To place in assignment # 15

Contract Formation/ Defenses

Essay Question

Data is a data processing company. Data’s business depends on the operation of several large
computers. Data decided to employ an outside company to provide computer maintenance and
service. Data’s president and other corporate officers met with the president of Reboot to discuss
a computer service agreement. The next day Reboot faxed its standard form contract to Data.
The contract reads as follows:

Client hereby agrees to purchase computer maintenance services from Reboot at a cost of
$2,000 per month. Reboot hereby agrees to provide up to ten hours of service per month,
with additional hours payable at $300 per hour. Reboot further agrees that it will provide
same-day service in response to every service request. This agreement shall expire one
year from the date on which it is made. In the event that Client fails to make a payment
required under this agreement, 80 per cent of the entire remaining balance under the
agreement shall become immediately due and payable.

Data signed and returned the contract and made the first $2,000 payment. During the first month
of the agreement, Data made two service requests. Both requests were received by Reboot at
9:00 a.m. In each case Reboot personnel arrived at Data’s offices at noon and quickly fixed the
problem. In both instances Data’s president complained about the delay but was told it was an
unusually busy day. After the second service call, Data sent a fax to Reboot stating that Data
would make no further payments under the contract. (Data later hired a different service
company.) Reboot then sent a letter to Data demanding $17,600, representing 80 per cent of the
remaining balance. When Data refused to pay, Reboot filed a lawsuit.

The president of Data claims that during the initial meeting with Reboot’s president, she told him
that it was absolutely crucial that Reboot respond to service requests within one hour. She says
that Reboot’s president told the group, “I understand. If you sign up with us, I promise we’ll be
there within an hour.”

Under what theory or theories might Reboot bring a lawsuit against Data, what defense(s), if any,
can Data assert, and which party is likely to prevail? Discuss.

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 Model Answer For
Contracts Assignment extra credit

Under what theory or theories might Reboot bring a lawsuit against Data, what defense(s),
if any, can Data assert, and which party is likely to prevail? Discuss.

Preliminary Negotiations

Preliminary negotiations are merely an invitation to deal.

Data decided to employ an outside company to provide computer maintenance service. Data and
Reboot’s president met to discuss a computer service agreement.

Thus, these were preliminary negotiations.

Offer

An offer is an outward manifestation of present contractual intent with definite and certain terms
which was communicated to the offeree.

The day after the meeting Reboot faxed over its standard form contract to Data with proposed
contract terms. The act of faxing the contract to Data shows Reboot’s outward manifestation of
present contractual intent to enter into a service agreement with Data.

The terms were described as: 10 hours of service per month, quantity; over the next year being
the time period; Data and Reboot are the parties; $2,000 per month is the price; and computer
maintenance is the subject matter. Since the terms are stated with sufficient particularity, the
terms are definite and certain.

Reboot’s faxing of the proposed contract to Data is a communication to the offeree.

Therefore, there was a valid offer.

Acceptance

An acceptance is an unequivocal assent to the terms of the offer.

When Data signed the contract there was an unequivocal assent to the terms of the offer.

Therefore, there was a valid acceptance.

Consideration

Consideration is that which is bargained for and given in exchange for a return promise,
requiring a benefit and a legal detriment to all parties.

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Reboot bargained to give Data 10 hours of computer maintenance service per monthin exchange
for Data’s return promise to pay $2,000 a month for the service.

Thus, Reboot incurred a legal detriment – providing up 10 hours a month of computer

maintenance service – in exchange for a legal benefit – receiving $2,000 a month for one year.
Conversely, Data incurred a legal detriment of making $2,000 payment per month to Reboot for
the next year in exchange for the benefit of receiving 10 hours a month in computer
maintenance.

Therefore, there is valid consideration.

Parol Evidence

Evidence of prior or contemporaneous negotiations or agreements that contradict, modify, or

vary contractual terms are inadmissible if the written contract is intended as a complete and final
expression of the parties.

The president of Data claims that during the initial meeting with Reboot’s president, she told him
that it was absolutely crucial that Reboot respond to service request within one hour. In
response, Reboot’s president responded “I understand. If you sign up with us, I promise we’ll be
there within one hour.” Hence, this is extrinsic evidence of prior negotiations.

Data seeks to introduce this extrinsic evidence to interpret the contractual meaning of “same-day
service” to mean service within one hour of being called. Since the discussion took place before
Data and Reboot put their agreement into writing, these prior oral statements are parol evidence,
and cannot be admitted to vary, add to, or contradict the terms of the signed maintenance
contract.

Thus, if the contract between the parties was intended to be the complete and final expression of
Data and Reboot, the prior discussions are inadmissible parol evidence.

Fully Integrated Contract

Where there is a writing that states the parties’ prior oral negotiations or agreements are fully
integrated into their written agreement, evidence of any prior oral negotiations or agreements is
parol evidence and thereby excluded by the parol evidence rule. Under the modern view, the
court will look to the circumstances of the parties and look to would a reasonable party would
have placed the oral agreement in writing.

Reboot faxed over their contract that stated Client agrees to purchase computer maintenance
services from reboot at a cost of $2,000 per month. Reboot agrees to provide up to 10 hours of
service and to provide those services within the same day. The contract did not contain a clause
stating that the contract represented the entire agreement between the parties.

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In applying the majority view, the relationship between the parties is a business relationship. A
reasonable party would have included contract terms that service was to be provided within one
hour. Thus, under the majority view, the evidence of the parties’ prior oral agreement is
inadmissible. Under the modern view, a reasonable party likely would have included a one-hour
response time given that it was “absolutely critical” for such a quick response.

Consequently, Data will not be able to introduce the prior agreements made before the parties’
signing of the service contract.

Unconscionability

Unconscionability is found when a term in the contract is unfair in the bargaining process.

Data will argue the clause requiring immediate payment of 80 percent of the entire remaining
balance for failure to make a payment is unfair. Further, it was contained in a standard form
contract drafted by Reboot. Under the circumstances, it would have appeared to Data that the
contract language was not subject to negotiation and had to be agreed upon to receive Reboot’s
services. Hence, the 80 percent term Data is procedurally unconscionable.

Therefore, the term is unconscionable.

Express Condition

An express condition is explicitly stated in a contract and is where one party expressly conditions
performance on the performance of the other party in the contract terms.

The agreement between Reboot and Data expressly stated that reboot agrees to provide same-day
service. Thus, the terms are explicitly stated in the contract. Reboot must provide same day
computer service before Data’s duty to pay arises.

Therefore, an express condition exists in the contract.

Frustration of Purpose

The defense of frustration of purpose requires that due to an unforeseeable event, the value of the
contract, as contemplated by both parties, is totally destroyed.

Data will argue that since they were under the belief that they would be getting service within
one hour of their service request and in fact it is only same-day their purpose under the contract
had been frustrated. In fact, Reboot had arrived within 3 hours of being called and had quickly
fixed the problem. Hence, the act of Reboot performing same-day service a does not totally
destroy the purpose of the contract between Data and Reboot, nor is it an unforeseen event based
on the terms of the signed contract.

Thus, frustration of purpose is not a valid excuse.

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Constructive Condition Precedent

An act or event that must occur before one’s duty arises.

Reboot must provide services before Data’s duty to pay arises.

Anticipatory Repudiation

Anticipatory repudiation is an unequivocal expression repudiating the intent to perform a

contract.

Data notified Reboot by fax stating that they would make no further payments under the contract.
Data’s language is an unequivocal expression repudiating its intent to perform.

Therefore, Data’s anticipatory repudiation would excuse Reboot’s condition to service Data’s
computers.

Voluntary Disablement

Voluntary disablement is an anticipatory repudiation through conduct.

When Data notified Reboot of their intention to make no more payments and later hired a
different maintenance service, Data’s conduct demonstrated their anticipatory repudiation
through conduct.

Therefore, Data’s conduct would excuse Reboot’s condition to pay.

Breach

A breach is an unjustified failure to perform which goes to the essence of the bargain.

Data refuses to pay Reboot pursuant to the terms of the contract which goes to the essence of the
bargain.

Therefore, Data is in breach of contract.

General Damages

General damages are damages that flow from a breach of the contract. The non-breaching party
is entitled to expectancy damages under the contract.

The non-breaching party may recover under the terms of the contract. However, Data might
argue that Reboot will have to mitigate its damages and try to find another company to service in
place of Data. However, there is no requirement for Reboot to do so.

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Hence, Reboot is entitled to general damages.

Liquidated Damages

A liquidated damage is a provision in a contract that sets a fixed amount of damages to recover
in the event of a breach since it would be extremely difficult to estimate the damage. The
damages must be based on the anticipated harm and cannot be a penalty.

Under the terms of the Reboot and Data contract the provision providing that 80 percent of the
entire remaining balance under the agreement shall become immediately due and payable if
Client failed to make a payment required under the agreement was a liquidated damage clause
since it specified the amount of damages recoverable for Data’s breach. However, under the
circumstances, it does not appear that Reboot’s damages would be difficult to estimate given that
the amount of its compensation over the remaining term of the contract was specified at $2,000
per month, plus $300 per hour for each hour more than 10 hours per month. The parties could
easily estimate the amount of lost income and other damages, if any, sustained by Reboot in the
event of Data’s failure to pay.

Therefore, this clause in the contract is a penalty and would not be enforceable (in addition to
being unconscionable).