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Application of Law
- Common law universe: contracts for personal services and real property.
- UCC Universe: contracts for the sale of goods.
- Mixed contracts follow two doctrines:
- All or nothing rule you cant be in two different universes. One body of law must apply.
- Exception: divisible contracts can be the common law and UCC realms because they are separate contracts.
- Predominant Purpose rule when contracting, does the good or the service play a bigger role? Usually, whichever
- A contract is a legally enforceable agreement.
- Agreement mutual assent
- An offer is a manifestation of a willingness to enter into an agreement by the offeror that creates a power to accept in the offeree.
- Governed by objective theory of contracts outward appearances of words and action matter, not secret intentions.
- Is not created through humor, anger or expression of opinions.
Requirements for an offer:
- Must be directed at a specific offeree
- Can be broader in cases of advertisements or rewards.
- Must cover all essential terms of the agreement (CL); court may fill gaps for everything except quantity (UCC).
- Requirements contracts, output contracts have an inferred quantity that the court will gap-fill.
- A valid offer must give the power of acceptance to the offeree such that all is required is a statement that I accept.
- There are six ways that an open offer can be terminated prior to acceptance. ECRCDT
- Express revocation: the offeror revokes the offer via express communication to the offeree.
- Constructive revocation: The offeree learns that the offeror has taken an action that is absolutely inconsistent with the continuing ability to contract.
- Rejection: the offeree rejects the offer
- Counter-offer: the offeree makes another offer.
- Death: the unaccepted offer is terminated upon the death of the offeror.
- Time: an offer will lapse after a reasonable amount of time.
- General rule: the offeror is usually able to revoke an offer at any time prior to acceptance.
- Four ways an offer can be made irrevocable
Irrevocable Offers: Option contract
A separate contract to hold the offer open for a stated period of time. Subject to its own K-law analysis. Will make an offer irrevocable
- A merchant can make a firm offer to buy or sell goods which is irrevocable, even absent consideration.
- Requirements: (1) in writing, (2) contain an explicit promise not to revoke, and (3) be signed by the merchant.
- Will last for the promised time, or if unstated, a reasonable amount of time not to exceed 90 days.
- May remain open even after the time the offer may remain firm.
Irrevocable Offers: Offeree has begun performance
A unilateral offer to contract cannot be revoked once performance has begun the offeree has a vested right to finish performing.
Irrevocable Offers: Promissory estoppel
- The offeror cannot revoke the offer if the offereee reasonably and detrimentally relied on the offer in a foreseeable manner.
- Note: contractor and sub issues.
- Manifestation of a willingness to enter into the agreement by the offeror.
- Standard: objective contract theory would a reasonable person believe the offeree to have accepted the offer?
- Manner of acceptance: as the offeror is the master of the offer, the offeree must accept in the manner proscribed in the offer.
- The offer must be specifically directed or communicated to the offeree, and the offeree must be aware of the offer.
MD distinction: Acceptance
- MD allows any reasonable means of acceptance unless otherwise specified by the offer.
- An electronic transaction can be agreed upon by both parties when it is within the contract, conspicuous and agreed to separately.
Acceptance of Uni/Bilateral Offers
- If a unilateral offer, can accept through performance.
- If a bilateral offer, can accept through words.
- UCC: if a seller accepts an offer but sends the wrong part, it is an acceptance + a breach of contract.
- Mailbox rule
- Acceptance by mail is valid when the letter is sent, except when
- If the offeree sends something else first (rejection, counteroffer)
- To other types of communications
- To option contracts
- If an acceptance and rejection are both mailed, the mailbox rule does not apply. Whichever letter which is opened first governs acceptance.
Acceptance by Silence
- An offeree cannot accept by silence except:
- For unilateral rewards or contests,
- For unilateral offers where parties are geographically close and the offeror can see performance occurring,
- Past history of silence serving as acceptance where the offeree should contact the offeror only to reject
- Offeror says that acceptance must come via silence and the offeree intends to accept by silence.
- Acceptance can be implied-in-fact.
Serves both as a rejection of the offer by the offeree as well as a new offer which is created by the offeree (now offeror).
CL mirror image rule
The terms of the acceptance must match the terms of the offer exactly. Failure to do so means that the purported acceptance is a counteroffer.
- Acceptance of an offer that does not the terms exactly can still serve as acceptance of the offer.
- If at least one party is not a merchant ? timely acceptance of an offer with additional terms is still acceptance unless acceptance is expressly conditional upon the assent of the additional terms. The additional terms are to be negotiated later.
- If both parties are merchants, the new terms govern the deal if they (1) did not materially alter the deal, (2) the initial offer did not expressly limit acceptance of the terms, and (3) the offeror does not object to the new term within a reasonable time.
- Bargained-for exchange promises involving a legal detriment or benefit.
- MD Distinction: this is the legal detriment bargained for in order for the contract to exist, and can take the form of (1) a return promise to do something, (2) a return promise to refrain from doing something legally permitted, (3) the actual performance of some act, or (4) refraining from doing that act.
What is consideration, and what is not?
- Gift promises, conditional gifts are not bargained-for consideration.
- Nominal consideration does not suffice; there must be some adequacy of consideration.
- An illusory promise is when a promisor does not clearly commit to the deal, and does not serve as consideration.
- Satisfaction contracts serve as consideration.
- Past consideration is not consideration.
- MD Distinction: past consideration may be acceptable to prevent injustice.
- A promise not to sue is consideration so long as there is (1) an honest belief in the validity of the claim and (2) a reasonable basis for that belief.
- MD Distinction: promise of marriage can serve as adequate consideration, but suit for breach of this promise cannot be brought unless the other party is pregnant.
Contract modification and the pre-existing duty rule - common law
- CL: Pre-existing duty rule: a promise to do something that you are already obliged to do is not consideration, except where:
- There is a change in performance
- A third party promises to pay
- Unforeseen circumstances which would excuse performance
- Partial payment for release from debt obligations is valid consideration when the debt is neither (1) due nor (2) disputed.
Contract modification and the pre-existing duty rule - UCC
Modifications made without new consideration which are made in good faith are binding.
Consideration substitutes: Promissory estoppel
Absent consideration, an agreement can still be enforced when (1) a promise is made that would be reasonably expected to induce reliance, (2) the promisee takes detrimental action in reliance on the promise, and (3) injustice can be avoided only by enforcing the contract.
MD Distinction: Promissory Estoppel
- a promise is binding if (1) promisor should reasonably expect to induce action or forbearance by the other party, (2) the promise did induce action/forbearance, and (3) injustice can be avoided by enforcement of the promise.
- Proof of reliance by clear and convincing evidence.
Consideration substitutes: Quasi-contract
- Contracts implied-in-law where (1) the plaintiff confers a measurable benefit on the defendant, (2) the plaintiff reasonably expected to get paid and (3) it would be unfair to let the defendant keep the benefit without paying.
- MD Distinction: MD allows recovery for restitution damages based upon unjust enrichment or quantum meruit theory - requires (1) Df received the benefit, (2) Df knew of the benefit, (3) Df accepted the benefit, (4) Pl had reasonable expectation of compensation and (5) Pl has clean hands.
Consideration substitutes: Moral obligation plus Subsequent Promise
Some jurisdictions will recognize that a moral obligation along with a subsequent promise to pay is binding.
Seal on Contracts
- The Seal does not serve as a consideration substitute in most jurisdictions.
- MD Distinction: no requirement for a seal, but the statute of limitations extends from three years to twelve.
Defenses to formation
- When invoked, a defense to formation may make a contract void ab initio or voidable by an aggrieved party.
- MD Distinction: everything except illegality, public policy and unconscionabilty are defenses to formation, while the others are a defense to enforcement.
- When the two parties attach different meanings to the same words. To invoke, one must demonstrate:
- The parties use a material term which is open to two or more reasonable interpretations
- Neither side attaches a different meaning to the term
- Neither party knows of the confusion
A belief which is not in accord with a present fact.
- An adversely affected party may rescind a contract if (1) there is a mistake of fact that existed at contract formation (2) which relates to a basic assumption of the contract which has a material impact on the deal, and (3) the impacted party had not assumed the risk of the mistake.
- MD Distinction: MD allows the remedy of restitution to the harmed party, and MD permits reformation of written contracts to fix mistakes unless likely to harm a third party.
- An adversely affected party may rescind a contract if (1) there is a mistake of fact that existed at contract formation (2) which relates to a basic assumption of the contract which has a material impact on the deal, (3) the impacted party had not assumed the risk of the mistake, and (4) (a) unconscionable, or (b) the other party knew of, or had reason to know of, or caused the mistake.
- MD Distinction: rescission when (1) mistake so severe that enforcement would be unconscionable. (2) mistake is material portion of K, and (3) aggrieved party was not aware nor the cause of the mistake.
Assumption of the risk and mistake defense
A party assumes the risk of mistake when (1) it is assigned via contract, (2) a party knows of limited knowledge with respect to the facts but considers it sufficient, or (3) risk is allocated by the court as reasonable under the circumstances.
- Certain parties are deemed incapable of forming contracts where they can be bound or forced to perform.
- Minors under the age of 18 (MD)
- Disaffirmance before reaching the age of majority or within a reasonable time thereafter, the minor can disaffirm the contract by going to the other party and declaring the contract void. The minor must bring whatever remains of the contract.
- Necessities for items that one really needs to live, the contract cannot be voided in toto. Instead, the minor is responsible for the fair value of the necessity. (This is not necessarily the contract price).
- Mentally ill persons who cannot (1) understand the nature and consequences of their actions, or (2) act in a reasonable manner in relation to the transaction *must be known*.
- Intoxicated persons *must be known.*
- A statement at the time of contracting that is not true.
- To assert the defense, the aggrieved party must show (1) a misrepresentation of a present fact (2) that is material or fraudulent and (3) was made under circumstances in which it is justifiable to rely on the representation.
- If nonfraudulent, misrepresentation must be material.
- If fraudulent, any misrepresentation will suffice.
Nondisclosure: Defense to Formation/Enforcement
- Occurs when a party remains silent about something and the other party does not learn of the condition.
- Generally, non-disclosure is not a defense unless there is (1) a fiduciary relationship or (2) an act of concealment.
- An improper threat that deprives a party from making a meaningful choice to contract.
- Physical duress is a threat of force.
- Economic duress arises when one party makes threats to induce a party to contract or to modify a contract.
Related to duress, and occurs when a party in a position of trust puts pressure on another party susceptible to the influence.
- A contract for an illegal act is unenforceable.
- A contract entered in furtherance of an illegal act that is not itself illegal is enforceable.
- Traditionally, no recovery, but modern trend to allow restitution.
- A contract contrary to public policy is not enforceable.
MD Distinction: non-competition clauses in employment contracts
Are void under public policy if the clause is (1) beyond what is reasonably necessary to protect the business, or (2) imposes undue hardship on the employee.
- A contract which is so one-sided that it shocks the conscience of the court.
- Two requirements:
- Procedural unconscionability: a defect in the bargaining process, like surprise or a contract of adhesion
- Substantive unconscionability: a rip-off in the contract.
- This is a question of law which does not go to the jury.
Statute of Frauds
- For most contracts, an oral contract will suffice, but five types of contracts must be in writing to prevent fraud.
- Does SOF apply?
- If so, has SOF been satisfied?
- If not, does an exception apply?
Types of contracts which apply Mr. SOUR
- Marriage: any agreement made in consideration of marriage must be in writing. The marriage itself need not be in writing.
- Suretyship: any contract promising to guarantee the debt of another must be in writing, unless the main purpose of paying the debt of another is for the suretys benefit.
- One Year Rule: any contract which has a term that cannot possibly be performed within one year of the formation must be in writing. This is interpreted narrowly.
- UCC $500: any contract for the sale of goods in excess of $500 must be in writing.
- Real property Ks: any contract for the sale of an interest of real property must be in writing.
Satisfying SOF through a writing
A writing is enforceable when it (1) identifies the parties (2) which contains the essential elements of the deal and (3) is signed by the party against whom enforcement is sought.
Satisfying SOF through performance
Service deals satisfy SOF through a complete performance by either party.
Real estate deals satisfy SOF through:
- Complete performance
- Partial performance + two of three
- Improvements upon the land
UCC and SOF
- A writing can allow gap-filling for everything but quantity, but is only enforceable for the amount of goods written.
- Partial performance is enforceable for the quantity delivered or accepted.
- Custom made goods are exempted from the SOF, and a maker satisfies SOF once it makes a substantial beginning towards manufacture.
- Judicial admissions of a contract are enforceable.
- If both parties are merchants, a party must object to a confirming memo within 10 days.
Miscellanous SOF issues
- Agents must have a signed writing to authorize contract formation under the equal dignity contract.
- A modification to a contract originally subject to SOF must also be subject to SOF to require a writing for the modification to be enforceable.
- The parol evidence rule governs whether a prior oral or written statements (extrinsic evidence) can be used when interpreting a subsequent written agreement.
- Question 1 is the contract a completely integrated writing?
- Completely integrated writing means that the contract expresses all terms of the agreement. Can be evidenced by a merger agreement.
- Partially integrated writing means that the contract is final, but some terms are not included.
- Some terms may be naturally omitted from a contract.
- UCC treats all contracts as partially integrated.
- PER does not bar evidence of defenses to contract formation.
- PER does not bar evidence of subsequent deals.
- Question 2 - does the extrinsic evidence contradict the contract?
- If yes, then the extrinsic evidence is barred for being used to interpreting and ambiguous term of the contract.
- If not, then the extrinsic evidence can be used to interpret an ambiguous term of the contract.
A promise about a term of the contract that explicitly shifts risk to the party making the promise.
A promise that affirms or describes the goods, and that itself is the basis of the bargain. NOT an opinion or puffery.
Implied warranty of merchantability
- A guarantee that goods are fit for their ordinary commercial purposes. Can be disclaimed if clear and conspicuous.
- Must be a merchant.
Implied warranty of suitability for a particular purpose
- A guarantee is implied when (1) a seller knows of a buyers special purpose and (2) the buyer relies on the sellers expertise when buying the good.
- Need not be a merchant.
- Can be disclaimed.
A future event which, upon its occurrence, triggers contractual liability in one or more parties.
- Created by language of uncertainty in the contract.
- Must be strictly satisfied unless excused.
- Objective standard of satisfaction for most Ks.
- Subjective standard of satisfaction for Ks involving aesthetic taste.
- Waiver of a condition
- Via conduct.
- Via wrongful interference (good faith standard).
Constructive Condition of Exchange
Under the constructive condition of exchange, one partys performance is conditioned upon the other sides performance.
Constructive Condition of Exchange: CL
- Doctrine of substantial performance.
- Imperfect satisfaction of the constructive condition of exchange will trigger performance provided that (1) breach is not material and (2) breach is not willful.
Constructive Condition of Exchange: UCC
- Perfect tender rule each party must provide perfect goods and perfect delivery.
- Imperfect tender gives the other party the right to (1) reject the goods upon delivery and (2) revoke the acceptance within a reasonable time.
- Installment contracts need not meet perfect tender.
- A seller who fails to tender perfect goods has a right to cure the defect if there is time left on the contract.
Common methods of tender/delivery for goods contracts
- Tender at sellers place of business.
- Shipment contract (1) get goods to the common carrier, (2) make arrangement for delivery and (3) notify the buyer.
- Destination contract seller must get the goods to the buyer and notify the buyer.
Risk of loss analysis
- 1. Does the contract assign risk of loss?
- 2. Has a party breached the contract? If breach, that party typically bears the risk of loss.
- 3. What type of delivery K?
- Shipment risk to buyer.
- Destination risk to seller.
- 4. If not a delivery K, then is the seller a merchant?
- If yes, risk to seller until buyer receives the goods.
- If no, risk to seller until seller tenders goods.
Like defenses except the contract has been formed. When successfully raised, a defense will forgive future performance
- Arises when (1) there is an unforeseeable event (2) of which the non-occurrence was a basic assumption of the contract and (3) the party seeking discharge was not at fault.
- If one party assumes the risk, it cannot subsequently raise this excuse.
- Common fact patterns:
- Performance becomes illegal
- Subject matter of K is destroyed
- K with a special person
- Anything that hinder the ability to perform not the cost to perform.
- MD Distinction: MD allows impracticability for unforeseen cost spikes, but not for foreseeable failures of supplies.
Death does not typically excuse liability for continuing to perform a contract unless there is something special to that persons performance.
Frustration of purpose
- Arises when (1) an unforeseen event undermines a party's principal purpose for entering into a contract, and (2) both parties knew of this principal purpose (3) at the time the contract was made.
- Distinguished from imp/imp: Person is still able to perform; however, the event on which the contract is based is no longer there.
Consideration for cancellation of contracts
In the event that both parties have performance remaining, they can both step away from performing the contract. This continued performance serves as binding consideration.
Accord and Satisfaction
- When the parties to an old contract agree that performance will be satisfied by a new contract.
- Accord: the old contract
- Satisfaction: the new contract which satisfies the old contract.
- If a party breaches the satisfaction, the nonbreaching party can sue under the accord or satisfaction.
- When both parties agree for a substitute person to take over contractual obligation.
- Distinguished from assignment because both parties agree.
- If novation is valid, the original promisor is excused for performance, and cannot be sued for any subsequent breach.
Anticipatory repudiation: common law
- CL requires (1) definite, clear and unequivocal manifestation of intent on the part of a party (2) that he does not intend to perform when performance is due. Such a statement serves as that partys intent to breach as breach itself.
- Options for the nonbreaching party (1) treat repudiation as breach and sue immediately, or (2) demand performance and what for the actual breach.
- Options for the breaching party it can retract its repudation provided (1) it has not been sued yet or (2) the nonbreaching party has acted in reliance upon the repudation.
Anticipatory repudiation: UCC
Under the UCC, if there are reasonable grounds for insecurity about the other sides performance, you are allowed to demand adequate assurance of performance. If the other party fails to respond within a reasonable time, you can treat this as repudiation.
Remedies for Anticipatory Repudiation
- Breach itself
- Material breach allows for damages and suspends return performance under CCE.
- A non-material breach allows for damages, but continued performance is required under CCE.
Money damages are the typical remedy in contract law.
- Awarded to put the non-breaching party in the same position that it would have been performed. (Value of performance with breach) (value of performance without breach).
- Must be proven with reasonable certainty issues with new or unproven business ventures. MD Courts dislike.
- Non-breaching party must mitigate damages take reasonable steps to reduce damages arising from the breach.
- Incomplete performance once a party has breached, the non-breaching party cannot continue to perform and rack up the bill. (Contract price) (Amount already paid) Amount that would be needed to finish the job).
Damages which are unique or special to the plaintiff. These damages must be either (1) foreseeable or (2) known to the defendant at the time of contracting.
Damages which put a party in the same economic position that it would have been had the contract never been created.
Damages which give the plaintiff an amount equal to the economic benefit that the plaintiff bestowed upon the defendant.
Damages agreed upon in the contract. Enforceable only if (1) liquidated damages were reasonable at time of contracting, and (2) actual damages would be uncertain in amount and difficult to prove.
Damages to punish to breaching party. Highly uncommon in contract law, except for fraud.
Lost volume profits
In spite of mitigation, the seller of a good may try to get expectation damages if the seller commonly sells these products in volume.
Economic waste and diminution in market value damages
- In the event that the cost to complete damages would drastically overcompensate the other party, the breaching party may be forced to pay diminution in value instead of expectation damages.
- Requires innocent and unintentional breach of contract.
- Specific performance is available when money damages are presumably inadequate.
- Presumptively available for real estate contracts.
- Presumptively not available in personal services contracts (pesky 13th amendment).
- May be available for unique goods like art or custom-made items.
May be provided to prevent the sale of real property or to prevent the breaching party from performing for a competitor.
Third Party Beneficiaries: The parties
- Promisor person who makes the promise to be enforced
- Promissee contractual counterpart to the promisor
- 3rd party beneficiary person who benefits from the promise.
A person who the promisor and promisee intended to bestow the benefit upon and has a right to sue to enforce.
A person who the promisor and promise did not contemplate receiving a benefit when they contracted, and cannot sue to enforce.
A third party who strikes a deal with the promisor to satisfy a pre-existing obligation, and may sue to enforce.
- A third party whose benefit does not satisfy a prior obligation.
- If the promisor intended to convey the gift to the donee beneficiary, then the donee beneficiary may sue to enforce.
Vesting of 3rd Party Rights
- A 3PB may sue to prevent the promisor and promisee from revoking or modifying his third party right. The third party must have vested, as demonstrated by:
- 3PB detrimentally relies on the rights
- 3PB manifests assent to the contract/rights
- 3PB files suit to enforce the contract.
- The promisor can assert any defenses/excuses against the 3PB that he could against the promisee.
- The transfer of rights under a contract.
- Rights are generally transferrable, even if prohibited (breach). Only agreements which invalidate assignment prevent assignment.
- Double assignment of rights without consideration, the last assignment controls, while with consideration, the first assignment controls.
- The transfer of duties under a contract. Contracts are generally delegable except where:
- Contract prohibits delegation
- Special interest with a specific individual performing
- Delegatee is generally not liable for breach unless consideration is given for the delegation.