Contract Law

When we think of contract law, the image of long winded words on a page comes to
mind for most people. This includes language that seems confusing to understand with
terms commonly referred to a “legalisms” which pertain to legal principles which no
one understands.
In some ways, there is a lot of truth to such a mental picture. There was a time when
contracts were very convoluted in nature and only attorneys could truly decipher what
was being said. Such an approach to contract drafting still exists. To make matters
worse, agreements are often written in a micro-script that is challenging to read.
Interestingly, case law decisions were written in a manner that was not at all reader-
friendly.
Nowadays, the mindset has changed in the legal community when it comes to writing
documents. The goal is to enable clients to coherently read legal documents without
confusion. True, there are still legalisms that documents will contain, but those terms
can be defined with plain language within the document in question.
As we focus on contracts themselves, plain language that identifies the duties and
obligations of the parties should be the mutual goal of the attorneys drafting the
contract. Parties should be entering agreements that detail the expectations of each.
In this regard, contracts should be written so that a relationship is being fostered. Clear
and concise language accomplishes that goal.
In this week’s lecture, students will learn how the building and forming of relationships
comes with the creation of contracts. Students will then understand that the further
fostering of the business relationship comes from the parties acting in good faith and
fair dealing with each other. Students will be introduced to the basic elements that go
into contract formation along with identifying the type of conduct that results in a
breach of contract. Resolving contract breaches outside of lawsuits via mediation and
arbitration will also be discussed.

Relationship Building
As we previously studied, Utilitarian is the ethical principle holds that the most ethical
choice is the one that will produce the greatest good for the greatest number. Right from
wrong is therefore determined by focusing on the outcomes.
In the same way, entrepreneurs recognize that they cannot go it alone in establishing a
successful business venture. They need strategic working relationships with other
professionals that can empower the entrepreneur to reach new levels of success. In the
BUSS213 Week 3 Lecture – Contract Law 2

best of all situations, the entrepreneur will likewise wish to be empowering force to
others.
These other professionals can be viewed as stakeholders in that they too will reap some
sort of benefit if the entrepreneur succeeds. Such stakeholders include the employees,
vendors, financial investors, and any other group of individuals or entities whose
interests parallel that of the entrepreneur. This can further include the community
within which the business operates and the surrounding environment, which is
impacted by the activities of the business, can be viewed as a silent stakeholder.
Specifically, for employees, vendors, financial investors, and other strategic partners,
the relationship with the entrepreneur is generally based on the contract between the
two. In this symbiotic relationship, a contract should promote a win-win situation for
all involved. Terms and conditions should be honestly negotiated so that no one is
being taken advantage of. This is how goodwill is created.
Along these same lines, when there is a good faith reason as to why one party cannot
perform the obligations in the contract, preserving the relationship becomes a
motivating factor in not pursuing litigation. Instead, there can be a shared mindset to
find a mutually acceptable resolution.

Contract Ethics: Good Faith and Fair Dealing

Building bridges with others, making friends, and creating longstanding relationships
can be a foundational goal of all business transactions and in Utilitarian perspective,
such a positive approach to interpersonal relations can produce good results. In essence,
such a spirit of mutual cooperation for mutual benefit can be characterized as the
parties acting in good faith with each other.
For this reason, legal scholars in the field of contracts and judges alike have recognized
that “Every contract imposes upon each party a duty of good faith and fair dealing in its
performance and its enforcement” (Restatement (Second) of Contracts § 205 (1981)).
When this does not happen, such conduct is often described as bad faith, and is
identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a
power to specify terms,” “interference with or failure to cooperate in the other party’s
performance,” and willful rendering of imperfect performance (Restatement (Second) of
Contracts § 205 cmt. d.).
Some examples of the failure to act in good faith and deal fairly under a contract are:

 Willfully using another company’s services when you promised under a contract
to exclusively use the services of one company;
 Tampering with goods to be delivered under a contract;
 Contracting to buy a house and then refusing to find a mortgage after being
denied by one mortgage company; and/or
BUSS213 Week 3 Lecture – Contract Law 3

 Lying about performing your obligations under a contract (Folk, 2018).

Good faith and fair dealing are tantamount to behaving ethically in contractual
relationships. Without it, there could never be certainty as to the intentions of the
parties. For this reason, every court in the US recognizes the existence of the duty of
good faith and fair dealing in every contract.
As we discuss the concept of Good Faith and Fair Dealing, take a look at this 1:26
minute video on Dealing in Good Faith by Jim Blasingame. While watching the video,
keep in mind the following points:
Dealing in Good Faith

 Consider how the principle of good faith and fair dealing fosters a business
relationship
 Reflect on how business negotiations can be a win-win for both sides
 Assess how acting in good faith goes to the spirit of the agreement
This video provides an excellent summary of how acting in good faith in honoring one’s
contractual commitment helps to maintain the business relationship such that both
sides mutually benefit from the arrangement. It also is a key ingredient in building
trust. With an attitude of acting in good faith, the final contractual product produces a
win-win situation for both sides. When parties recognize that no one is trying to take
advantage of the other, focus can remain solely on mutual business goals. As such, the
essential purpose for the agreement between the parties remains strong as well as the
professional relationship. This is especially important in the event that unanticipated
contingency arises which interferes with contract performance. Rather than pursuing a
lawsuit for breach of contract, the parties can focus on how to save their professional
relationship.
Now that we have covered the topic of good faith and fair dealing, let us take a quick
break and review the material with an ungraded knowledge check.
Check Your Knowledge
True or False: Good faith and fair dealing means securing your interests at the expense
of others.
Answer: False. Good faith and fair dealing imply that both parties intend to fulfill their
contractual obligations.

True or False: A contract cannot be a win-win situation for both parties.

Answer: False. A contractual relationship can help to foster a mutually benefiting
financial situation.
BUSS213 Week 3 Lecture – Contract Law 4

Multiple Choice: Lying about performing your obligations under a contract would be
an example of . . .
A. Intent to contract
B. Feeling frustrated with the contract
C. Breach of the Covenant of Good Faith and Fair Dealing
D. None of the above

Answer: ‘C’ Lying about performing your obligations under a contract is an example of
acting in bad faith and evasion of the spirit of the bargain.

Special Note: Common Law Versus the Uniform Commercial Code Article
II

In the United States, two primary sources of law govern our contracts: the common law and the
Uniform Commercial Code (UCC) (Ltmen Learning, 2019). In this lecture, focus will be on
common law contracts where the formation requirements to create an enforceable contract are
more stringent. Moreover, contracts for services to be performed are not governed by the UCC.
Let us briefly look at the UCC.

The Uniform Commercial Code (UCC) Article 2 is a proposed set of rules that govern contracts
between merchants and the sale of goods valued at $500 or more. The UCC is only a
model/recommendation for what a particular state’s commercial code might include; however, in
practice, every American state has adopted some version of the UCC, and those state versions,
known as the states’ commercial codes (for example, the California Commercial Code), do have
the force of law—in fact, they are laws (Steingold, 2019).
In contracts for the sale of goods, the UCC holds parties to a standard of strict liability with
respect to the subject goods such that if the good is defective, the seller is automatically liable to
the injured party. Interestingly, the sale of goods includes express and implied warranties that the
product is exactly what has been ordered, that it is fit as sold for its intended use, and that the
seller has title sufficient to pass the goods to the buyer (ABA, 2019).
Note that as between merchants, the UCC requirements differ from common law in contract
formation. The rationale is that because business arrangements happen in a fast pace
environment where contracts between merchants do not always contain offers that include
definite terms, there needs to be flexibility in how parties form their contracts.
The primary differences between common-law contracts and the UCC are in the UCC’s
relaxation of various common-law contract formation requirements such that for the UCC, the
primary issue is whether the parties intended to enter into a binding agreement (Lumen Learning,
2019).
BUSS213 Week 3 Lecture – Contract Law 5

Contract Basics
Contract law in the United States is founded upon case law decisions, state statutory
law, the Uniform Commercial Code (when contracts are between merchants and the
sale of goods is over $500) and the legal treatise that is known as the Restatement of
Contracts (currently in its second edition). In order to create a binding agreement that is
enforceable and valid between two parties, a contract requires that six basic elements be
present. Those are:
1. Offer
2. Acceptance
3. Consideration
4. Legality of the Subject Matter
5. Capacity, and
6. Contractual Intent
Each of these elements will be explained in concise detail.

Offer
An offer exists when one party manifests an intent to enter into a contract. The offer is
the beginning step in the formation of a contract. Per the wording of the Restatement
(Second) of Contracts § 24 (1981): “An offer is the manifestation of willingness to enter
into a bargain, so made as to justify another person in understanding that his assent to
that bargain is invited and will conclude it.”
An example would be, “I offer to sell you my car for $5,000.” With this initial offer to
you, we could not establish a contractual relationship. In this example, I would be the
offeror and you would be the offeree.
Within our discussion on offers, three factors must be present. First, the offer must
show that there is an intent to enter into a contract. In other words, it would appear to a
reasonable person that the offeror intends on making an offer. As such, a person joking
about making an offer to sell something is not an intent to enter into a contract.
Second, the offer must be communicated to the offeree. Simply put, it makes sense that
the offeree is aware that there is an offer pending. Communication can be verbal, in a
written letter, or email or any other form of communication.
Third, the offer’s terms must be certain and definite and not in any way ambiguous so
as to question the intent of the offeror. This is established per the existence of four
elements. The first is that the contract identifies the price at issue (This bargain for
exchange of money for goods/services is known as Consideration and it will be
discussed in detail later). The subject matter of the contract must be clearly identified.
In the example above, a car was the subject matter. The parties to the contract must be
identified. Time of performance must also be identified and if not, courts will presume
BUSS213 Week 3 Lecture – Contract Law 6

that a “reasonable time” was intended. So, in the example above, if you came to me ten
years later to ask to purchase my car, that would not be performance within a
reasonable time.
Note that it is common for businesses to often conduct preliminary negotiations. Such
conversations help to set forth the precise expectations of the parties. Moreover, if each
party identifies what they expect and require from this contractual relationship, this
assists the attorneys for each side in crafting the precise terms and conditions that
everyone will agree to. As such, preliminary negotiations can result in the creation of a
memorandum of understanding which is a document that in essence says that the
parties intend to agree to do business with each other, the evidence of which will be a
final contract that shows the parties assenting to the agreement. Therefore, when both
parties understand that no promise is intended and that their words constitute only
preliminary negotiation, no contract results.
Now that we have reviewed the topic of contractual offers, let us take a quick break and
review the material with an ungraded knowledge check.
Check Your Knowledge
True or False: An offer does not need to identify the subject matter of the contract.
Answer: False. In an offer, the subject matter of the contract must be clearly identified.

True or False: If a contract does not identify the time of performance, the contract is
invalid.
Answer: False. Time of performance must be identified and if not, courts will presume
that a “reasonable time” was intended and the contract is enforceable.

Fill-In the Gap: The offer must show that there is an _____ to enter into a contract
A. intent
B. acceptance
C. excuse
D. None of the above

Answer is ‘A’ .It must appear to a reasonable person that the offeror has an intent to
make an offer to enter into a contract.

Acceptance
To create a valid contract, the party to whom the offer is made (the offeree) must accept.
Note that the law will not enforce an obligation on a party to which that party has not
agreed. Moreover, acceptance must be manifested in some sort of affirmative manner
such as by words or actions. For example, the offeree tells the offeror, “I accept the
BUSS213 Week 3 Lecture – Contract Law 7

offer.” Another simple example is where as a consumer, you hit the “Yes” button to a
software user-agreement.
Where the contract is agreed upon as in a promise for a promise, this is commonly
referred as a bilateral contract. If acceptance had to be in the form of the offeree
performing an act, this would be known as a unilateral contract. An example of this
would be if I said, I will give you $10 if you mow my lawn this afternoon,” and you
actually do in fact mow my lawn.
As a basic rule, an offeree’s silence is not a form of acceptance. There has to be some
form of notice of acceptance. The acceptance must also be absolute and unqualified. In
other words, there has to be an affirmative response.
Also, acceptance must be communicated within reasonable time as an offer is presumed
not to be open indefinitely. Along these same lines, the offeror can revoke the offer
before it has been accepted.
If the offeree changes the terms of the offer, then we have a counteroffer. For this
reason, the acceptance must be of the exact terms in the original offer—this is referred to
as the Mirror Image Rule – the acceptance is a mirror image of the offer.
There are four unique occasions when the offer is terminated as a matter of law. The
first is there is the death or destruction of the subject matter of the contract. The second
is when the contract itself becomes an illegal act after the offer was made. We see this
example when foreign merchants would contract with each other in time of peace but
then if war breaks out, their mutual arrangement becomes an illegal contract (a contract
with a foreign enemy). A third example is when there is the death or insanity of the
offeror or offeree. Finally, there is the lapse of time because the offeree to an
unreasonable amount of time to respond with an acceptance.
Now that we have covered the topic of acceptance, let us take a quick break and review
the material with an ungraded knowledge check.
Check Your Knowledge
True or False: You can accept an offer through silence.
Answer: False. Acceptance must be manifested in some sort of affirmative manner such
as by words or actions.

True or False: If the offeree changes the terms of the offer, then we have a counteroffer.
Answer: True. The acceptance must be of the exact terms in the original offer.

Fill-In the Gap: Where the contract is agreed upon as in a promise for a promise, this is
commonly referred as a …
BUSS213 Week 3 Lecture – Contract Law 8

A. good thing
B. honesty
C. bilateral contract
D. None of the above

Answer is ‘C’. In a bilateral contract, both parties are promising to do something. An

example would be where one party promises to sell a car and the other party promises
to pay money for that car.

Consideration
This term is new to many students. It basically holds that there must be some
bargained-for-exchange between the parties. In my initial example above dealing with
my car, the bargained-for-exchange is money for the car.
Interestingly, a court will not weigh the sufficiency of consideration once it has found it
to be of some value and the definition of value can mean whatever the parties intended
to mean. Therefore, the consideration exchanged does not necessarily have to be of a
certain market value. Courts may consider such factors as parties' relationship, their
friendship, love, affection and regard for each other.
Here is an example that many can relate to. Think of the situation where a parent passes
ownership to their teenage child. When registering the new ownership at the
department of motor vehicles, the price paid can state one dollar. True, the vehicle is
worth more than one dollar, but this bargain-for-exchange is reflective of the parent-
child relationship.
Another example is where a director of a corporation promised to be primarily liable for
the payment of $6,000 to settle a claim of $20,000 against corporation and despite the
difference in amounts, the court found this to be sufficient consideration to support a
settlement agreement. Fairchild v. Cartwright (App. 1918) 39 Cal.App. 118, 178 P. 333,
see the link to the case at https://www.courtlistener.com/opinion/3291391/fairchild-
v-cartwright/.

Nor does the bargain-for-exchange necessarily have to be cash in hand. Cancellation of

a pre-existing debt, release of security, or forbearance to sue, even though it
subsequently appears that forbearer might not have been successful in the suit, is
sufficient "consideration" for contract.
Although consideration viewed as a bargain-for-exchange might seem like a simple
concept, there is one deviation to discuss. The concept is called Promissory Estoppel.
Per this legal principle, one party reasonably believes that a valid contract exists and
that a bargained-for-exchange has taken place. As such, this party in good faith then
changes their position/reliance. So, for example, I say to you, “Your uncle says that he
BUSS213 Week 3 Lecture – Contract Law 9

will pay for your college education” and based on this promise, you enroll at Bryant &
Stratton and pay tuition. The court could enforce this promise and permit recovery of
your tuition because you acted in reliance on that promise. As such, the doctrine of
promissory estoppel provides a substitute for consideration to allow enforcement of a
promise.
Now that we have covered the topic of consideration, let us take a quick break and
review the material with an ungraded knowledge check.
Check Your Knowledge
True or False: Consideration is viewed as a bargained-for-exchange.
Answer: True. For there to be a valid contract, the parties must make a bargain-for-
exchange such as money in return for goods or services.

Fill-In the Gap: The legal concept of consideration holds that there must be some
between the parties.
A. bargained-for-exchange
B. intent
C. contract
D. None of the above
Answer is ‘A’. There has to be a promise in exchange for a return promise or
performance.

True or False: Cancellation of a pre-existing is viewed as a bargained-for-exchange.

Answer: True. Any benefit conferred or agreed to be conferred is sufficient
consideration.

Legality of The Subject Matter

The subject matter of the contract must be for a legal purpose. So, for example, if the
subject matter of a contract is the sale of a controlled substance, that would be an illegal
and non-enforceable contract because of its subject matter. If the subject matter pertains
to the sale of cannabis, the legality of the subject matter would depend upon which state
the transaction is taking place.
In certain instances, it is the type of contract that can make it unenforceable depending
if particular formalities were followed, generally, a writing is required. Such contracts
are known under the concept of the Statute of Frauds.
A listing of the types of contracts that fall under the Statute of Frauds that require a
writing are as follows:
1. Contracts for the sale of goods valued over $500
BUSS213 Week 3 Lecture – Contract Law 10

2. Contracts for an interest in realty

3. Contracts that are not to be performed within one year
4. Guarantees for another person’s debt, and
5. Contracts in consideration of marriage
So, for example, a premarital agreement or post-martial agreement, have to be in
writing. In some states, the requirements for these contracts will require compliance
with state statutory codes. Another example is when there is the sale of a condo or
home. Such contracts generally consist of a written Grant Deed that identifies the
parties selling and buying the property along with a legal description of the property.
Such documents are also notarized.
Now that we have reviewed the topic of legality, let us take a quick break and review
the material with an ungraded knowledge check.
Check Your Knowledge
True or False: The legal concept of Statute of Frauds requires that certain types of
contracts must be in writing in order to be enforceable.
Answer: True. For certain types of contracts, the parties must have their agreement in
writing so as to act as proof of the parties entering into an agreement.

True or False: A premarital agreement needs to be in writing.

Answer: True. The Statute of Frauds requires such writings to be in written form.

Fill-In the Gap: The of the contract must be for a legal purpose.
A. Subject Matter
B. The preliminary negotiations
C. The Consideration
D. None of the above

Answer: ‘A’. The subject matter must be for a legal activity or purpose.

Capacity
Another factor to assess in the enforceability of a contract is whether the parties had the
capacity to understand that they were indeed entering into a contractual arrangement.
In other words, there must be mutual understanding of what is being done. This is often
referred to as a meeting of the minds.
However, this meeting of the minds concept can be challenged when there is a
legitimate issue as to the capacity of one of the parties in understanding the obligations
they are contractually creating.
BUSS213 Week 3 Lecture – Contract Law 11

So, for example, if a party to a contract in under the age of majority (in most states, that
is under the age of 18), it is legally presumed that the young party does not fully
comprehend nor recognize the responsibilities created in a contract. An exception arises
where the contract is one of necessity such as when a youth needs to purchase a car in
order to take his mother to medical appointments.
Another issue that can challenge capacity is where someone is under the influence of
alcohol, narcotic or medication that impairs their ability to understand that they are
signing a legal document that will require their performance of obligations.
Mental cognizance issues, a psychiatric condition, or a mental state of dementia or
Alzheimer’s can likewise prevent comprehension of a legal document challenging or
even impossible.
Capacity tests have been employed by the courts and as such vary by state. They can
however be summarized as follows (McLinden, 2012):
In most states, the degree to which a person understands the meaning and effect
of a contract’s wording, otherwise known as the “cognitive test,” carries the most
weight. However, in other states, an “affective test” is used to determine if a
person understood the meaning and effect of the contract’s wording, and the
other party had reason to be aware of that person’s condition. In others, a
“motivational test” is used where courts determine if the person in question ever
had the ability to judge whether or not to enter into a contractual arrangement.
Now that we have covered the topic of capacity, let us take a quick break and review
the material with an ungraded knowledge check.
Check Your Knowledge
True or False: Lack of mental capacity by a party at the time of contracting can result in
a contract being held unenforceable.
Answer: True. For there to be a valid contract, the parties must have the mental capacity
to understand their actions.

Multiple Choice: The degree to which a person understands the meaning and effect of a
contract’s wording is known as the . . .
A. cognitive test
B. satisfaction test
C. comprehensive test
D. None of the above

Answer: ‘A’. The cognitive test goes to a person’s understanding of the meaning and
effect of the contract’s terms and conditions.
BUSS213 Week 3 Lecture – Contract Law 12

True or False: Capacity to contract means there must be a mutual understanding of

what is being done.
Answer: True. The parties must understand the consequences of their action.

Contractual Intent
The parties must have had a voluntary intent to enter into an agreement. Intent and
capacity are different in that capacity goes more to mental comprehension of the act of
contract while intent infers an outside factor from a third party as mispresenting or
coercing the entering into the agreement.
Fraud
Deceiving someone to enter into a contract is commonly referred to as fraud and it
consists of the following four elements: 1) the misrepresentation 2) of a material fact 3)
made with the intent to deceive 4) detrimentally relied upon by the innocent party.
Duress
This occurs when a party feels pressured to enter into a contract such as when there is a
threat of physical harm to a party and/or their loved ones. When that pressure is
coming from a family member or someone who has a close relationship with the
innocent party, this is referred to as undue influence.
Mistake
It can happen that without any intent to commit fraud or coercion, the parties might
make a mistake of fact. For example, one party may sell the other their beach house in
Jamaica without realizing it has been destroyed in a hurricane.
Now that we have assessed the topic of contractual intent, let us take a quick break and
review the material with an ungraded knowledge check.
Check Your Knowledge
True or False: Fraud goes to a material fact in the contract.
Answer: True. A material fact is one that goes to the purpose of why the parties entered
into the agreement.

Multiple Choice: Undue influence generally comes from who?

A. a government official
B. a family member
C. a teacher
D. None of the above
BUSS213 Week 3 Lecture – Contract Law 13

Answer: ‘B’. Undue influence generally happens from a family member or someone
who has a close relationship with the innocent party.
True or False: A mistake can happen that without any intent to commit fraud
Answer: True. It can be unintentional as there might be a change in the facts that no
party was aware of.

Contracts for the Benefit of Third Parties

It can sometimes happen that the two originating parties to the contract will draft their
agreement in such a manner as the benefit conferred goes to a third party. So, in the
original example of “I offer to sell you my car for $5,000,” it might read “I will sell you
my car for $5,000 to be paid to Bill whom I owe $5,000 for remodeling work to my
kitchen.” Bill is the person I intended to benefit from the sale of my car. Bill is therefore
a third-party creditor beneficiary.
Using the same example above, let us say I made the following change, “I will sell you
my car for $5,000 to be paid to my niece, Monique, as her high school graduation gift.”
Monique is a third party done beneficiary.
Breach of Contract
When one party fails to perform their owed obligation under the agreement, this is a
breach of contract and the innocent party has an immediate right to sue as such. The
key is that the breach must be material in that the failure to perform goes to the essence
of the reason for contracting between the parties. As such, the courts look to the intent
of the parties at the time of contracting and the words used in that contract.
To remedy the breach of contract, courts will look to factors such as the degree of
hardship placed on the injured party, the extent to which monetary compensation can
help the injured party, and whether the injured party was able to engage in any
mitigating actions to prevent further loss/harm incurred.
In most cases, the aggrieved party will pursue monetary damages which are referred to
as Compensatory Damages. The goal for the courts is to put the aggrieved party in the
position they would have been had the contract not been breached. Here is an example
of how this monetary amount is determined. Let us say that the contract was for the sale
of goods. Compensatory Damages would be the difference between the market price
and contract price.
If special losses happen as a result of the breach, the aggrieved party can recover what
is called Consequential Damages. The key here is that at the time of contracting the
breaching party must have been aware or any unusual or special losses that would
happen if the contract is breached.
BUSS213 Week 3 Lecture – Contract Law 14

Note that damages must be proved with a degree of certainty as opposed to being
uncertain or unprovable. With such proof, alleged losses are viewed as Speculative
Damages and are not recoverable in the courts.
If at the time that the contract is being formed, one party notes that if the contract is
breached certain monetary damages will mostly likely result. The goal here is to
identify a monetary figure of compensation in an effort to avoid high legal fees and
lengthy litigation later. Such damage amounts are therefore agreed upon by the parties.
This is known as Liquidated Damages.
Although our discussion has been focused on monetary compensation to make up for
the losses incurred, it might be that the aggrieved party will not be satisfied with a
monetary award. This is especially true where the subject matter of the contract is
unique or special. An example of this is where real estate is at issue. In order to get the
breaching party to comply with the contract, the aggrieved party may ask the court to
order Specific Performance.
In addition to these remedies, the court can also do their own evaluation of the contract
per their understanding of the intent of the parties. As a result, the court reforms
(Reformation) the contract to meet what it believes is the intent and expectations of the
parties.
Elsewhere, if one party asserts that due to changed conditions, honoring the contract
would be too burdensome, the court can order rescission of the contract and whatever
funds have up to then been expended by the parties are mutually reimbursed. This is
known as Rescission and Restitution.
As we discuss the concept of capacity, read the online article, Suing the Beatles and
Others: Perils and Precedents of Celebrity Lawsuits, by Stan Soucher. While reading
this article, keep in mind the following points:
Suing the Beatles and Others: Perils and Precedents of Celebrity Lawsuits

 Consider how a breach of contract claim can stem from facts going back decades
in time
 Reflect on the connection between breach of contract and breach of fiduciary
duty
 Assess the need for documentation to support a breach of contract claim
This article provides an example how complex a fact pattern can be in a breach of
contract claim and that the underlining facts can go far back in time. In this instance, the
facts go back to the early 1960s. Note too that even where the parties may settle, newly
discovered evidence may justify the original Plaintiff’s decision to once again file a
breach of contract claim against a Defendant. Sometimes the newly discovered facts
relate to a fiduciary responsibility that was breached. Finally, accurate record keeping
BUSS213 Week 3 Lecture – Contract Law 15

helps to prove transactional history. Sometimes such documentation can be

intentionally hidden and not disclosed. For this reason, civil litigation can force the
hand of the one hiding information to be truthful in producing evidentiary
documentation or else suffer a contempt of court action from the presiding judge.
Now that we have examined the topic of breach of contract, let us take a quick break
and review the material with an ungraded knowledge check.
Check Your Knowledge
True or False: When one party fails to perform their owed obligation under the
agreement, the innocent party has an immediate right to sue as such.
Answer: True. Once the breach happened, the innocent party has an immediate right to
file suit.

True or False: When a breach of contract happens, the aggrieved party will generally
pursue monetary damages which are referred to as Compensatory Damages.
Answer: True. With Compensatory Damages, the court puts the aggrieved party in the
position they would have been had the contract not been breached.

Multiple Choice: Where the subject matter of the contract is unique or special, the
aggrieved party may ask the court for the following:
A. an arbitration hearing
B. a lawsuit
C. specific performance
D. None of the above
Answer: ‘C’. Where the subject matter of the contract is unique or special, the aggrieved
party may ask the court to order Specific Performance.

Alternative Dispute Resolution

As discussed above, the goal of contracting between the parties should be relationship
building. The contract should be designed as a win-win prospect for all involved.
Although there are legal avenues that can address relief where one party fails to meet
their obligations, a rush to the courthouse to file a breach of contract lawsuit does not
have to be the only option to consider.
Business prosperity can go in trends such that if hard times fall on an entrepreneur,
their business relationships can sustain them through another season and vice-versa.
Being flexible with contract performance in challenging times is a mutually benefitting
mechanism to preserving that strategic relationship.
BUSS213 Week 3 Lecture – Contract Law 16

However, should there be a need to specifically address concerns such as

nonperformance, there are ways that the dispute can be resolved in a forum that does
not directly involve the courts.
This is known as Alternative Dispute Resolution (ADR). The advantage to seeking
resolution through ADR is that the parties are taking their claims to a neutral third
party (usually an attorney or retired judge) who is experienced in the business field of
issue. This third-party neutral is in a unique position to help resolve the dispute on two
similar but distinct ways via the ADR process of mediation and arbitration.
In mediation, the third party neutral (now called the Mediator) listens to the arguments
of both parties. Evidence is allowed to be presented such as documents or the testimony
of witnesses. Both sides have the ability to question each other. The Mediator will then
separate both parties and speak to each privately to discuss their legal options and
identify what it would take to resolve the dispute. If the parties can reach a common
ground of understanding, the Mediator will craft a contract that lists the steps the
parties will take in their relationship to remedy the problem and which upon agreement
of its terms and conditions, both parties sign the contract. Note that the key role played
by the Mediator is not that of a decision-maker as that was left to the parties themselves.
Rather, the Mediator’s role was that of a negotiator/referee that assists the parties in
preserving their relationship.
In arbitrations, the third-party mediator (now called the Arbitrator) holds a more formal
meeting between the parties who in advance of the arbitration hearing, have identified
the desired result. Here too the parties can bring documentary evidence and witnesses
to support their claims. Both sides can question each other, and the Arbitrator likewise
has the same power to ask questions. At the end of testimony, the arbitration hearing is
closed, and the parties go their own way to await the final decision of the arbitrator. If
the parties had initially agreed that the decision is to be binding (also known as Binding
Arbitration), then whatever result the Arbitrator determines is the final word on the
dispute. If the parties had initially agreed that the decision is to be nonbinding (also
known as Non-Binding Arbitration), the Arbitrator will make a final decision and the
losing party has an opportunity to pursue other legal remedies such as a civil lawsuit.
As between the two forms of ADR, arbitration is more akin to a minitrial without its
many legal formalities and the rules of evidence are more relaxed. In both forums, the
parties are allowed to have their own attorneys present.
Many entrepreneurs see ADR clauses as a valuable necessity to ensure that they are not
exposed to unnecessary litigation and excessive legal fees. Below is a sample of what an
Alternative Dispute Resolution clause looks like.
Now that we have examined the topic of alternative dispute resolution, let us take a
quick break and review the material with an ungraded knowledge check.
BUSS213 Week 3 Lecture – Contract Law 17

Check Your Knowledge

True or False: In a mediation, the mediator makes a final determination as to the result
of the contract dispute.
Answer: False. Mediator will then separate both parties and speak to each privately to
discuss their legal options and identify what it would take to resolve the dispute. The
key role played by the Mediator is not that of decision-maker as that was left to the
parties themselves.
True or False: In an arbitration, the arbitrator makes a final determination as to the
result of the contract dispute.
Answer: True. The Arbitrator will make a final decision.
Multiple Choice: The ability of parties to take their claims to a neutral third party is
known as . . .
A. a lawsuit
B. preliminary negotiations
C. alternative dispute resolution
D. None of the above

Answer: ‘C’. Through ADR, the parties are taking their claims to a neutral third party
(usually an attorney or retired judge) who is experienced in the business field at issue.

Sample Alternative Dispute Resolution Clause in a Contract

Below is a sample alternative resolution clause to serve as an example of how these
clauses are written. Note that this provision is written to be in accordance with
California law that would be governing the contract. A writer would therefore research
what the law of their particular state mandates. Note, too, that at the very end, the
wording is bolded and in a different font size. This is because some courts require that
the ending paragraph, where the parties give up their right to a jury trial in favor of
mediation and/or arbitration be written in a manner so that the wording is given
special emphasis.

Alternative Dispute Resolution Provisions

Mediation

Before invoking the binding, dispute mechanism set forth in this Agreement, the
parties shall first participate in mediation of any dispute arising under this Agreement.
The mediation shall be held in Los Angeles County, California and be conducted
BUSS213 Week 3 Lecture – Contract Law 18

according to the laws of the State of California. The cost of mediation shall be borne
by the parties equally. A mediator shall be chosen in the following manner: The party
invoking the mediation clause shall furnish the names of three (3) qualified attorneys
or retired judge with expertise in the area of dispute to the other party, and the latter
shall choose one of the three names given. At least (10) ten business days before the
date of the mediation, each side shall provide the mediator with a statement of its
position and copies of all supporting documents. Each party shall send to the
mediation a person who has authority to bind the party. If a subsequent dispute will
involve third parties, such as insurers or subcontractors, they shall also be asked to
participate in the mediation. If a party has participated in the mediation and is
dissatisfied with the outcome, that party may invoke the arbitration provisions of this
Agreement identified below.

Arbitration

If the mediation described above does not result in a mutually acceptable resolution of
the dispute(s), then any party to such dispute may demand binding arbitration, in
accordance with California Code of Civil Procedure sections 1280 through 1294.2. The
arbitration shall be conducted according to the laws of the State of California. Either
party may enforce the award of the arbitrator under section 1285 of the Code. Before
arbitration commences, each party shall pay the arbitrator half of the expected cost of
the arbitration. The parties shall have the right to discovery in accordance with
California Code of Civil Procedure §1283.05. This arbitration clause shall be self-
executing. Should either of the parties to the arbitration, upon due notice, refuse or
neglect to appear or to participate in the arbitration proceedings, the arbitrator shall,
notwithstanding the absence of any such non-appearing party or parties, hear the
evidence of the parties who do appear, decide all of the disputes and claims,
submitted, in accordance with whatever evidence is presented by the party or parties
who do appear and participate and shall render an award based upon such evidence.
At the conclusion of arbitration, the arbitrator may award the prevailing party some or
all of the arbitration costs including attorney’s fees. Judgment on the award may be
entered in any court of competent jurisdiction.

Further, the parties acknowledge that, by agreeing to binding arbitration, the parties each waive the
right to submit the dispute for determination by a court and thereby also waive the right to a jury or
court trial.

Signature of Parties
BUSS213 Week 3 Lecture – Contract Law 19

Weekly Recap

In this week’s module, we examined how the need to form mutually benefiting and
productive relationships is the motivating factor behind the creation of contractual
agreements. It is in this spirit of cooperation that parties develop an ethical obligation to
act in good faith and fair dealing respectively.
In this process, concepts like offer, acceptance, and consideration were introduced as
the elements establishing a meeting of the mind between the parties to intentionally
enter into an agreement. Yet, there can be legitimate challenges to intent when a party
lacks capacity and intent is negated by factors such as fraud, duress or even an innocent
mistake of facts.
When another party fails to perform their obligations, breach of contract occurs which
entitles the non-compliant party to seek some form of remedy, general money or if the
subject matter of the contract is unique, specific performance.
Although breach of contract and the seeking of remedies are generally disputed in civil
court, alternative dispute resolution, in the form of mediation and/or arbitration, is fast
becoming the preferred manner of resolving contractual disputes. In this manner,
parties find that they can reach a mutually satisfying result to their differences while
both preserving their contractual relationship and avoiding the contentiousness and
costs of civil litigation.

References
Fairchild v. Cartwright (App. 1918) 39 Cal.App. 118, 178 P. 333, Retrieved from
https://www.courtlistener.com/opinion/3291391/fairchild-v-cartwright/.
Folk, A. (2018, July 20). Contract Good Faith and Fair Dealing. LegalMatch.com.
Retrieved from https://www.legalmatch.com/law-library/article/contract-good-faith-
and-fair-dealing.html
Jimblasingame. (2012, June 4). Dealing in good faith. Retrieved from
https://www.youtube.com/watch?v=J_JYMzfSIfA
Letofsky, I. (1989, September). Brian Wilson Sues Music Publisher. Retrieved from
https://www.latimes.com/archives/la-xpm-1989-09-19-ca-4315-story.html
McLinden, S. (2012, March 12). Can the mentally ill sign legal contracts. Bankrate.
Retrieved from https://www.bankrate.com/finance/real-estate/mentally-ill-sign-
legal-contracts.aspx

Restatement (Second) of Contracts § 205 (1981)

Soucher, S. (2016, March). Suing the Beatles and Others: Perils and Precedents of Celebrity
Lawsuits. Retrieved from
BUSS213 Week 3 Lecture – Contract Law 20

https://www.lommen.com/wp-content/uploads/2016/03/Suing-the-Beatles-and-
Others.pdf