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CONTRACT

A contract is a legally enforceable agreement.


Promise + Consideration = K
Promise + Detrimental Reliance = K

PROMISE CONSIDERATION
A promise is the manifestation of intent to act To constitute consideration, a performance or
or refrain from acting in a specified way promise must be bargained for, i.e. sought in
exchange for another performance or a return
A promise or performance must offer some promise
legal detriment, i.e. something of value or
some form of freedom Each party has the duty to bargain in good
faith

DETRIMENTAL RELIANCE
In some instances, detrimental reliance acts in
place of consideration.

UNENFORCEABLE

DISCRETIONARY

ENFORCEABLE
Conditional & Illusory
Promises
An agreement that depends
on the wish, will, or Vague & Indefinite Terms
pleasure of one of the
parties will not be enforced. Six Ways of Interpreting a Term: Satisfaction Clauses
Two Categories:
The Courts use these to determine (1) Objective test: Reasonable
INTENT person standard, where
(1) Language of the K “satisfaction” can be asserted to
(2) Dictionary something measurable
(3) Prior Negotiations Between the (2) Subjective test: Good faith
No Commitment Parties
One party cannot convert standard, where “satisfaction” is
(4) Trade Usage determined by the fancy, taste, or
what both parties knew to be (5) Standards Incorporated by
a joke into a serious judgment of the parties
Reference
transaction simply by (6) The Conduct of the Parties
claiming it to be so.
Other relevant factors:
There must be a meeting of Evidence; Subject Matter
the minds.
Exclusivity:
Good Faith & Reasonable Efforts
Implied Promises = A promise may be
lacking, and yet the whole K may be
“instinct with an obligation, imperfectly
expressed.” In these situations the
court reads in the promise through
good faith and reasonable efforts by
both parties.
Defenses to K
Formation
An unjustified failure to perform an
absolute duty

(I). Lack of Capacity (II). Duress


(1) Illiteracy without guidance (1) Mere Stress of $ Situation = No Void of K
(2) Mentally Ill (Bad public policy)
(3) Infant (Minor) (2) Assent Induced by Improper Threat =
Voidable K
K is voidable if: (3) Business Compulsion creates no other
- Party is unable to understand in a speedy remedy = Voidable K. i.e. did the person
reasonable manner do what they otherwise would not have done?
- Party is unable to act in a reasonable
manner

(III). Unconscionable & Unjust


K’s of Gross Inequality are not sustained

Adhesion & Unjust Terms:


K’s offered by the party with more power to the party with weaker power on a take-it-or-leave-it basis.

Rule: Enforceability depends upon the (1) degree of inequality and the (2) social necessity of the
contract.

Unconscionability:
Occurs where there is an absence of meaningful choice on one party, together with contract terms
unreasonably favorable to another party. Must be a necessary act of life, not a luxury or hobby.

Rule: Where the element of unconscionability is present at the time a K is formed, the K is unenforceable. K
must be with the reasonable expectations of the weaker party [substantive] to be enforceable. Conduct is
also considered [procedural].

NOTE: Both substantive and procedural unconscionability must be shown for a K to be unenforceable.
Defenses to K
Formation (Continued)
An unjustified failure to perform an absolute duty

(IV). Fraud & Misrepresentation (V). Release


(A) Nondisclosure = Recission of K Rule: When one party’s obligation to another party is
(B) Partial Disclosure believed to be Full extinguished, usually through a K clause.
Disclosure = Promisor is Liable
To be valid and enforceable the release must:
Rule: If the promisee acted in reliance, then (1) Clearly, unambiguously, and explicitly express the
there is no K and the Promisor is liable. specific intent of the subscribing parties
Nondisclosure of knowledge of a defect that (2) Be distinguished from the rest of the contract
creates misrepresentation is illegal. There is a language when signed.
duty to disclose if lack of disclosure creates (3) Notify the releasor of the effects of signing
reliance. (4) Remain within the realm of known risks, i.e. those
reasonably foreseeable to the acts the release is
meant to protect.

(VI). Mistake
If the expressions of the parties are capable of two different and equally reasonable interpretations, and
neither one negligently misled the other, there is no contract. Parties are bound by the reasonable
meaning of what they said.

Mutual Mistake:
The Court offers NO REMEDY for cases of mutual mistake.
Latent Ambiguity = A problem that was hidden before a certain event that is essential to the contract.
Parole Evidence (Extrinsic Evidence) = Can be used to clear up a latent ambiguity. Think chicken/cotton
shipping case.
Was the mistake as tothe mistake as to a basic assumption or essential term of the contract?
(1) Was
a basic assumption?Yes = K is voidable; No = K is enforceable.
• Yes = Contract
(2) If is
liability can be determined the courts consider:
voidable (i) Element of Risk for each party
• No = Contract (ii) Fraud of Quasi-Fraud
enforceable: (iii) Negligence

Unilateral Mistake:
(1) General Unilateral = When through fraud or mistake one party is misled, the K must be revised on the
Did the other partyside of the injured party. If the other party knew or had reason to know of the mistake and did not
know or have reasondisclose it, the K is unenforceable.
to know of the(2) Scribner’s Error = If the parties have agreed to terms, and only the written document is defective, a
mistake? meeting of minds has occurred and the contract is enforceable on original understood terms.

NOTE: Contract is voidable if one party does not bear risk of mistake. Also note that risk is allocated
depending on fairness; the court will also see whether risk has been allocated in the contract itself.
Contract is voidable under
R153
Basic Remedies

Compensatory Damages
When a person makes a promise, the promisor undertakes
the promised performance or a sum or money that will
place the promisee in the same position as they would
have been had the promise been performed.

Expectation Reliance
Positive: What the injured party would Negative: Returns the injured party to
have made in profit had the K been before the K was made.
performed.
Rule: Wasted expenditure can be
Rule: The law is meant to place recovered when it is wasted by reason of
compensate the injured party for the the defendant’s breach of K. If one party
benefits he would have gained in the knows expenses exist as a result of their
contract, not to place the injured party in a agreement to K, but breaches anyway, that
better position than they would have been party is liable for the expenses of the
in had they performed the K. injured party.

KP – Cost of Goods Sold = Damages

Restitution General v. Consequential Damages


Negative: Getting back the benefits
conferred. “Disgorging” the benefits General Damages:
conferred. Incidental damages resulting from the seller’s
breach including those commercially
A court may award damages in an attempt to reasonable.
return to the injured party any value that it Consequential Damages:
may have conferred on the breaching party. (1) In a sellers breach: Any loss resulting from
This interest is distinguished from quantum general or particular requirements and needs
meruit because restitution can only be given that the seller had reason to know at the time of
for breach of K. K and could not have reasonably prevented; (2)
Injury to person or property directly resulting from
Fair Market Value of benefit conferred is a breach of K.
returned.
To recover consequential damages:
(1) The damages must flow naturally from the
breach
(2) Both parties must be aware of the damages
and assume the risk of those damages at the
time of K
Remedies: How the Law Enforces Promises

Punitive Damages
• Almost never recoverable for
breach of contract.
• Only if compensatory damages are
inadequate.
• Exist to punish/deter the
SPECIFIC RELIEF: Granted when legal
wrongdoer, considered
remedy is inadequate.
inappropriate for contract cases.
(UCC 2-719)

INJUNCTION SPECIFIC Easier to


PERFORMANCE get for Sale
of Goods
Contract

Granted IF: Granted IF:


• Special circumstances to prevent unfair • There is a breach
competition (anti-competition clauses • Remedy at law is inadequate (UCC)
• Unfair trading of secrets • Performance is practical
• Unique goods and services • Courts can supervise
• Limited to Employment Contracts • Special Circumstances
• Public interest is at harm • Contract is clear and valid
• Irreparable harm where monetary • Uniqueness makes it impossible to assess
damages is not enough damages
• If costs of remedy damages exceed Not Granted IF:
cost of injunction (Walgreens) • Inconvenient and Expensive
• Temporary/Permanent? • Impractical
• Contract too vague
• Project too complex
• No Special Circumstances
Alternative
Remedies
When basic remedies are not enough

Arbitration Quantum Meruit


Is there an arbitration clause? Only when unjust enrichment occurs outside of a
Did both parties agree to arbitration? If contract
Yes… Must be the reasonable value of goods and
services conferred.
Arbitration over litigation: - A benefit conferred on D by P
• Faster - Appreciation or knowledge by D of the benefit
• Cheaper - Acceptance or retention of the benefit by D
• Rules of evidence don’t apply under circumstances
• Prevents class-action
• Avoids a jury Two ways of measuring unjust enrichment:
1. What the non-breaching party received
Reasons for appeal: 2. What the breaching party received
1. Fraud or corruption
2. Award is irrational Under CA law, a breacher cannot recover under
3. Award is against public policy QM.
4. Hearing is postponed for no reason

Liquidated Damages Tort


Specified damages for breach of K to be Provides remedies for civil wrongdoings not
given even if no actual damages occur: arising out of contractual obligation
Kinds of cases: personal injury, outrageous
Penalty or Reasonable estimate? conduct, outrage, special relationships,
Only obtainable if: insurance.
1. Damages are too difficult to ascertain at
the time K was formed
2. Amount agreed upon by the parties was a
reasonable forecast of compensatory
damages
AVOIDABLE CONSEQUENCES : DUTY TO MITIGATE DAMAGES
Injured party should do whatever it reasonably can to improve all reasonable and proper
opportunities to lessen injury.
Non-breaching party cannot recover for damages it could have reasonable avoided following
notice that the other party is repudiating the contract. Restatements 350.

Construction K Mitigation Sale of Goods Mitigation


• Once contract has been breached non- • If lost volume seller: UCC 2-708: If the
breacher should not be allowed to pile up measure of damages proved (KPrice
damages. – Market Price) is inadequate to put
• Stop building when they tell you to stop. seller in as good a position as
• Remedy is to treat contract as broken performance would have done,
when receives notice and sue for the seller’s lost profit on the sale is an
recovery of such damages as he may appropriate measure.
have sustained from breach. o Expectation Interest
• Ex. Luten Bridge Protected

Construction:
KP - Cost of Completion (expectation) Sale of Goods:
Or KRate for completed part + Lost Profit Seller: K Price – Market Price
(reliance) Buyer: Cover Price – Kprice

Employment K Mitigation
• Employee has to show that he was actively looking for another job after employment contract
was breached.
• Must prove there was no other comparable employment.
o The employee’s rejection of or failure to seek other available employment of a
different or inferior kind may NOT be resorted to in order to mitigate damages.
(Shirley McLain)
• Can collect excess damages with the difference between salaries for both jobs. (Employee)
• Money needs to comparable, type of work, seniority (how much input you’ll have),
reputation, location and skill set.

Employement:
Employer: Replacement K – Breached K
Employee: KPrice – 2nd Job Earnings (Mitigation)
Limits on
Legal Limits
Promise If a contract is immoral, unfair, or illegal, then it is
For a K to be enforceable: unenforceable and against public policy:
• No violation of public policy • Illegal on face
• No criminal activity • Illegal in performance
• Illegal in procurement
The illegality must be of a substantial degree to prove no K.

Positive Law = Public Policy Limits on Contract


Restatement § 178
(1) A promise is unenforceable if legislation makes it so, or if its
enforcement is clearly outweighed in the circumstances
because of public policy.
(2) In weighing enforcement courts examine:
(i) The parties justified expectations
(ii) Any forfeiture that would result if
enforcement were denied
(iii) Special public interest in enforcement of a
term.
(3) In weighing public policy:
(i) The strength of the relevant policy
(ii) The likelihood that refusal to enforce will
further that policy
Relationships (iii) The seriousness of misconduct
(iv) The connection between the misconduct and
the promise

Parent-to-Child

(1) Extrinsic evidence of Secret Service


a binding agreement
must be shown Attorney – Client
K is not enforceable if:
(2) Evidence must be • Litigation discloses confidential
express: clear and Limited to Quantum Meruit for the
matters
convincing to prove K value of services performed by
• Litigation might have even a slight attorney when client discharges
(3) Circumstances are
chance of impairing or attorney
considered
undermining covert
operations

Spousal
(Some states have a palimony rule)
Property rights established in a pre-nuptial agreement are enforceable

Spousal support waivers and pre-nuptial agreements are not in violation of public
policy and are not per se unenforceable. Judicial discretion is applied to determine
enforceability of K

Unmarried cohabitants can sue only under Quantum Meruit because no marriage K
exists. Occurs if one party retains an unreasonable amount of property that was gained
by the efforts of both parties.
Consideration
§ 71 Restatement
(1) For consideration, a performance or promise must be bargained for.

(2) A performance or promise is bargained for if it is sought by the promisor


in exchange for his promise, and is given by the promisee in exchange for
that promise.

(3) A performance may be:


- An act other than a promise
- Forbearance
- The creation, modification, or destruction of a legal relationship

(I). Bargain v. Gift Promise (II). Adequate Consideration

An unbargained for promise, unless While the law does not question the
enforceable for some other reason, will be adequacy of consideration, there must
a gift promise and will not be be value to the buyer.
enforceable. Novel ideas are not required.
There are no additional requirements of:
Prior to delivery of the gift, the promise can - A gain
be withdrawn. - Equivalent value
- Mutuality of obligation
A discretionary policy also has an
obligation to act in good faith, and this is In an exclusivity K, parties must act in
consideration. good faith for consideration to be
adequate. Parties must have valid
business reasons for varying a
requirements K.

(II.) Past Consideration & Moral Obligation

Past Consideration:
No valid consideration is bargained for because a promise is made in return for a detriment already
suffered by the promisee. To be valid, there must exist new consideration.

Moral Obligation:
Is sufficient consideration for an express promise only so far as there exists another good or valuable
consideration at some point
Exceptions:
- Debts (1) barred by the statute of limitations; (2) incurred by infants; (3) bankruptcy debts
- Where one party has received a material benefit (such as life or a hand)
Consideration
(Continued)

(IV). Action or Forbearance from Reliance (VI). Form & Enforceability


§ 74 Restatement
Forbearance to assert a claim that proves to be invalid is not
consideration unless:
(a) the claim is doubtful because of uncertainty as to the law
(b) the forbearing party believes that the claim may be fairly
determined to be valid

If the plaintiff believes in good faith that they could have brought
a claim but did not file suit in exchange for something else, that
good faith agreement will be enforced.

DETRIMENTAL RELIANCE:
In some instances, if one party relied on the promise of another
party and thus did or did not do something because of that
promise, the promise is enforceable even though it did not have
bargained for consideration

Unbargained-For Reliance:
(1) Must be reasonable
(2) Must be foreseeable

(V). Pre-Existing Duty

A promise to do something one is already obligated to do, or forbearing to do what they are not legally entitled to
do. There is no contract in cases of pre-existing duty because there is no bargained for exchange of
consideration. One party must already do something.

Contract Modification:
(1) New Consideration. Any change in an existing K must have new consideration to support it. In such a case,
the K is continued, not ended. (= more compensation for more hours worked)
(2) Mythical Intermediate K. Employment K’s. (a) Old K (b) is terminated by consent of both parties (c) and a new
K is executed in its place. The mutual promise to terminate is consideration (Intermediate K), and to re-contract
is again consideration. Usually occurs in one moment. (= pay raise for same work hours).

Actions Speak Louder Than Words (N.O.M. K’s):


(i) The pattern of conduct between two parties may can amount to the oral modification of a K.
(ii) Conduct as oral modification may amount to a waiver of some right by a party

Settlements of Debt & Compromise:


The difference between the two depends upon the intent of the parties.
(A) Accord & Satisfaction = A compromise providing for the future acceptance of a stated performance in
satisfaction of the existing claim.
(B) Substituted Contract = A compromise agreement itself that is accepted as a substitution and
extinguishment of the existing claim.

An Accord is more likely if:


(1) The original duty was one to pay money; (2) if the issue is undisputed; (3) if it was liquidated; (4) if it was
matured