nasc Services, Inc. v. Jervis, in which court refused to enforce non-competition clause in employment contract, where former employees taught soccer at youth soccer camps, because court held: (1) the defendants did not possess any extraordinary skills, (2) the defendants did not possess any trade secrets or other confidential information, and (3) the clause would prevent defendants from working for any comparable business in any capacity throughout the country, and therefore would be unfair to former employees.

A church contracts with Printer to produce a flyer for a Christmas fundraising party. Printer does not print the flyer until January 12. Printer's breach of the contract is not a material breach unless the contract explicitly stated that time is of the essence.

False

Alan and Bruce make a bet regarding whether State University will win the championship this year. State law makes wagering on sports illegal. If Alan loses the bet but refuses to pay Bruce, then Bruce may sue Alan to enforce the agreement.

False

An exculpatory clause may relieve a party of liability caused by fraud.

False

In order for an assignment to be valid, the assignee must give some consideration to the assignor.

False

Specific performance is almost never awarded in contracts for the sale of land.

False

Unconscionability exists only under Article 2 of the UCC.

False

Construction contracts typically are subject to a strict performance standard.

False. Construction contracts are usually subject to a substantial performance standard.

In the previous question, Church must still pay Printer for the flyer, but may sue for any damages.

False. If a material breach occurs, the non-breaching party has no duty to perform, is discharged from any further obligations, and has the right to sue for damages.

Intoxicated persons are always allowed to disaffirm a contract.

False. Intoxicated persons may disaffirm a contract only when it is so extreme that the person is unable to understand the nature of the bargaining process.

Legal remedies for breach of contract include specific performance or injunction.

False. Legal remedies for breach of contract include compensatory damages, nominal damages and liquidated (contractual) damages.

Persons with a mental incapacity may disaffirm a contract, but will never be permitted to ratify the contract.

False. Once the person regains capacity, he or she may ratify the contract.

In order to satisfy the writing requirement of the statute of frauds, both parties must sign the writing.

False. Only the party against whom the contract is being enforced (i.e., usually the defendant) must sign the contract.

In order to be enforceable, all contracts must be in writing.

False. Oral contracts are enforceable unless they are the types of contracts that fall within the scope of the statute of frauds.

To be valid, ratification must be expressly made in writing.

False. Ratification may be express or implied by conduct.

A minor's right to disaffirm a contract ends on the day the minor attains the age of majority.

False. The right ends within a "reasonable" time after the minor attains the age of majority.

The standard for materiality of a breach is when less than 50% of a contract has been performed.

False. The standard for the materiality of a breach is flexible, but generally based on the seriousness of the breach and timing for performance.

A contract required that a service would be completed by a specific date. The service was not completed until a few days later. This is an example of substantial performance.

False. The standard here is strict performance, and as a result of the breach, the promisee need not perform.

Statutes that require proof of character and skill and impose penalties for violation are considered to be revenue raising in nature.

False. These would be regulatory.

Jill orally promised the loan officer of First Bank to pay Jack's debt to First Bank if Jack defaulted on the note. Jack defaulted, therefore Jill must pay Jack's debt.

False. This is a collateral contract and, according to the statute of frauds, it must be in writing to be enforceable. Jill need not pay Jack's debt.

Basics

In general, a writing is not required to create a legally enforceable contract. Oral contracts are legally valid, if proven. However, a written contract is preferable to an oral contract for a number of reasons: more definite, harder to deny, signature provides authentication, and can be used as evidence. Sometimes, a writing is required...

Duty to Pay for Necessaries

Minors are required to pay the reasonable value for "necessaries" that they have purchased (and received).

Why would an obligee assign her rights to a 3/P?

Obligee may owe a debt to the 3/P; a business may factor it's A/R for financing, etc.

Disaffirmance

Right to avoid a contract is.....? -Only the minor may avoid the contract. -Any words or acts are sufficient

Courts might enforce exculpatory clauses in contracts when: A) only liability for negligence is waived. B) only liability for intentional torts are waived. C) only liability for fraud is waived. D) "all liability" is waived.

The correct answer is (A)

Which of the following is covered by the statute of frauds? A) Mark and Susan exchange mutual promises to marry each other. B) A real estate mortgage. C) A contract for services that can be performed within a week. D) A mechanic charging $200 to repair a vehicle.

The correct answer is (B).

Which of the following is least likely to excuse performance of a contract? A) Destruction of a house that was to be sold by A to B, with closing to occur in 30 days. B) The death of a party who was contractually obligated to pay money. C) A contract to sell high-tech electronic equipment to Iran, and Congress subsequently passes a law prohibiting all such sales to Iran. D) A decree of bankruptcy.

The correct answer is (B).

Robert contracted to paint Stan's house by the end of June, but realized after signing the contract that he had too many jobs and could not finish by the end of June. Robert called Stan and told him he could not do the job. Robert: A) Is excused due to impossibility B) Engaged in anticipatory breach C) Is excused because of condition precedent D) None of the above

The correct answer is (B). Stan may: withhold his own performance (payment) and immediately sue Robert for damages for total breach of contract; or wait until the time for performance to file suit in case Robert changes his mind and decides to perform; or waive his right to performance under the contract and hire someone else.

A contract of adhesion: A) is always illegal B) is contrary to public policy C) is a "take it or leave it" agreement.

The correct answer is (C)

Helga owns an insurance business in Virginia. Her clients are all Virginia residents. She later sells her business to Carlos. As part of the deal, the contract contains a non-compete clause that prevents Helga from operating an insurance business anywhere in Virginia, Maryland or Delaware for 10 years. Six months after this sale, Helga opens an insurance business in Maryland. If Carlos seeks to enforce the non-compete agreement against Helga, will he be successful? A) Yes, because this is an otherwise valid contract. B) Yes, because this does not impose an undue hardship on the public. C) No, because this agreement is not reasonable in time, area and scope. D) No, because non-compete agreements that are part of the sale of a business are against public policy.

The correct answer is (C)

Which of the following contracts is most likely to be enforced? A) A gambling contract. B) A contract that violates a licensing statute the purpose of which is regulatory. C) A contract that violates a licensing statute the purpose of which is to raise revenue. D) A loan agreement that charges an interest rate which exceeds the limit set by state law.

The correct answer is (C)

Under UCC 2-201, if there is no signed memorandum, then the SOF may be satisfied by a "confirmatory memorandum," which: A) requires that the memorandum be signed by the party to be charged. B) requires that the memorandum be sent within ten days after the contract is made. C) applies even though the memorandum does not satisfy the UCC's writing requirement. D) requires that both parties to the contract be merchants.

The correct answer is (D).

Under UCC 2-201, if there is no signed memorandum, then the SOF may be satisfied by: A) part payment or part delivery. B) an oral admission in court made by the party suing the "party to be charged." C) specially manufactured goods that are not suitable for sale to others. D) A and C, but not B.

The correct answer is (D).

A minor entered into a contract with GEM & Co. Upon attaining majority, he wishes to enforce the contract. The adult party must: A) perform the contract. B) rescind the contract. C) abandon the contract. D) ratify the contract.

The correct answer is (a)

Generally, contracts entered into by a minor are voidable by the minor. However there are certain statutory exceptions to the right to disaffirm. Which of the following is not an exception?: A) A contract to purchase medical insurance. B) A contract to purchase a car. C) A contract to obtain a student loan. D) Marriage.

The correct answer is (b)

Ted is 17 years old and emancipated from his parents. He bought a car from CarCo. Two weeks after he bought the car, Ted damaged it in an accident. Ted had the vehicle towed back to CarCo and asked for a full refund. CarCo must: A) Refund the full purchase price. B) Refund only the present value of the car. C) Refund the purchase price less the present value of the car.

The correct answer is (b)

It is important that the assignee immediately provide notice of the assignment to the obligor and that the obligor should now render performance directly to the assignee because . . . A) Notice is a necessary legal requirement for a valid assignment. B) An obligor who renders performance to the assignor without notice has no further liability under the contract. C) The obligor who renders performance to the assignor without notice remains liable to the assignee

The correct answer is (b).

It has been determined that Irma does not have sufficient mental capacity to contract. On Monday Irma purchases a new car. One month later, a court declares her to be mentally incapacitated and appoints a guardian for her care. Which of the following is true about the contract for the purchase of the new car?: A) Since a guardian has been appointed, the contract is void. B) The contract cannot be disaffirmed because it is fully executed. C) If Irma paid cash, she ratified the contract. D) The contract is voidable.

The correct answer is (d)

Susan buys a car from CarMax for $10,000 on credit. Joe's daughter likes the car, so Joe buys the car from Susan. Joe also agrees to pay the balance due to CarMax on behalf of Susan. Joe defaults. Who can CarMax sue for breach of contract? A) Susan only. B) Joe only. C) Joe and his daughter. D) Susan and Joe.

The correct answer is (d)

Other Covered Contracts

Though uncommon, the statute of frauds requires a writing to evidence (a) contracts in which an executor or administrator promises to be personally liable for debts of an estate, or (b) contracts in which marriage is the consideration.

A delegator can be relieved from his duty to perform to the original obligee by a novation.

True

A induces B's consent to contract under duress. A later assigns his rights under the contract to C. B may assert the doctrine of duress against C as a ground for avoiding the contract.

True

A minor is required to pay for the reasonable value of the necessaries she receives.

True

Anti-assignment clauses in contracts are enforceable.

True

Debtor (D) owes a debt to Creditor (C). S contracts with D to pay D's debt to C. C is a creditor beneficiary of the contract between S and D.

True

Most states hold that the age of majority for contracting purposes is 18 years.

True

Once a contract made by a former-minor has been ratified after the age of majority, it cannot be disaffirmed.

True

The statute of frauds applies only to executory contracts.

True

When a condition precedent occurs, the duty to perform arises.

True

The "infancy doctrine" is a valid defense to prevent the enforcement of an arbitration clause against a minor.

True (See Stoupes v. The Finish Line, Inc. (slide 14-6)).

Ralph is the executor of his mother's estate and makes an oral promise to pay his mother's debts from his personal assets. This oral promise is not enforceable.

True. If the executor promises to pay the debts personally, out of his own assets rather than the assets of the estate, then the promise falls within the SOF and would have to be in writing to be enforceable.

Non-competition clauses in employment contracts will not be enforced if they restrict employees from earning a livelihood.

True. Must not impose an undue hardship.

John agrees to work as Katy's realtor until he sells her house. Katy closed on her house sale yesterday, so the contract has been discharged.

True. This is an example of a condition subsequent.

Best Buy owes Creditor money and the repayment date is quickly approaching, so Best Buy contracts with Shady Loan Co. for a short-term loan. Creditor orally gave its personal guaranty to Shady Loan Co. that Best Buy would repay the loan. Best Buy defaulted, therefore Creditor must repay Best Buy's loan.

True. This is an example of a situation in which the main purpose or leading object rule applies: no writing is required where the guarantor makes a collateral promise for the main purpose of obtaining a direct personal economic advantage. Since Best Buy took out the loan to repay Creditor, Creditor made the collateral promise for direct personal economic advantage. Even though the contract was oral, Creditor must repay the loan for Best Buy.

Mark purchases carpet for his house for $475, but later decides to purchase better quality carpet for $525. As modified, the contract must be in writing to be enforceable.

True. UCC 2-209(3) requires that if the contract, as modified, is for $500 or more, it must be in writing to be enforceable.

Exception to Collateral Contract Rule

Under the main purpose or leading object rule, no writing is required where the guarantor makes a collateral promise to pay the debt or perform an obligation of another person for the main purpose of obtaining a direct personal economic benefit to himself (if so, it's treated as an original obligation, not a collateral obligation). - Ex.: Bank is a creditor of Best Buy. Sony sells goods to Best Buy, but requires a guarantee of payment. To help keep Best Buy in business and ensure that Bank will be repaid, Bank orally promises Sony that it will guarantee Best Buy's payment to Sony. - Bank's oral promise is considered to be an original obligation and is outside the SOF and is enforceable.

Collateral contracts:

a contract in which a person (guarantor) agrees to pay the debt or perform an obligation that another person (principal debtor) owes to a third person (obligee) if the principal debtor fails to perform. Ex.: Father personally guarantees car loan from Bank to Son. If Son defaults, Father will pay.

The transfer of one's rights under a contract is an ?

assignment

The transfer of one's duties under a contract is a ?

delegation

Original =

direct personal economic benefit = no writing required

Does stock ownership =

direct personal economic benefit?

FMV

fair market value

Once the delegator properly delegates a duty to the delegatee, the delegator is relieved (discharged) of any obligation to perform the duty.

false

Nonperformance of a duty

generally is a breach of contract, but nonperformance may be excused in certain circumstances.

"Benefit Rule"

holds that, upon rescission, recovery of the full purchase price is subject to a deduction for the minor's use, depreciation, or damage of the goods.

Capacity

is the ability to give consent to be bound to a contract (i.e., to incur legal obligations and acquire legal rights).

Emancipation

is the termination of a parent's right to control a child. - Minor may avoid contracts even if the minor is emancipated. - However, minors may not avoid certain contracts if statutory exception exists. - Marriage: VA Code §20-48: Marriage permitted at age 16, with judicial consent. - Student loans, life and medical insurance policies

"infancy doctrine"

is to protect minors from their own lack of judgment.

Necessaries:

items that are required for survival (food, clothing, shelter, medical care, etc.) that are not provided by the minor's parents or guardians. -Liability is based on Quasi-contract (to prevent unjust enrichment; see Slide 9-22)

MSRP

manufacturer's suggested retail price

Collateral =

no direct personal economic benefit = writing required

The person to whom the duty is owed is the

obligee

A person who owes a duty to perform under a contract is the ?

obligor

Effect of the assignment:

the obligee-assignor's right to receive the performance from the obligor is extinguished; the right to receive the obligor's performance is transferred to the assignee.