CONTRACTS TOPIC OUTLINE1

Transcription

1 CONTRACTS TOPIC OUTLINE1 1. OFFER AND ACCEPTANCE a. offer defined b. preliminary negotiations c. advertisements d. unilateral offer e. who may accept an offer f. irrevocable offer g. material terms h. acceptance defined i. rejection defined j. indefiniteness k. objective theory of contract l. writing contemplated m. option contract n. mailbox rule o. termination of power of acceptance p. peerless rule q. gap fillers r. good faith s. express, implied contract t. promises made in family context u. rewards v. method of acceptance w. acceptance by silence 2. CONSIDERATION a. definition b. what can be consideration c. why do we care if there is consideration d. bargained for e. benefit/detriment f. sham or nominal consideration g. past consideration h. promise for benefit received 1 Copyright 2007 Daniel Wilson. Revised Permission is freely given to use this material to prepare for the Colorado bar exam. This material is drawn from several sources, including released Colorado bar exam essays; released multi-state essays from the National Conference of Bar Examiners; released MBE questions from the National Conference of Bar Examiners; and various commercial outlines. Grateful thanks to Professor Emeritus Burt Brody DU Law School.

2 i. moral consideration j. pre-existing duty k. modification l. illusory promise m. promise to pay past debts n. accord and satisfaction o. implied promise to use best efforts p. right to terminate agreement 3. PROMISSORY ESTOPPEL a. elements b. gratitutous promise c. charitable subscription 4. EXCUSES FOR NONPERFORMANCE I--BADNESS a. illegality--void b. duress by force--void c. duress by threat--voidable d. misrepresentation--voidable e. unconscionability--voidable f. duress by threat--voidable g. undue influence--voidable h. fraud in the inducement--voidable i. fraud in the factum--void 5. EXCUSES FOR NONPERFORMANCE II--TECHNICAL a. mistake, mutual and unilateral b. statute of frauds i. contracts covered ii. requirements of memorandum iii. exceptions iv. common law vs UCC c. capacity 6. EXCUSES FOR NONPERFORMANCE III--NO BADNESS a. impossibility/impractibility i. building/remodeling ii. goods iii. personal services iv. increased cost of performance c. frustration of business purpose d. supervening illegality 7. BREACH a. partial, material, total

3 b. substantial performance b. anticipatory repudiation c. perfect tender rule 8. PAROL EVIDENCE RULE a. common law b. UCC c. PER does not bar evidence of: d. interpretation e. trade usage, course of performance, course of dealing 9. CONDITIONS a. contrasted with promises b. satisfaction clause c. forget constructive conditions d. excuse of conditions 10. REMEDIES a. Remedies at law i. expectation ii. reliance iii. restitution b. Equitable remedies i. specific performance ii. quasi-contract c. limitations on recovery d. liquidated damages e. UCC remedies 11. THIRD PARTY BENEFICIARIES AND ASSIGNMENT AND DELEGATION a. TPB i. intended beneficiaries ii. vesting b. Assignment & Delegation i. non-assignment clause ii. What duties cannot be delegated iii. defenses 12. DISCHARGE a. Rescission & restitution b. novation 12. WAYS THE CODE CHANGES COMMON LAW

4 CONSIDERATION ISSUES2 1. Consideration is a three part rule. A. A promise, act or forbearance, B. That is bargained for and given in exchange for, C. That is a detriment to the promisee or a benefit to the promisor. of the promise we are seeking to enforce. 2. Promises that are not supported by consideration are usually not enforceable. The doctrine of consideration helps us to determine if a promise is enforceable. 3. Most contracts consist of an executory promise exchanged for another executory promise. Some contracts consist of an executory promise given in exchange for performance. 4. Gift promises are not enforceable. A gift promise that is conditional is not consideration. Ex.: Kirksey v. Kirksey. 5. But non-economic benefits can be consideration. Detriment is doing anything you are not required to do or refraining from something you have a right to do. Hamer v. Sidway. 6. But motive is irrelevant. Testator tells witnesses he wants his widow to have a life estate in his house but does not so provide in his will. Beneficiaries to the will agree the give widow life estate if she pays $100 a year and maintains house. That is consideration even though the motive was not to get the $ Sham and nominal consideration is not consideration. "In consideration of $1 paid and other valuable consideration I promise to give you $1000." But false recitation of nominal consideration can be consideration if there was a bargain. Exception is option to buy land contract. 8. Promisee must be aware of the promise. Rewards. 2 Copyright 2008 by Daniel Wilson.

5 9. Past consideration is not consideration because it was not bargained for and given in exchange for the promise. Typical problem is a promise of a pension. "In consideration of your years of service we promise to give you a pension when you retire." 10. Pre-existing debt. Promise to pay debt the collection of which is barred by statute of limitations or discharge in bankruptcy is enforceable to the extent of the promise. In BK must be in writing. 11. Consideration is usually a promise. An act that is requested by a unilateral offer is both acceptance and consideration. 12. Illusory promises. Promises which appear to promise a performance but do not really do so. "A offers to deliver to B at $2 a bushel as many bushels as B may choose to order. B says 'you got a deal.'" B's promise is illusory. "D signs a promissory note in return for a promise from P that he will not collect it until 'such time as I want my money.'" P's promise is illusory. 13. Promise to pay for benefits received. Should be unenforceable because the benefits received are past consideration. One case exists that allows the promise to be enforced. Webb v. Mcgowin. Value of the benefit is disproportionate to promise. Restatement 2nd sec Family promises. Problem is that promises in a family context are usually not intended to create legal liability. Balfour v.balfour, Marvin v. Marvin. 15. Adequacy of consideration. Court will not inquire into adequacy of consideration. Gross disparity in value might indicate fraud, duress, coercion. Batsakis v. Demotsis. But inadequacy of consideration may lead court to determine if there was duress, fraud or coercion. 16. Accord and Satisfaction. Problem arises when a debtor offers to pay part of the debt in exchange for creditor's promise not to sue on the remainder. Business people often prefer to compromise but will not do so unless the promise to accept partial payment is enforceable. The preexisting duty rule holds that a promise to do something you are already obligated to do is not consideration. So promising to pay part of a debt that

6 you are already obligated to do is not consideration. In Foakes v. Beer. the debtor owed a liquidated debt and promised to pay it in payments. The creditor agreed, but after debt was paid sued for interest. Held: The debtor must pay the interest. Case still good. Applies to undisputed and unliquidated debt. But if the debtor changes his duty in the slightest that is consideration. But if debtor's duty is changed in any way the accord and satisfaction is enforceable. Paying one day early. Paying by cash rather than check. This discussion only applies if the debt is liquidated and undisputed. 17. However, promise to accept payments on a liquidated debt is enforceable if the debtor gives security; if the debtor refrains from bankruptcy; pays interest. 18. Pre-existing duty rule. Alaska Packers Assn. v. Domenico. Fishermen agreed to work the salmon season for a determined salary. When they got to Alaska they claimed gear was inadequate and demanded higher pay. On-site manager agreed but company disavowed when ship returned to SF. Held: Promise of higher pay unenforceable. 19. Another situation is construction contracts. Contractor demands more money when project is half done. Owner's promise to pay more is enforceable if the contractor's duty is changed, even if change saves contractor money. 20. Unforeseen circumstances. A modification is enforceable without consideration if it is fair and equitable under the circumstances not anticipated at time of formation. Garbage collection. Angel v. Murray. 21. UCC abolishes rule. Modification of a contract for sale of goods is enforceable without consideration. 22. Forbearance from suit can be consideration. If the claim turns out to be invalid forbearance is still consideration if the party subjectively and reasonable believed he had a valid claim. 23. Third party duty. If pre-existing duty is to third party a promise to perform that duty can be consideration. 24. Right to terminate agreement does not make promise illusory. Even

7 an unfettered right to terminate at any time without cause does not make the promise illusory because there is an implied duty of reasonable notice. 25. Requirements and Outputs contracts. "Requirements and Outputs contracts do not lack mutuality of obligation since under this section the party who will determine quantity to be required to operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his outputs or requirements will approximate a reasonably foreseeable figure." Comment Conditional promises. A condition is something, other than the passage of time, that must occur or not occur before the duty to perform arises. A condition that is exclusively out of the control of the promisor does not make the promise illusory. A promise that is partially in the control of the promisor implies a good faith effort to make the condition happen. A condition that is exclusively in the control of the promisor makes the promise illusory. 27. Accord & Satisfaction Claim will be discharged if check contains a conspicuous statement that the instrument is tendered in full satisfaction; claim is unliquidated; and debtor acted in good faith. C/L: Creditor endorsement of under protest ineffective. PROMISSORY ESTOPPEL 1. Promissory estoppel is a second theory of recovery. In "Contracts" there are three theories of recovery; breach of contract, promissory estoppel, and unjust enrichment. Only breach is really a contracts issue, but there is nowhere else to put PE and unjust enrichment. 2. Elements: a) a promise; b) which the promisor should reasonably expect to induce reliance on the part of the promisee; c) the promisee changes position in reliance on the promise; the promise will be enforced to the extent necessary to prevent injustice. 3. Case which is a released MBE question. P owns a tract of land which he desires to develop. P and D sign a document in which D promises to obtain financing. The document has no details such as interest rate, payment, duration, etc. Relying on the promise P demolishes existing building. D does not obtain financing. The document is too indefinite to be

8 a contract. Held: The promise will be enforced to the extent of the cost of demolition. P will recover reliance damages but not expectation damages. Wheeler v. White. 4. Gift promises. Grandfather is distressed because his granddaughter has to work. Grandfather gives granddaughter a promissory note and she quits her job. His estate refuses to honor it. Held: The promissory note is enforceable. 5. No reliance is necessary if the promise is a charitable subscription. 6. Other factual situations: Promise of continued employment in an at will job; promise to gift land; promise to pay pension; gratuitous bailments and agencies; promise by subcontractors. 7. Duty to bargain in good faith. By entering into negotiations a person may be found to have promised to bargain in good faith. Hoffman v. Red Owl.

9 OFFER AND ACCEPTANCE I. PRELIMINARY REMARKS A. For essay questions, start with "Contract is offer, acceptance, consideration and mutual assent. B. Contracts for sale of goods is governed by Article II. Contracts for services and real property are governed by C/L. C. Offer must have sufficiently definite terms. Material terms include parties, subject matter, quantity, price, delivery and payment terms. D. Contracts questions often center around communications passing between the parties. Analyze if the communication is: preliminary negotiations, offer, rejection, revocation or acceptance. II. OFFER A. OFFER DEFINED. Manifestation of present intent to be bound to sufficiently definite terms so made that a reasonable person would believe his assent will Seal the bargain. B. Advertisements are usually not offers, unless by their terms it is clear who can accept. C. Offer creates the power of acceptance in the offeree. D. Price quote is usually preliminary negotiations. Communication addressed to a large audience is not an offer. A communication that requires a further expression of assent is not an offer. A communication that lacks definiteness may lead to a contract if the response supplies the missing terms. E. UNILATERAL OFFER. An offer that can only be accepted by performance. Most offers request a return promise, but a unilateral offer requests an act as acceptance. F. IRREVOCABLE OFFER 1. Firm offer. Article II, signed writing by a merchant, irrevocable for time stated or if no time stated a reasonable time, but in no event for longer than three months, is irrevocable w/out consideration. 2. Option contract. A contract the subject matter of which is to make an offer irrevocable. Must be supported by consideration. JUST LIKE ANY OTHER CONTRACT REQUIRES OFFER, ACCEPTANCE, AND CONSIDERATION. 3. Beginning of performance in response to unilateral offer makes the offer irrevocable for a reasonable time. BEGINNING OF PERFORMANCE IS NOT ACCEPTANCE. 4. When a contractor uses a sub's bid in fashioning his bid, the sub's bid is an offer that becomes irrevocable when the main bid is submitted. G. Offer may only be accepted by offeree. H. Rewards are unilateral offer. Offeree must be aware of the reward. III. ACCEPTANCE A. Acceptance defined. A manifestation of assent to the terms of the proposed bargain. B. In C/L acceptance must mirror the offer. Any differing or additional terms act as a rejection and counter-offer. However, a suggestion is not a rejection and counteroffer.

10 C. In addition, the acceptance must be made in a reasonable manner. The means and medium of the offer will always be a reasonable means and manner of acceptance. D. Offeror is master of the offer. E. Mailbox rule. If mail is a reasonable means of acceptance an acceptance is effective on dispatch if properly stamped and addresses even if it never reaches the offeror. Acceptance of offer that is irrevocable because of option contract not effective until receipt. If rejection is sent first and then acceptance whichever reaches the offeror first is effective. F. Acceptance of a unilateral offer means complete performance. Performance must be communicated to offeror if he is not likely to learn of the performance. G. TERMINATION OF THE POWER OF ACCEPTANCE 1. Rejection. An expression by the offeree that he does not intend to be bound by the terms of the proposed bargain. 2. Revocation. An expression by the offeror that he no longer intends to be bound by the terms of the proposed bargain. 3. Lapse of time. An offer may expire on its own terms. 4. Destruction of the subject matter. Blackacre burns down. 5. Death or incapacity of offeror or offeree. 6. Supervening illegality. H. Rejection effective on receipt I. Revocation effective on dispatch. Indirect revocation: When the offeree learns from a reliable source that the offeror has taken action inconsistent with the offer remaining open. J. Objective theory of contract. Offer and acceptance will be interpreted under an objective reasonableness standard. Secret intent is irrelevant. K. Silence is generally ineffective as acceptance, unless the terms of the offer so specify and the offeree by remaining silent intends to accept. L. Promises made within family context can form a contract, but analyze if parties intended to be legally bound. M. An express contract is formed by words, written or spoken. Implied contract is formed by parties acts under the circumstances. They have the same effect. N. Every contract has an implied term of good faith. O. SALE OF GOODS. Code can supply missing terms if court finds parties intended to form contract. Must have quantity term. Reasonable price, payment is cash on tender of delivery, delivery is at seller's place of business. P. Peerless rule. I have to explain this in person. Q Battle of the Forms. See my Sales outline. R. Under C/L cross offers do not form a contract. Under UCC they do. S. Goods. An order to buy goods for prompt shipment can be accepted either by a return promise or shipment. T. Shipment of nonconforming goods is acceptance and breach. Unless shipment has notice that it is accommodation shipment. See my UCC outline.

11 MISTAKE AND THINGS WHICH ARE NOT MISTAKE 1. Mistake is an erroneous belief of fact at the time of formation. Mistake can be unilateral or mutual. 2. Distinguished from impractibility/impossibility. Impossibility/impractibility are defenses for nonperformance due to changed circumstances after formation. 3. Mistake is also not misunderstanding. Peerless rule is misunderstanding as to what a term means. Mistake is not scrivener's error. Remedy for scrivener's error is reformation. 4. Remedy for mutual mistake is either rescission and restitution or reformation. 5. Case: Rose of Averlon. Buyer and seller both thought cow was barren. Cow turns out to be pregnant. Barren cow is worth $50; pregnant cow is worth $ Rule: The mistake must concern a basic assumption of the contract; must have a material effect on the contract; neither party assumed the risk of mistake. 7. Risk of loss can be express, or one party can assume the risk by knowing he is ignorant and proceeding anyway. 8. Fact situations: Minerals in land. Seller sells land without knowing of mineral deposits. Risk of loss is allocated to seller. Land conditions for building. Builder and owner are both unaware of land conditions that will make builder's performance much more expensive. Builder has assumed the risk. 9. Unilateral mistake. Same rule plus equities. Mistaken party unlikely to get rescission unless he can show that enforcement of the contract will work a forfeiture or the other party had reason to know of the other's mistake and took advantage of it.

12 BREACH 1 Breach of a contract is a failure to perform duties under the contract. The crucial question is whether the breach is material. A breach is material if the breaching party did not render substantial performance. 2. If the non-breaching party has received the substantial benefit of the bargain the breach is not material. There is lots of other material on how to distinguish between material and nonmaterial breach. You don't have to worry about it. Breach has to be obvious in a question. 3. If the breach is material the duties of the non-breaching party are suspended for a reasonable time in order to allow the breaching party to cure. 4. If the breach is not cured within a reasonable time the duties of the non-breaching party are discharged. 5. If the breach is non-material we say the breach is minor. The duties of the non-breaching party are not suspended. He must perform, but is entitled to damages. We will discuss the measure of damages when we discuss remedies. 6. Perfect Tender Rule UCC. "If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole, accept the whole, or accept any commercial unit(s) and reject the rest." This changes the rules above. Even if the breach is minor the non-breaching party is relieved of his duty to perform. Summers & White say the rule is not enforced in the real world; It is on the Bar. However, consider whether the breaching party has a right to cure. 7. UCC installment contracts. Duty to perform is discharged as to one non-conforming installment if the non-conformity substantially impairs the value of the installment and cannot be cured. Buyer may cancel entire contract if the non-conforming installment "substantially impairs the value of the entire contract." 8. I recommend that discussion of "acceptance", "rejection", and "revocation of acceptance" is beyond the scope of the bar exam. 9. Anticipatory repudiation is when one party indicates he will not perform. The other party may declare the contract at an end and immediately bring an action for damages, even if the time for performance has not yet arrived. Hochster v. De La Tour. 10. If a party indicates he would like to perform but will be unable to do so is not anticipatory repudiation. 11. UCC "When reasonable grounds for insecurity arise with respect to the performance of either party the other party may in writing demand adequate assurance of performance and until he receives such assurance may suspend his performance." Examples--

13 buyer falls behind on account payments, seller delivers defective goods. "After receipt of a justified demand, failure to provide within a reasonable time not to exceed 30 days such assurance as is adequate is a repudiation of the contract." Adequate assurance is determined according to commercial standards. PAROL EVIDENCE RULE 1. Parol evidence rule (PER) issues are often confused with modification. PER only applies at the time of formation. If the parties change the terms after formation it is a modification issue. 2. UCC is a good expression of the rule. "Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented by: course of performance, course of dealing, trade usage; or evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the agreement." 3. Elements of above rule: a. There was to be a writing. b. The parties had to intend that the writing be a final expression of the agreement. c. The rule excludes prior writings or conversations or oral agreements at time of formation that contradict the terms of the writing. d. But the writing can be explained or supplemented by parol evidence of consistent additional terms. e. But if the writing is not only a final expression of the agreement but also a final expression of every aspect of the agreement, no additional terms will come in. A complete and final expression is called a completely integrated agreement. f. But it looks like even if the writing is completely integrated the Code will allow course of performance, course of dealing and trade usage to come in. 4. PER does not exclude evidence of: fraud, coercion, duress, mistake, presence of a condition or failure of consideration. 5. Integration clause is clause that says the writing is completely integrated. Merger clause is not dispositive but merely evidence. STATUTE OF FRAUDS 1. Some contracts must be in writing to be enforceable. IMPORTANT: Failure to meet writing requirement does not mean no contract--it means contract is unenforceable. 2. Transfer of an interest in land, including easements and options, but not including leases;

14 contracts that cannot be performed within one year; suretyship contracts; sale of goods of $500 or more. 3. Memorandum that satisfies the Statute. 4. Issues: a. Reasonably identifies the subject matter of the contract. b. Indicates a contract has been formed by the parties. c. States with reasonable certainty the essential terms of the contract. d. Is signed by the party to be charged. a. Writing may be produced after formation. b. Writing may suffice even if it was not intended to satisfy the Statute. c. Statute may be satisfied by two or more documents read together, particularly if documents are actually attached or if signed one refers to other document. d. signature requirement very liberally interpreted. Letterhead. 5. UCC Statute satisfied if there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought. 6. Merchants exception. If writing not signed by both merchants. a. Writing sufficient to bind Merchant A. b. Is sent to Merchant B. c. Merchant B has reason to know contents of writing. d. Merchant B does not object within 10 days. e. Result: Writing will bind Merchant b even though he did not sign writing. 7. Bringing writing out of the Statute. a. Land--part performance, which means being on the land, making payments, making improvements. (Must have all three to get point.) b. Suretyship that is made for the benefit of the surety.

15 c. Cannot be performed within a year, part or full performance. d. goods that have been specially made.

16 REMEDIES OUTLINE I. Kinds of Damage measures A. Expectation Interest. Amount of $ necessary to put Plaintiff in the position he would have been in had the contract been performed. 1. Also called benefit of the bargain and lost profits B. Reliance Interest. The amount of $ needed to put the Plaintiff in the position he would have been if the contract had not been formed. 1. Also called out of pocket costs. C. Restitution Interest. The amount of $ needed to put the Defendant in the position he would have been if the contract had not been formed. II. Expectation damages A. Contract price -- money saved by Plaintiff not having to perform. 1. Example: Builder contracts with owner to build house. Contract price is $300,000. When builder is half done owner repudiates contract and builder ceases work. By not having to complete house builder saves $100,000 in wages and materials. $300,000 (contract price) -- $100,000 (money saved) = $200, Example: Builder contracts with owner to build house. Contract price is $100. Cost of performing would be $ = 50 = benefit of the bargain. Already spent $10 before breach. Salvage of $5. 50 (profit) + 10 (already spent) -- 5 (salvage) (down) = 45. B. Limitations on recovery 1. Reasonable certainty 2. Lost profits of a new business if Plaintiff can show with reasonable certainty. III. Reliance damages A. Contract and non-contract situations 1. Cannot show with reasonable certainty. 2. Promissory estoppel. IV. Restitution damages A. Prevent unjust enrichment of defendant. 1. Benefit conferred with expectation of being paid. V. Quasi-contract A. No contract attempted 1. Emergency medical services

17 B. Unenforceable contract. Statute of Frauds, mistake, illegality, impossibility, impractibility. C. Recovery by breaching plaintiff. Cannot sue for breach, but entitled to restitution -- damages to plaintiff. 1. also called quantum meruit 2. frequently in construction cases. D. Plaintiff must not have officiously intermeddled. VI. Foreseeability A. Another limitation on recovery B. Hadley v. Baxendale. 1. Court will award damages for remote or unusual consequences if defendant had actual notice of the possible consequences. 2. Court will award damages for consequences "not in the usual course of things" if the defendant should have reasonably foreseen them. VII. Avoidable damages. A. Where a plaintiff might have avoided damage by reasonable effort, without undue risk, expense or humiliation, plaintiff may not recover. B. Duty to mitigate. Salvage. C. Personal services contract. Plaintiff need not accept a position that is significantly different or inferior. D. Plaintiff entitled to incidental damages incurred in reasonable effort to mitigate. VIII. Liquidated damages. A. Parties agree in advance what the measure of damages will be in the event of breach. B. Earnest money. C. Must be reasonable and not punitive. VIII. Sales remedies A. Buyer's remedies 1. Cover. Buyer may buy substitute goods. Measure of recovery is difference between contract price and cost of cover plus incidentals and consequentials. In good faith and without unreasonable delay. 2. Difference between contract price and market price at the time the buyer learned of the breach. Plus incidentals and consequentials. 1. Incidentals include inspection, transportation, storage, transportation etc. 3. Specific performance.

18 B. Seller's remedies 1. Contract price 2. If goods rejected, difference between contract price and market price at time and place of breach plus incidentals 3. Lost profits. Seller has a relatively unlimited supply of fungible goods. IX. Equitable remedies A. Specific performance B. Injunction C. Equitable remedies available when 1. Remedy at law is inadequate a. Damages difficult to calculate b. Defendant insolvent c. subject matter unique. D. Personal services contracts. No specific performance, but injunctive relief may be available.